PwC/AGEFI Monthly Barometer - May 2023

In collaboration with AGEFI Luxembourg

Economic Confidence Indicator

May 2023

The PwC barometer fell 6 points in April to +1. The construction sector caused a slowdown in business confidence in Luxembourg as monetary tightening squeezed economic activity to cool headline inflation.

The consequences of the ECB’s aggressive rate hikes are becoming increasingly evident in Luxembourg, where the economy has suffered a significant slowdown since late 2022. While the number of bankruptcies in the country has remained relatively low, they have contributed to nearly 900 job losses in recent months, particularly concentrated in the construction sector, whose confidence dropped drastically in April, falling by 8.3 points to -1.7, the lowest level since May 2020. This can be attributed to a reduction in demand stemming from an upswing in mortgage rates combined to very high valuations in the residential real estate market. The ECB estimates that the Luxembourgish residential market is overvalued by 61%, an outstanding figure compared to Belgium, France, and Germany (respectively at 14%, 19.8%, and 24%). The industrial sector’s confidence is down by ten points to its lowest level since September 2020, whereas output per working day decreased by 8.2% YoY in January. While monetary tightening sparked a decline in economic activity, it eased Luxembourg’s inflation to 3.6% in March, supported by falling energy prices. However, food inflation remained high, reaching 13.3% in March (compared to 17.5% in the Euro Area), weighing down on consumers and leading to a drop in confidence in April, following the recovery observed in the first months of the year.

On the other hand, the Euro Area continued its economic expansion in the second quarter of the year, maintaining its momentum since the beginning of 2023. Growth in April reached an 11-month high, driven by services activity while manufacturing production fell for the first time since January. Despite this, employment growth increased to almost a one-year peak, while inflationary pressures continued to decrease. An improvement in demand conditions supported greater Euro Area business activity levels, with new order inflows rising moderately for the third consecutive month, driven by domestic sources. However, new export orders declined for the fourteenth month in a row.

In the US, headline inflation fell to 4.9% in April (the lowest value since April 2021) whereas core inflation remains high at 5.5%. Despite cooling inflation, the country’s economic outlook remains uncertain, as elevated interest rates have braked rising prices but squeezed the banking sector in the meantime, with the failure of First Republic Bank marking the fourth collapse in less than three months.