PwC/AGEFI Monthly Barometer - March 2024

In collaboration with AGEFI Luxembourg

Economic Confidence Indicator

March 2024

In March, the economic barometer dropped to -7, marking the first decline since September. Despite some indications of confidence recovery, the ongoing crisis in the construction sector in Luxembourg persists without any signs of abatement, contributing to a deterioration in the overall business sentiment.​

In February, confidence within the construction sector of the Grand Duchy experienced a notable decline, reaching a new low of -17.6 points according to Eurostat. The challenges faced by the construction sector in Luxembourg – since the beginning of 2022 – persist and show no signs of improvement. The slowdown was further highlighted in the last quarter of the previous year, as demonstrated by a 14% YoY decrease in new mortgages granted (-17% compared to Q3). The drop was predominantly fueled by a decrease in demand for single-family homes, plummeting by 37% YoY in Q4, marking its lowest level since 2013. However, the bank lending survey indicates an improving outlook for new household loans. The seven major banks surveyed reported a reduction in loan refusals on average, with no plans to further tighten their criteria for home loan approval in the coming months. They anticipate a potential increase in mortgage demand starting from Q1 2024, which could offer some relief to the struggling construction sector. On a positive note, STATEC has lowered its inflation forecast for this year to 2.2% from the previous estimate of 2.5%. Nonetheless, inflation might rebound to 3.3% in 2025 after the energy price caps are lifted next January if no new measures are implemented. The Minister of the Economy has stated that the government is considering extending some energy subsidies that are set to expire, aiming to mitigate the impact of rising prices resulting from a reduction in aid.​

At the Euro Area level, the composite PMI increased from 47.9 in January to 48.9 in February. Although remaining below the critical threshold of 50, there are signs that the rate of decline is moderating in the first quarter of 2024. Nevertheless, caution remains prominent in economic outlooks, as noted by the European Commission. Factors such as the phasing out energy support schemes, sustained geopolitical tensions, and potential escalations in Middle Eastern conflicts impacting Red Sea routes continue to pose risks. Consequently, growth projections for 2024 have been downgraded, with the EU now expected to see a modest growth of 0.9%, down from the previously anticipated 1.3%. The ECB has also revised its forecasts, anticipating that inflation will average 2.3% in 2024 and reach the 2% target in 2025. With this adjusted outlook, the possibility of rate hikes could materialise as early as June.​

During the March meeting, the Fed decided to keep the official interest rates stable in the US. With inflation remaining above the targeted 2%, there is a necessity for clear evidence of a consistent downward trend before contemplating any rate adjustments. Given the strength of the US economy, policymakers stressed that there is no pressing need for immediate rate reductions. They may seek additional indicators demonstrating the impact of the highest US policy rate in decades on the labour market. February's data highlighted a resilient job market, surpassing economists' forecasts by 75,000 new job additions.