PwC/AGEFI Monthly Barometer - February 2025

In collaboration with AGEFI Luxembourg

Economic Confidence Indicator

February 2025

In January 2025, the PwC Business Barometer reached -6, up from -12 in December 2024, marking a recovery from the downward trend that began in October 2024, though it remains in negative territory.

The Grand Duchy started the year with some optimism about the economic outlook as consumer confidence improved significantly across all categories, rising from -13 in December 2024 to -8 in January 2025, the highest level since April 2024, possibly driven by the favourable expectations generated by the ECB’s easing monetary policies. Thanks to the improvement in demand perception, confidence in services has also revived. This includes non-financial services, such as legal and accounting services, which had experienced considerable volatility over the past year. On a less positive note, the housing sector still faces significant challenges, mirroring the eurozone trend. Residential and non-residential building permits remain at historically low levels, even with a slight increase in overall construction permits in Q3 2024. As indicated by STATEC, the construction sector’s woes are likely to persist in 2025 both in terms of investment and overall activity. Similarly, the Luxembourgish labour market experienced slow growth, with temporary employment still significantly below pre-pandemic levels although there was a slight recovery in hours worked within the construction, transport, and industry sectors. Nonetheless, the government’s measures effective from 1st January 2025, such as a 2.6% minimum social wage increase, a 1.6% rise in pensions, and the adjustment of the income tax scale by 2.5 indexed bands, could help alleviate the stagnation. Finally, inflation reached 1.94% in January 2025, up from 1.04% in December 2024 and 0.8% in November 2024, according to STATEC. This increase is mainly due to a 43.9% rise in energy prices after a 13.6% decline in December 2024. The rebound follows the lifting of government price shields, in place since September 2022, and adjustments in network charge pricing aimed at enhancing efficiency and reducing peak consumption. As a result, the next round of indexation is expected to occur in the second quarter of 2025 and 2026.

The euro area economy started the year with a marginal recovery, as indicated by the Eurozone Composite PMI rising to 50.2 in January 2025, up from 49.6 in December 2024, marking the first expansion in private sector activity since August 2024. This slight improvement was supported by a narrowing of sector divergences, with service growth slowing and manufacturing output contracting at a slower pace. A near-stabilisation in employment further supported activity during the month, with a minimal decline in the workforce, mainly affecting manufacturing, while services sectors saw a slight increase. The disinflation process is on track, with the ECB implementing its fifth interest rate cut at the end of January 2025. Expectations are for two or three more cuts, with the next likely in March 2025, leading eurozone companies to express greater optimism. Meanwhile, Spain remained the key growth driver within the bloc in 2024 with 3.2% GDP growth whilst German GDP shrunk by 0.2%. Stagnation dominates the European economic landscape overall as  Italy’s GDP grew by a mere 0.5% and French GDP by only 1.1% despite extravagant public spending with public deficit approaching the 6% mark as a share of GDP.

The US Fed, in contrast, kept interest rates steady this month, resisting political pressure from President Trump, after implementing three rate cuts in 2024, including a substantial 50bps reduction. Amidst rising trade tensions, tariffs on Canada and Mexico have been postponed for one month after their leaders announced increased border security measures, as requested by Trump. On the other side of the globe, President Zelensky has expressed readiness to negotiate a peace agreement with President Putin as a last resort. Meanwhile, despite a ceasefire in Gaza, the Netanyahu government is still committed to removing Hamas from power while also rejecting the Palestinian Authority’s reinstatement in Gaza. Several statements further raised uncertainty about the region's future, with questions surrounding Trump’s plan to take control of Gaza and create a “Riviera of the Middle East”.