PwC/AGEFI Monthly Barometer - July 2023

The Monthly PwC Business Barometer

Economic Confidence indicator in collaboration with AGEFI Luxembourg

PwC/AGEFI Monthly Barometer - July 2023
Economic outlook worsens further as contraction persists

Key Takeaways

  • The PwC Business Barometer dropped by 5 points last month reaching -8 as of June 2023.
  • The impact of the ECB's rate hikes is resulting in a slowdown of business activities in Luxembourg. However, certain sectors, such as the banking sector, continue to exhibit resilience with higher profits and value-added in aggregate.
  • In the Eurozone, the ECB’s monetary tightening had a more pronounced negative effect on the industrial sector, compared to the services sector, leading to a two-speed economy. The manufacturing sector is expected to face declining demand and excess capacity, which may result in downsizing and production cuts in the second half of 2023.
  • In June, global consensus on monetary tightening started to waver, as major central bank meetings revealed divergences. Notably, the Fed opted for a "hawkish pause" in interest rate hikes.
In collaboration with AGEFI Luxembourg

Economic Confidence Indicator

July 2023

Continuing its decline since Q1 2023, the PwC barometer fell 5 points in June to -8. Business confidence has continued to slip since Q1 2023, as monetary tightening slows growth in the overall economy.

After temporary spikes in May due to wage indexation, Luxembourg experienced a decline in both annualised core and headline inflation, reaching 4.7% and 3.6% respectively, by the end of June 2023.

However, inflation is likely to rise again due to increasing prices in consumer services after April's wage indexation. The job market may be starting to feel the impact of the economic slowdown, with unemployment rising from 4.9% in May to 5.0% in June, the highest level since 2021. The construction sector contracted by 0.8% year-on-year in Q1 2023 amid the ongoing real estate crisis. Meanwhile, certain sectors, such as the industrial sector, showed resilience in the first quarter as employment grew by 0.3%. Luxembourg’s banking sector also benefited from the ECB's rate hikes, as interest margins surged by 66%, fueling profits and value-added in aggregate. Nevertheless, the Eurozone recession is severely undermining Luxembourg’s industrial confidence, which sank to its lowest level since the onset of the Covid-19 pandemic in April 2020.

At the Eurozone level, the ECB’s commitment to raising interest rates has resulted in divergent price movements for goods and services. Indeed, services-related inflation remains sticky due to wage pressures, although rising prices are slowing down. Meanwhile, demand for goods is declining at an accelerating pace, which is relieving pressure on previously strained supply chains as factories reduce their orders for inputs. Hence, the secondary sector is grappling with surplus capacity, which may be mitigated through downsizing and production cuts in the second half of 2023. Output will likely suffer until the rest of the year, especially if the tertiary sector follows the same trajectory as the industrial sector. PMI for industrials dipped slightly into recession levels, dropping to a six-month low of 49.9.

In June, global consensus on monetary tightening started to waver, as major central bank meetings revealed divergences. The US Fed decided to maintain rates in June while signalling potential future hikes later in the year, as officials assess the effects of the US banking crisis and previous rate increases. Three weeks later, the BoE moved forward with another hike, increasing rates by 0.5 percentage points. In contrast, China responded to lower-than-expected consumption and industrial output data by reducing its interest rates to stimulate its slowing economy.

About the PwC Business Barometer

  • The monthly PwC barometer, in collaboration with AGEFI Luxembourg, is an economic confidence indicator that is intended to be a simple and pragmatic tool aimed at capturing the economic atmosphere of the Grand Duchy each month.

  • The indicator is based on a number of sentiment indices published monthly by Eurostat and Sentix, which are based on surveys (businesses, consumers or investors/analysts).

  • The indicators used are: consumer confidence (EA for euro area and LUX for Luxembourg), industrial confidence (EA and LUX), construction confidence (EA and LUX), financial confidence (EA), retail confidence (EA), services confidence (EA) and the Sentix Index (EA).

Contact us

Dariush Yazdani

Dariush Yazdani

Partner, Global AWM Market Research Centre Leader, PwC Luxembourg

Tel: +352 49 48 48 2191

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