PwC/AGEFI Monthly Barometer - March 2023

The Monthly PwC Business Barometer

Economic Confidence indicator in collaboration with AGEFI Luxembourg

PwC/AGEFI Monthly Barometer - March 2023
The economy’s resilience suggests relatively soft landing but lagged effects of monetary tightening are likely

Key Takeaways

  • The PwC Business Barometer increased by 4 points last month, reaching a level of +7 as of the end of February.
  • The retail sector’s good performance and expectations of a stable inflation rate in 2023 are the main factors driving growth in business confidence in Luxembourg.
  • Business activity in the Euro Area grew for the second consecutive month in February, led by an improvement in the services sector’s output.
  • Despite a strong degree of resilience observed in the last period, the global economy is likely to experience the effects of monetary policy tightening in the coming months.
In collaboration with AGEFI Luxembourg

Economic Confidence Indicator

March 2023

The PwC economic barometer increased by 4 points in February to reaching a level of +7 by the end of the month. This marks the fourth consecutive month of improvement. Although the services and construction sectors performed poorly, business confidence was bolstered by the strong performance of the retail sector.

Although business confidence in Luxembourg has been gradually recovering from its lowest point in September, the recovery has been less pronounced compared to other EU economies. The non-financial services sector has been experiencing low demand since January, constraining current economic growth. Additionally, the tightening of financial conditions is starting to have a significant impact on investment, especially in the housing sector.

As expected, the increase in interest rates is having a negative impact on households' ability to borrow money. Specifically, the variable and fixed rates for new real estate loans have increased from a respective 1.30% and 1.49% in January 2022 to 2.58% and 3.54% in December 2022. As a result, the number of mortgage applications that were approved decreased by 11% for apartments and 20.3% for houses in 2022 compared to 2021. Additionally, the mortgage volume in euros also declined, with a reduction of 30.7% for apartments and 15.7% for houses, denoting a shift to smaller apartments as prices per square meter skyrocket. In the short-term, the situation is unlikely to improve as the most recent data indicates an average "variable" loan rate of 3.51% in January. This is up from 2.58% in December according to official data and is almost on par with the "fixed" mortgage rate, which reached 3.6%. Despite this, overall confidence has improved due to positive sales data and lower-than-expected inflation projections for 2023. Recent forecasts suggest that inflation in Luxembourg is expected to be limited to 3.4% in 2023, thanks to government measures aimed at limiting increases in gas and fuel prices. However, the inflation rate is expected to rise to 4.8% in 2024 due to expected upward adjustments in energy prices, assuming there are no new government measures implemented.

Private sector activity in the euro area expanded for the second consecutive month, reaching an eight-month high due to improved services output and stable manufacturing production. However, despite increased business confidence, concerns remain that high inflation and unexpected economic resilience may lead to more aggressive monetary policy tightening by the ECB in the coming months. The eurozone's hard data is not promising, with downward revisions to German and Irish GDP data placing the economy on the brink of recession in Q4 2022 – with a possibility of stagnation in Q1 2023. Following the expected 50bp hike in March, the ECB is likely to increase rates by 25bp in May and June before pausing its hiking cycle. A terminal policy rate of 4% is the most likely outcome for H2 2023, with a possible peak of 4.5% if inflation persists until 2024.

Despite expectations of stagflation or a mild technical recession in 2023, the US economy's near-term growth is proving to be more resilient to monetary policy tightening than initially anticipated, leading the Fed to continue raising interest rates. However, some experts believe that the long-lasting effects of the largest monetary tightening cycle in 40 years may eventually lead to a severe recession.

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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