On the occasion of its traditional annual economic conference, Luxembourg's Chamber of Commerce took stock of 2020, a year marked by the COVID-19 health and economic crisis, as well as companies' expectations for 2021, a year expected to be marked by uncertainty and considerable volatility, between new health restrictions and the hope of a positive impact of vaccinations.
The uncertainty and volatility inherent in the unpredictable nature of the COVID-19 pandemic as well as its very heterogeneous impact on the different economic sectors make it difficult to establish reliable projections, especially in Luxembourg, an open economy and largely dependent on developments abroad. At the start of the crisis in the spring, the forecasting institutes were counting on a difficult year but also on a rapid return to a “new normal” at the end of 2020, opening the prospect of a rigorous recovery from 2021. Instead, the second wave of the pandemic and the related health restrictions will impact the economy and many businesses into 2021 (and beyond).
According to the Chamber, the fact that the pandemic often has a very unequal impact on the different economic sectors also makes it more difficult to put in place effective remedies and solutions. The 2021 state budget, which will be voted on this week, is heavily influenced by business aid measures. The Chamber stressed that these must be maintained and even extended to ensure the survival of viable companies before the crisis and to put the post-COVIDrecovery on solid foundations. These direct and indirect aid, loans guaranteed by the State, partial unemployment, investment subsidies, etc. significantly increase public deficits and indebtedness while tax revenues also decline. However, the Chamber maintained that there is no option but to pursue a counter-cyclical fiscal policy in the current situation.
Medium-term economic development will largely depend on the success of the vaccination campaigns which started in December in certain European countries and beyond. The more or less widespread arrival of vaccines from early 2021 therefore bodes well, although it may take several months to see the first lasting effects on society and the economy.
Although weakened by the crisis, Luxembourg is faring better than the rest of the EU. This can be explained, in part, by the structure of its economy, which is largely oriented towards services and finance (which accounts for more than a quarter of its GDP), a sector which has been doing well so far. The relative health of public finances has enabled the rapid implementation of direct and indirect aid measures for businesses and households. After rising in April and May, the unemployment rate remains higher than at the start of the year but stable at around 6.3%. According to STATEC forecasts, assuming that the pandemic is contained, growth should start to rise again in 2021, without however returning to its pre-crisis level. Confirmation of this trend hinges on factors that are difficult to predict, such as the trajectory of the pandemic, the additional costs it will impose on the economy, the robustness of sectors and consumer confidence.
The results of the second quarter edition of the "Barometer of the Economy" survey are rather encouraging. However, it should be noted that the investigation was conducted in September, at a time when the probability of a second confinement, partial or complete, with a new closure of certain sectors of activity, seemed low.
During the third quarter of 2020, real GDP went up 0.5% compared to the same quarter of 2019 and up 9.8% compared to the second quarter of 2020. Thanks to this strong recovery recorded by STATEC and assuming that the GDP in the fourth quarter of 2020 is equal to that of the third quarter, the decrease in GDP in 2020 would be limited to 1.4%, which is more favourable than all forecasts since the start of the pandemic.
Nevertheless, different sectors of activity face various difficulties. The decision to extend the closure of cafes and restaurants until January is hitting the hospitality industry hard. To counteract this gloomy development, the aid announced by the government will have to be released and made available as soon as possible, according to the Chamber.
The hospitality sector, like almost all sectors in great difficulty, is expected to suffer in 2021 from the combined effect of an increase in labour costs and a more or less serious shortage of cash. In this context, the Chamber has called for more administrative support for the sectors particularly affected by the crisis, for example, by the establishment of a moratorium without default interest on the payment of debts to public administrations accompanied by adaptation of payment terms to companies' reimbursement capacities. The tourism sector, which is suffering in particular (like the passenger transport sector) from a marked drop in business tourism, must be supported.
Other sectors are characterised by a certain resilience. This is particularly true of the financial sector, whose continuous diversification and development over the past decades has given it a certain solidity. Faced with the duration of the crisis, the Chamber warned of the delayed effects and a phase shift in the impact on the banking and insurance sectors of customers who can no longer honour their commitments following the crisis. This risks lowering their income, while the costs continue to rise. The increase in provisions for risks will lead to a decrease in the contribution of the financial sector to government tax revenues.
The industrial sector stands out for a definite recovery which bodes well for good performance in 2021, provided that external demand remains sustainably high and that competitiveness and attractiveness can be maintained. Nothing is less certain, however, in a volatile environment marked by structural challenges impacting the industrial sector, including the digital and energy transition. Construction is still facing dynamic domestic demand and this good performance should also continue in 2021, if the planned investments are maintained. The same is true of the ICT sector, faced with the acceleration of the use of the internet and the Cloud.
The Chamber concluded that, to get through this crisis, the companies most affected by health restrictions must also benefit in 2021 from public support measures. In general, the economy must be supported by a countercyclical budgetary policy, based on high public investments and by a pro-business and stimulating environment, the main vectors of which strengthen competitiveness and the attractiveness of the Grand Duchy. On this basis, the recovery must be resolutely prepared now, in order to allow the Luxembourg economy to return to the path of qualitative and vigorous growth. A proactive political strategy in this direction is necessary to prepare society for the many challenges of the future, to diversify the economy, to quickly consolidate public finances, to consolidate the triple A and to rebuild financial reserves to face the next exogenous shocks and endogenous.