The PwC Business Barometer has recorded an increase for the third consecutive month, rising an additional 13 points in May. With overall sentiment at high levels, the economic outlook is looking largely positive for the coming weeks, as restrictions continue to be lifted and several activities steadily return to normal.
According to the OECD, Luxembourg’s GDP is expected to increase by 4.8% (YoY) in 2021, stimulated by the gradual improvement of domestic demand and the full reopening of several economic activities. A stabilisation of new Covid-19 cases, as well as significant progress in the vaccination programme have allowed for the relaxation of the sanitary measures in the country, such as the full abolishment of the curfew and the extension of working hours for bars and restaurants. That being said, unemployment is expected to rise to 6.6% in the third quarter of 2021, due to the cessation of several short time employment schemes that were put in place to foster the recovery. The future looks bright, however, as the acceleration towards the completion of the vaccination campaign will likely boost private consumption and investment even further, leading to a faster recovery in 2021 and 2022.
The rise in business sentiment is also evident at the eurozone level, as evidenced by an increase in service sector sentiment observed in most parts of the bloc. Specifically, activity in this sector rose for the second consecutive month, while manufacturing output growth also stood at high levels. With overall sentiment remaining positive, the recovery in the services sector is expected to continue during the summer, hence encouraging business owners to hire more personnel. New orders have outpaced output capabilities, which have been hampered by weak supply chains and delays in delivering necessary inputs. As a result, inflationary pressures are expected to resume, given the current supply-demand gap and the higher production costs businesses are facing.
Towards the end of May, the OECD published a revised version of their economic outlook for 2021 and 2022, highlighting the fact that global economic activity has largely returned to pre-pandemic levels. Nevertheless, the organisation has clearly stated that this recovery has been rather uneven between regions and that certain downside risks still exist. The resurgence of virus cases in some regions, as well as the appearance of new variants have increased concerns over a new wave of infections, while uncertainties regarding the production and effective distribution of vaccines could pose significant threats to economic recovery. In addition, the gradual withdrawal of fiscal support measures in 2021 and 2022 could also contribute to a lower growth rate and to unemployment standing above its pre-pandemic levels. On the other hand, excess household savings accumulated during 2020 could affect the recovery positively, accelerating demand growth in several developed economies.