PwC/AGEFI Monthly Barometer - October 2023

In collaboration with AGEFI Luxembourg

Economic Confidence Indicator

October 2023

The barometer continued its decline that began in the second quarter, reaching -11 at the end of the third quarter, suggesting that the slight upturn observed in September was only a temporary break from the overall downward trend of the euro area economy.

The decline was driven by a drop in consumer confidence in the euro area and particularly in Luxembourg, where consumer confidence fell by almost 3 points to reach -16.5 in September. Admittedly, the fall in consumer confidence was not reflected in the headline sales data for Luxembourg, which rose by 5.5% year-on-year in the first seven months of 2023. However, the positive trend in sales was mainly due to increased demand from foreign consumers, driven in particular by distance selling and fuel. Conversely, although household consumption rose last year, the increase was mainly due to a significant rise in car purchases (+20% in Luxembourg), while retail sales fell in a context of persistent inflation. Headline inflation in the Grand Duchy fell slightly to 4.1% in September, but the figure was pushed up by rising fuel prices. Finally, on the employment front, the seasonally adjusted unemployment rate in Luxembourg remained broadly unchanged in the latest data from August, rising from 5.2% to 5.3%. However, quarterly employment growth in Luxembourg fell to its lowest level in ten years, excluding the COVID crisis, largely due to subdued growth in trade, transport and hotels and restaurants.

The economic picture was less nuanced in the broader euro area, where business activity is clearly slowing in the face of falling demand and household savings rates have risen for the fourth consecutive quarter. Output fell in both the manufacturing and services sectors in September, as companies worked through their backlogs of work due to insufficient orders. Although employment rose again last month, the increase came only from the services sector, highlighting the lagged response of manufacturing and services to the economic slowdown in the euro area. This two-speed economy is also reflected in the latest inflation figures, with inflation in services but deflation in manufacturing. In summary, a sharp fall in demand in a cooling euro area economy paints a gloomy picture for businesses in the year ahead.

With the Federal Reserve approaching what could be its interest rate peak, hopes of a downward adjustment in the near future are fading fast in the face of persistent inflation. A prominent contributor to global inflation this quarter, which shows no signs of abating, is oil. Demand for fuel remains robust, but major producers continue to restrict supply. In addition, the recent military attacks on Israel may put additional upward pressure on prices as the market prices in the potential risk of escalation in the region, which could further restrict the supply of key fossil fuels.