PwC/AGEFI Monthly Barometer - June 2025

In collaboration with AGEFI Luxembourg

Economic Confidence Indicator

June 2025

The PwC Business Barometer has rebounded to -1 in May, a notable improvement from April’s -13 reading and the highest level recorded so far this year.

This rebound in sentiment within the Grand Duchy has been largely driven by a sharp recovery in consumer confidence. According to the Central Bank of Luxembourg, households have significantly revised their expectations regarding both their personal financial outlook and, more markedly, the broader economic situation in Luxembourg. This renewed optimism has been underpinned by a loosening of consumer credit conditions in the first quarter of the year, as reported by the Bank Credit Survey. The easing was primarily attributed to declining interest rates and narrower lending margins. While consumer sentiment has improved, the construction sector has only shown a modest recovery. Despite a slight upward trend in recent months, activity remains subdued and well below its long-term average. Encouragingly, since the beginning of the year, the proportion of firms reporting insufficient order backlogs has been declining, reversing a trend that persisted through the end of 2024. Employment prospects in the sector have also seen a mild improvement, and the share of companies citing labour shortages has recently stabilised. Conversely, job creation in the financial sector has slowed considerably. Preliminary data for the first quarter indicate employment growth of just 0.3%, a pace last observed during the height of the COVID-19 crisis in late 2020. The sector now faces additional headwinds from proposed US legislation. A provision in Donald Trump’s “One Big, Beautiful Bill Act” (OBBB) could significantly raise US withholding taxes on dividends and interest income. If enacted, Section 899 would empower the US Treasury to impose withholding tax rates of up to 50%, potentially impacting Luxembourg UCITS heavily exposed to US securities.

The implications of the OBBB extend beyond Luxembourg. The entire European Union may come under pressure, as the bill includes retaliatory measures targeting European firms in response to taxes levied on US companies abroad. This development casts a shadow over the region’s economic outlook, which had recently improved following a fifth consecutive month of business expansion in the Euro Area in May. Manufacturing led the growth, while services activity contracted for the first time since November. The resurgence in business confidence was further supported by easing inflation, which fell to 1.9% in May, according to preliminary figures. With the ECB’s 2.0% inflation target effectively met, policymakers enacted a fourth interest rate cut since the start of the year, potentially signalling the end of the current reduction cycle.

In the US, inflation dropped to 2.4% in May, reinforcing market expectations that the Fed will begin cutting rates by September, with a second reduction likely by year-end. However, this outlook could be disrupted if protectionist policies exert stronger-than-anticipated inflationary pressures. Trump has already indicated that unilateral tariffs could be reintroduced imminently, as the current pause expires on 9 July. Should further tariffs be imposed—and met with retaliatory measures—the disinflationary trend could stall, forcing central banks to reconsider their monetary policy trajectories and potentially undermining business confidence in the second half of the year.