PwC/AGEFI Monthly Barometer - September 2024

In collaboration with AGEFI Luxembourg

Economic Confidence Indicator

September 2024

In August 2024, the PwC Monthly Barometer dropped to -10: a decrease of 8 points since the last published figure for June, after touching -8 in July. The decline can be attributed to the large drops in confidence in the industrial and construction sectors of Luxembourg, offsetting the stability measured across all other sectors, together with large uncertainty between investors across the Eurozone.

The business confidence across Luxembourgish economic sectors has been hit by the effects of the decline in aggregated demand, with data showing a slowdown in economic activity. The STATEC report for July presented the values of the yearly employment rate, which registered the slowest growth rate since the 2009 financial crisis (+0.8%).  At the same time, the unemployment rate has remained stable, further evidence of an economic slowdown, with individuals choosing inactivity against job-seeking. This is even more true for the construction sector, which in the first half of 2024 stagnated at the low employment levels recorded in the previous year. In August, STATEC reported also a decline in cross-border employment, especially from Germany and Belgium, registering a -0.5% and -0.2% respectively between the end of 2023 and May 2024. These slowdowns are the outcome of the decline in demand across all productive sectors, which in turn forces them to scale down their activities.  This negative economic sentiment has even overcome the excitement surrounding the positive results obtained on inflation, as the Grand Duchy registered its lowest level since the beginning of 2021, at 2%. A result derived from the drop in prices of petroleum products observed in the last couple of months, together with the seasonality of some retail products (clothing and footwear).

Despite the positive results obtained by the ECB’s monetary policy to tackle inflation - with the Eurozone reaching the lowest level for three years ago (2.2%) in August - European investors’ confidence has drastically dropped in the last two months. The EU’s political scenario remains uncertain, with the two largest economies, Germany and France, amid tide-turning elections. Both countries are also facing the need for reforms to improve their economic results, currently underperforming, in terms of GDP growth, against EU’s periphery countries. In the second quarter of 2024, Germany recorded another negative (-0.1%) GDP quarterly change while France recorded a sluggish albeit positive figure (+0.2%), however remaining far behind Spain’s 0.8% growth. The European stock market has been affected by the decline in confidence, which was likely influenced by economic reports from the U.S. The Euro Stoxx 50 index experienced a 6% drop in early August but has since recovered in the following weeks.

On August 2nd, the Labor Department of the U.S. published its figures on employment levels, with an unexpected spike in the unemployment rate, the highest since 2021. In the same week, the Nikkei registered an overnight loss of 12.4% due to the Bank of Japan’s further increment of interest rates – the worst day for the index since the 1987 crisis. This had investors all over the world fearing a global recession, with some even invoking the Sahm Rule. This led to the S&P 500 losing 6% in a week, with the Nasdaq and Dow Jones also dropping by 7.5% and 5% respectively. While the fear index (VIX) reaching a peak not seen since the pandemic. A similar scenario appeared more recently, after the publications of the Institute for Supply Management’s survey results, which showed manufacturing activity contracting for a fifth straight month in the U.S. Many have expected a reactionary policy by the FED, which arrived in the last week of August. In the FED’s annual retreat, Jeremy Powell stated: “The time has come for policy to adjust”. This powerful forward-guidance response has allowed the markets to already recoup their losses, with analysts expecting a 25bps cut in interest rates to happen in September and a presumably improved outlook for the months to come.