PwC/AGEFI Monthly Barometer - July 2023

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.