PwC/AGEFI Monthly Barometer - July 2025

In collaboration with AGEFI Luxembourg

Economic Confidence Indicator

July 2025

The PwC Business Barometer declined to -5 in June, a four-point drop from May, reflecting growing unease over Luxembourg’s economic trajectory.

After a strong rebound in the fourth quarter of 2024, Luxembourg’s economic recovery showed signs of faltering in Q1-2025. Real GDP contracted by 1.0% in the first quarter, primarily due to a downturn in the financial sector, which continues to exhibit pronounced volatility. Financial sector performance in Q1 was mixed amid stock market volatility, rising long-term interest rates, and rate cuts from the ECB. Value added in current prices rose modestly for financial auxiliaries, particularly fund management firms and insurance companies (by 2.6% and 2.1% QoQ, respectively). However, banks experienced a 2.7% decline. Their net interest margins dropped by 2.8% compared with Q4 2024 (and by 3.8% YoY). Although recent business surveys point to tentative improvements in industry and construction, activity levels in both sectors remain well below post-pandemic highs and pre-energy crisis benchmarks. In non-financial services, business sentiment has improved somewhat since mid-2024, but progress in early 2025 remains limited. These factors, coupled with a deteriorating global economic outlook, have led to a downward revision of Luxembourg’s GDP forecasts. Growth is now projected at just 1.0% for 2025 and 2.0% for 2026, markedly lower than projections made last autumn.

At the Euro Area level, the private sector recorded its sixth consecutive monthly rise in output in June, alongside a fourth straight increase in employment. However, both metrics remained subdued. Encouragingly, the decline in new orders appears to be stabilising, and the 12-month outlook reached its highest level in nearly a year. Input price inflation remained steady at May’s six-month low and below the long-term average, due to continued reductions in manufacturing input costs. Conversely, service providers reported persistently strong price pressures. This divergence was also reflected in output prices, which fell in manufacturing but continued to rise in services, albeit at a pace above the historical norm. Business confidence improved further from April’s 18-month low, although overall optimism remains muted compared to long-run trends, partly due to ongoing uncertainty surrounding transatlantic trade negotiations.

The Trump administration has postponed the reintroduction of sweeping tariffs until 1 August. From that date, tariffs will revert to their 2 April levels for countries that have not secured revised trade agreements with the United States. Washington has proposed a deal to the European Union that would maintain a baseline tariff of 10% on EU goods, with certain exemptions for sensitive sectors such as aerospace and spirits. This move follows the passage of President Trump’s “One Big Beautiful Bill” (OBBB), a major fiscal package expected to add an estimated USD 3.3tn to the federal deficit over the next decade. Should current trends continue, the US debt-to-GDP ratio could exceed 200% by 2050, a scenario that has raised alarm both domestically and internationally over the long-term sustainability of US public finances.