PwC/AGEFI Monthly Barometer - September 2023

In collaboration with AGEFI Luxembourg

Economic Confidence Indicator

September 2023

The PwC barometer reached -11 in July, the lowest point in an overall negative trend that began in February. In August, the indicator rebounded back to June levels at -8.

The July drop was caused by a decline in Luxembourg’s consumer confidence that was primarily driven by a substantial increase in prices during the summer season. Inflation in the Grand Duchy escalated significantly, rising from 3.2% in June to 3.7% in July and reaching 4.2% in August (source: STATEC). This surge in inflation is mainly due to soaring fuel prices, with diesel prices surging by 10% and petrol prices by 6.2% during August. Petroleum product prices have thus seen continuous increases over the past three months – a striking development. Furthermore, the cost of heating oil for households preparing for the upcoming winter season saw a remarkable 19.1% increase within a single month. However, despite the growth, petroleum product prices still remained 1.3% lower than those of August 2022. And – excluding adjustments related to sales and petroleum products – prices for various other goods and services in Luxembourg saw a mere 0.3% increase over the past month. In response to the mounting inflation, the government has decided to implement additional wage indexation measures as of September 1st, resulting in a 2.5% increase in wages and pensions.

The overall outlook for the Grand Duchy thus remains altogether cautious for the remainder of the year, mostly because of the inflation surge but also due to a stubborn unemployment rate (5% in May, 5.2% in June and July).

Within the Euro Area market, the short-term economic outlook worsened in August, as new business declined for the third consecutive month – a decline occurring at a rapid tempo not seen since November 2020. This trend has affected both manufacturers and service providers, with manufacturers experiencing comparatively more pronounced challenges. Exports of both goods and services fell for the eighteenth consecutive month, and this decline was one of the most severe ones on record. The weakening demand also manifested in capacity data, as outstanding business decreased at an accelerated rate in August. Moreover, the drop in backlogs during the latest period was the most significant one since the second half of 2012 – Covid-19 period excluded. Manufacturing backlogs have been steadily declining since June 2022 as well, while outstanding work for service providers has fallen six times during the past year.

Global economic outlook remain very prudent. Recent IMF projections foresee a slowdown in overall economic growth, from 3.5% last year to 3% this year and the next (an improvement of 0.2% compared to the previous forecasts). This slowdown may be particularly substantial among advanced economies, where growth is set to fall from 2.7% in 2022 to 1.5% this year and remain subdued at 1.4 % in 2024. However, global inflation is expected to decline from 8.7 % last year to 6.8% this year, with a downward revision of 0.2% points, and to further decrease to 5.2% in 2024. But the Euro Area, still recovering from last year’s spike in gas prices, is generally expected to experience a significant deceleration.