PwC/AGEFI Monthly Barometer - September 2022

In collaboration with AGEFI Luxembourg

Economic Confidence Indicator

September 2022

The PwC economic barometer decreased by 9 points during the months of July and August reaching a score of negative six by the end of the period. The monetary policy tightening by the European Central Bank increased confidence in the financial sector, while the reduced purchasing power of consumers continued to negatively impact other industries.

Luxembourg’s economic outlook for the second half of the year is not very promising. The environment is currently characterized by persistent inflation, which has not only eroded consumers’ purchasing power but has also affected their confidence – causing them to reach Covid-19 crisis levels. Rising living costs has put pressure on households, forcing them to end non-essential spending. Parsimonious behaviors and inflation have similarly affected international demand and the Luxembourg economy alike. Inflation forecasts for the country have been revised and adjusted to consider an expected increase of 90% in gas prices as well as further uncertainty about euro depreciation. As a consequence of the rising input costs and decreasing demand, the industrial confidence has weakened and has caused a less optimistic outlook for the third quarter. The bank lending survey published in July shows a fall in the second quarter for the issuance of fixed-rate mortgages, caused by a decline in the demand for home loans due to a change in consumers’ market perception. The outlook for business loans is quite similar. Although the rates have registered a growth of only 10 bps, the demand has fallen by 3.1% over one year. This trend, however, is not sustained at the European level where the issuance of these loans is rising, driven by working capital needs.

The decreasing demand trend that we see in the food and real estate industries persists, even when this analysis is extended to the entire euro zone where low consumer confidence, fear of rising costs, and elevated uncertainty still play a primary role. On the other hand, the clothing and personal items industries have shown more resiliency than anticipated, recording a slight increase of 0.3% in July - for both sales and demand - hinting of a possible recovery and return to more normal spending patterns. Accumulated savings, pent-up demand, and gradual easing of supply constraints, were cited by the ECB as possible aids to sustain economic activity in the coming months. However, if further restrictions are placed on gas suppliers, households will gradually begin to feel the financial strain brought on by price increases.

The month of July was also characterized by the European Central Bank’s decision to increase interest rates by 50 bps to hedge against rising inflation. However, this decision also brings challenges. Firstly, the ECB’s macroeconomic projections for the month of September may include the possibility of economic stagnation in 2023 since the euro has reached parity with the USD, further raising uncertainty and fear of recession. Furthermore, the European Central Bank may also face the challenge of fighting inflation without destabilizing bond yield spreads. However, on a more positive note, European debt obligations are characterized by a relatively high weighted-average maturity, a key factor for debt sustainability since it will take longer for an interest rate shock to affect the whole stock and average cost of debt.