PwC/AGEFI Monthly Barometer - May 2025

In collaboration with AGEFI Luxembourg

Economic Confidence Indicator

May 2025

In April 2025, the PwC Business Barometer settled at -13, down from -7 in March. The reading marks a 30-month low, with the indicator at levels not seen since October 2022.

Global uncertainties, spurred by President Trump’s “Liberation Day” and a general loss of investor confidence regarding the future prospects of the U.S. economy, triggered a reallocation of assets towards European financial markets, suggesting a favourable scenario for the Grand Duchy. Indeed, Luxembourg-domiciled investment funds saw net asset inflows amounting to EUR 60 billion in Q1, marking a four-year record, benefiting from substantial portfolio rotations away from Ireland-domiciled ETFs targeting U.S. equities. On another positive note, the construction sector’s confidence rebounded from historic lows — driven by stabilising housing sales prices (+1.1% QoQ in Q4-24) and encouraging order books. Nevertheless, consumer morale and business confidence remains precarious, particularly in non-financial services. This fragility is well reflected in employment data, where employment in financial and non-financial sectors showed no growth compared to April 2024. Overall, aggregate employment increased by 1% YoY for the fourth consecutive quarter, driven solely by significant contributions from the public administration sector (+4%). Besides stalling economic conditions, Luxembourg residents also had to contend with an increase in inflation to 1.7%, up from 1.3% in March, mainly linked to seasonal rises in travel costs fostered by the Easter holidays, which more than offset falling oil prices that dropped to four-year lows.

The Euro Area economy remained in expansion territory in April, with the Eurozone Composite PMI holding steady at 50.4. The pace of expansion slowed compared to the previous month, and business activity remained below the long-term average, signalling the impact of uncertainties on the broader economic environment. The manufacturing sector’s performance kept the economy marginally out of contraction, thanks to output rising at the fastest rate since March 2022, while the services industry slowed despite increased hiring. New order intakes were depressed by weak demand conditions, leading companies to rely mostly on backlogs to support operations and to cut manufacturing jobs for the twenty-third consecutive month. This fragile demand, exacerbated by mounting trade tensions, increased the risk of further GDP growth slowdown and helped keep inflation under control, with the latest CPI reading stable at 2.2% in April. This situation prompted the Governing Council to cut interest rates by 25 basis points at its last meeting, where Christine Lagarde described the economic outlook as “clouded by exceptional uncertainty”.

Similarly, the Bank of England reduced interest rates to 4.25%, with Governor Andrew Bailey citing tariff-led global economic slowdown risks during his press conference. The Federal Reserve held its key interest rate unchanged at a range between 4.25% and 4.5% at its last meeting, with Jerome Powell emphasising a cautious approach amid policy uncertainties. Nevertheless, recent weeks have brought some relief regarding trade tensions between the U.S. and some global partners, supported by an initial deal struck with the U.K., which maintained the general 10% baseline on all products, with some exceptions for cars, steel, and aluminium. A more significant development occurred in Geneva, where the U.S. and China announced a 90-day pause on reciprocal tariffs. This agreement will reduce U.S. tariffs on Chinese imports from 145% to 30% and Chinese tariffs on U.S. goods from 125% to 10%. In this context, the macroeconomic outlook remains precarious, with the IMF reducing its global growth forecast to 2.8% in 2025 — down 0.5% from its previous estimate released in January — and slashing the expected U.S. growth rate for 2025 to 1.8% from 2.7%. Although these projections were released prior to the critical U.S.-China trade agreement, they still point to a global economy facing considerable headwinds in the medium term. New geopolitical frictions between India and Pakistan, along with difficulties in reaching definitive peace agreements in Ukraine and the Middle East, have further deteriorated the outlook, worsening overall confidence levels.