PwC/AGEFI Monthly Barometer - January 2023

In collaboration with AGEFI Luxembourg

Economic Confidence Indicator

January 2023

The PwC economic barometer increased by 8 points during the month of December, reaching a level of -5 by the end of the period and recording a second consecutive month of positive growth. Business confidence seems to recover as a consequence of the inflation slowdown and a milder than expected economic downturn.

The Luxembourgish economy appears to have weathered the worst possible outcomes that could have been brought about by regional geopolitical and macroeconomic instability. The end of 2022 was characterized by a rebound in GDP growth in Q3 (+1.1% over a quarter; +2.2% YTD), mostly led by the resilient financial sector which recorded a 2.6% surge in the real value added. However, data related to Q4 might show a weak slowdown supported by economic indicators already available. In particular, the labour market in Luxembourg has been weakening in recent months showing a rise in unemployment since the summer, led by the construction sector (-2.6% decline YoY in the employment rate), retail trade (-1.4% YoY) and the industrial sector (-0.8% YoY). Despite the pressure of the slowdown on the job market – which recorded an unemployment rate of 4.9% in November – the economy in the Grand Duchy has been benefitting from the turnaround in industrial output prices observed after the peak reached in June. The reversal was mainly due to the prices of intermediate goods which recorded a 3% decline between June and October. At a product level, the prices of steel goods and non-ferrous metals fell by 10% and 7% respectively in the same period. The price declines signal a slowing inflation which fell down to 5.9% in November – the first time it fell below 6% since February.

The disinflation in Luxembourg is in line with observations at the eurozone level where the increase in prices appears to have eased by end-2022. The cost input inflation reached a 19-month low among goods and services providers, leading to a cooling pressure on output prices. However, although a modicum of macroeconomic stability appears to have been attained, the economic downturn persists, once again driven by the manufacturing sector together with the decline in service activity. These two sectors have been contracting for six and five consecutive months respectively.

Financial markets worldwide are also benefitting from the weakening inflation, and are anticipating further easing in the future. A first signal comes from the US market where the Dow Jones Industrial Average surged by 700 points during the first week of January. The optimism also impacted the S&P 500 and the NASDAQ composite which recorded a 2.28% and 2.6% increase respectively in the same period.