PwC/AGEFI Monthly Barometer - January 2025

In collaboration with AGEFI Luxembourg

Economic Confidence Indicator

January 2025

In December, the PwC Business Barometer fell to -12, down from -9 in November, marking the lowest value of the year. This decline reflects a fragile Euro Area economy, with activity levels shrinking due to sustained drops in new business and employment.

Luxembourg's economic situation is showing signs of improvement, with modest growth expected in 2024 following a contraction in real GDP in 2023, as reported by STATEC. However, the recovery remains uneven across different sectors. A modest expansion of +0.5% is anticipated for 2024, with more robust growth forecasts of +2.5% for 2025 and +2.4% for 2026. This rebound is largely driven by lower interest rates, which are expected to boost residential investment and the export of financial services. Employment growth in Luxembourg continued to slow in 2024, reaching its lowest level since 2009, primarily due to a downturn in the construction sector. The anticipated economic recovery is expected to support employment growth, with forecasts of 1.4% in 2025 and 2.2% in 2026, although still below the average of the last twenty years (around 3%). Unemployment – which stood at 5.9% in November – is projected to reach 5.9% in 2025, before falling to 5.7% in 2026. Looking at inflation, STATEC expects it to fall below 1% in 2024 – one of the lowest rates in Europe – before rebounding to 2.1% by the end of 2025 and then 1.8% in 2026. As a result of the current low level, a new wage indexation is not expected before the second quarter of the year. Compensation per employee has slowed significantly since 2023, rising by just 1.2% YoY in Q3 2024. STATEC forecasts a +2.2% increase for 2024, with compensation per employee expected to recover in 2025 (+3.0%) and settle at 2.4% in 2026. Despite disinflation and real wage growth, household consumption remains constrained by high savings levels.

The Euro Area economy experienced a marginal contraction in December, driven entirely by a decline in the manufacturing sector, while services activity saw a moderate rebound. However, the expansion in services was insufficient to offset the sharp drop in manufacturing production. Germany, France, and Italy, the three largest economies in the Euro Area, all reported reductions in business activity in December. Consequently, employment in the single market area fell, with firms reducing workforce capacity at the sharpest rate in four years. Inflation rebounded to 2.4% in December, following a larger-than-expected drop in November. In response to the November drop, the ECB cut key interest rates by 25bps in December for the fourth time since June. The ECB has cautioned that the path to its 2% inflation target will be uneven, expecting to reach this milestone sustainably by year-end. The ECB is anticipated to continue cutting interest rates until they reach a neutral level of 2% by mid-2025.

In the US, the Federal Reserve cut official interest rates by 25bps in December, aligning with market expectations. However, Fed Chair Jerome Powell indicated that further reductions in borrowing costs depend on continued progress in lowering high inflation. Powell's remarks highlighted the need for caution, which unsettled Wall Street, causing significant drops in the stock market. On the day of Powell’s speech, the S&P 500 fell by 2.95%, while the Nasdaq and Dow Jones dropped by 3.6% and 2.58%, respectively.