PwC/AGEFI Monthly Barometer - January 2024

In collaboration with AGEFI Luxembourg

Economic Confidence Indicator

January 2024

Despite remaining in negative territory, the economic barometer surged to -5 as of end-December 2023, achieving its most favorable reading since May and marking a consecutive second improvement. This upturn was propelled by advancements in all the confidence indicators.

Despite the growing confidence, the overall economic outlook for the Grand Duchy remains bleak. Luxembourg's real GDP experienced a 0.1% quarter-on-quarter contraction in Q3, following a 0.2% drop in Q2, pushing the country into a technical recession, although further revisions might contradict these findings. The recession is primarily attributed to the Luxembourgish financial sector’s underperformance, with its gross value added contracting in real terms by 3.4% quarter-on-quarter and 8.8% year-on-year. The sector's performance is to some extent bolstered by price effects, largely driven by heightened interest rates and stock market valuations. Conversely, the real estate sector has been heavily impacted by the high interest rates. The ECB’s hawkish policy, implemented to counter inflation, has notably dampened demand, leading to the lowest number of property sales in Q3 since 2007. Consequently, prices for existing apartments and houses have fallen by 12.3% and 18.7%, respectively, since the beginning of the year. Even prices for apartments under construction were affected, experiencing a 7.7% year-on-year decline in Q3. On a more positive note, after one month in office, the CSV-DP government led by Luc Frieden clarified the widely-expected paradigm shift into what could be summarised as a “business and finance-friendly” government. Eager to boost short-term purchasing power of the middle class, the coalition government passed the “income tax adjustment” bill, which will cost the state some EUR 180 million in 2024. Consequently, as from 1 January 2024, the tax brackets will be adjusted by 10.38% compared with the rate applicable since 2017.

In the Euro Area, year-end business activity was hindered by a persistent decline in demand, as evidenced by a significant drop in new business receipts for manufacturers and service providers. Although the private sector's new orders showed a slower decline since July, sales were notably affected by a sharp decrease in new export business compared to total new orders. Despite these challenges, firms' growth expectations for the upcoming year increased, reflecting a sustained improvement in business sentiment. However, the overall level of optimism, while stronger, remained subdued compared to historical standards.

Despite the global economy demonstrating resilience against recessionary risks in 2023, the World Bank warns that near-term challenges stemming from geopolitical tensions will impede growth. As a matter of fact, it expects the current half-decade of growth to be the worst in 30 years, and forecasts a third consecutive year of slowing global growth in 2024, dipping to 2.4% (from 2.6% in 2023). As a result, global economic sentiment remains low.