In the midst of overall economic improvements at national and international levels, the Luxembourg economy is expected to benefit from GDP growth this year and next of close to 5%, according to figures released by STATEC, the national statistics agency. 

This expansion would be better balanced, they say, on the one hand between domestic and external demand and on the other hand between the respective performance of financial and Non-financial industries.

Global growth, after slowing in 2015 and 2016, is expected to strengthen this year and next, benefiting both advanced and emerging economies. The euro area is continuing a relatively moderate but steady growth cycle. Very positive signals have come from business surveys in recent months, which suggest the possibility of a strengthening of activity in the euro area as a whole this year.

Based on these developments and the forecasts of the main international organisations, STATEC expects growth in the euro area to be close to 2% in 2017 and 2018. Domestic demand is mainly driven by household consumption to date. It should benefit from an acceleration of private investment in 2017 and even more so in 2018, which would allow the recovery in the euro area to become more self-sustaining 

Luxembourg's GDP growth exceeded 4% in 2016 and the dynamics of previous years have been revised upwards. Economic expansion continued at the end of last year, with a better balance between external and domestic demand. The financial sector should benefit from a more favourable environment, underpinned in particular by the upturn in the stock markets and the continuation of a good dynamics of loans to households and businesses. 

For the other sectors, indicators of production (industry and construction) and turnover (non-financial services) showed somewhat disappointing developments in the first months of 2017. However, the confidence of firms and households is historically high, and the strengthening of European economic dynamics are favourable factors that can stimulate activity.  

There is much support for increased private consumption and investment, while these two components have contributed modestly to growth in recent years.

For the current year as a whole, STATEC forecasts a real GDP growth of nearly 5%, a pace that should be maintained in 2018. The economy is thus heading towards a top of the cycle with a clearly positive output gap and a rapidly expanding labour market, all against the backdrop of no significant tensions on prices and wages.                                                                                                                                      

In Luxembourg, as well as in the euro zone, the inflation rate has recovered considerably in recent months and reached a high since 2013. It was supported at the beginning of the year by oil and food prices - In Luxembourg due to the effects of the indices applied in January. Beyond these factors, the underlying pressures are low.

STATEC expects an inflation rate in Luxembourg of 1.8% in 2017 and 1.7% in 2018. This substantial rise is due not only to the upturn in oil prices, underlying inflation. This would rise to 1.4% in 2017 and 1.8% in 2018.

In 2017, the average salary cost in Luxembourg is expected to increase significantly, mainly due to indexation at the beginning of the year, but also to the wage agreement in the civil service and - to a lesser extent - of the revaluation of the minimum social wage on 1 January. 

The expected fall in unemployment for this year and next year is also expected to contribute to increased cyclical pressures on wages. In real terms, that is, excluding the impact of indexation, the trajectory of the latter would remain relatively moderate until 2018. 

Domestic salaried employment accelerated by the end of 2016, reaching 3.3% over one year in the last quarter. All sectors are contributing to this improvement and job vacancies remain at a historically high level. 

Unemployment reflects this dynamic and continues to decline, reaching 6% of the working population in April 2017, after 6.2% at the turning point of the year. The decline is also affecting the most vulnerable categories. 

However, the absolute level of unemployment remains too high to generate significant tensions on prices and wages. These developments, together with the expected economic growth for 2017 and 2018, lead to a continuation of high-growth job creation and a fall in the unemployment rate this year and next.

A slight surplus on financial funds is expected for 2017 and 2018. The Luxembourg government finances are in a very favourable state, respecting all the European criteria and releasing for the sixth consecutive year a surplus. 

The latter, at €850 million or 1.6% of GDP in 2016, is nevertheless expected to deteriorate in 2017. The tax breaks related to the tax reform and the new VAT losses on electronic commerce Indexation at the beginning of 2017 will boost both revenue and expenditure, with a slight increase for the latter, which will weigh on the balance. 

However, it should remain positive and then improve substantially in 2018, under two conditions: the continued recovery and the absence of new structural disturbances. On the other hand, the structural balance - cleared by the effects of the economic situation - could become negative by 2017, according to STATEC forecasts, but still meet the European criterion of a deficit of less than 0.5% of GDP.