PwC/AGEFI Monthly Barometer - July 2021

In collaboration with AGEFI Luxembourg

Economic Confidence Indicator

July 2021

June has seen the PwC Business Barometer record its fourth consecutive monthly increase, rising an additional 11 points from last month. Looking forward, we strongly expect to see a further acceleration in business activity as the economic recovery unfolds over the following weeks.

According to STATEC, Luxembourg’s GDP grew by 1.4% over the first quarter of 2021, bolstered by strong performance in the financial and communications sectors. This allowed Luxembourg to stay ahead of the Euro Area, which recorded an average decline during this period amid a resurgence in cases which hampered the expansion of economic activity in the bloc. For Luxembourg, the stabilisation of new COVID-19 cases and the fact that most economic activities in the country have returned to normal indicate a favourable landscape for the coming weeks. Nevertheless, the accelerating spread of the Delta variant should not be ignored, as it could create headwinds to economic recovery and further development.       

June saw the Eurozone record its fourth consecutive in overall business activity, attaining levels unseen since 2006. This was underpinned by a marginal uptick in manufacturing output, a strong improvement in the services sector and a boost in both domestic and foreign demand. With backlogs still increasing, the output capacity for both manufacturing and services sectors continues to be challenged, with staff levels rising further in order to alleviate pressure. Nevertheless, businesses were faced with rallying production costs during this month, fuelled by an upward pressure on wages and other operational costs. This notwithstanding, sentiment remains at very optimistic levels for the coming weeks - with strong growth expectations being recorded across the Eurozone.  

STATEC performed an econometric analysis of Luxembourg’s housing prices, which was published in a report in June. Researchers created a model based on several fundamental variables that usually affect house prices in order to determine whether or not there is a speculative bubble in the Grand Duchy’s residential property market. By taking into account cost, supply and demand variables (such as the cost of land, number of buildings completed, number of households etc.), they concluded that there is no significant overvaluation present in the current market. In other words, the divergence between the current price trajectory and what fundamental variables dictate is not strongly pronounced, standing at a 5% overvaluation for 2020. Looking ahead, their model indicates that this percentage difference will stand at +9% for 2021 and +5% for 2022.

One of the ongoing debates among strategists and economists across the globe concerns the spike in inflation observed in many developed economies. This uptick in prices is primarily fuelled by supply constraints and a surge in demand resulting from the accumulation of savings during the pandemic. Nevertheless, the nature of this inflation (whether temporary or long term) remains to be seen in the coming months.