Luxembourg’s GDP Forecast at 7% in 2021

On Friday 17 December 2021, Luxembourg statistics agency Statec presented its updated macroeconomic forecasts for Luxembourg and predicts 7% growth in real gross domestic product (GDP) for 2021 and a slowdown of 3.5% in 2022.

These forecasts remain largely dependent on how the health situation evolves and two alternative scenarios have also been drawn up with more or less severe pandemic-related restrictions than in the central forecast.

In the upper scenario, rapid vaccination roll-out would reduce uncertainty and boost confidence among households and businesses. Households would use some of the savings accumulated since the beginning of the the COVID crisis. The increase in consumption would consolidate the economic recovery in the short term and would bring global GDP back to a level comparable to a scenario without a COVID crisis over the medium term.

On the other hand, in the lower scenario, the spread of new COVID variants would lead to further health restrictions, dampening demand and further disrupting value chains. The economic recovery in 2022 would be limited and the financial markets would take a hit. For 2021, the results of the three scenarios are relatively close given that a good deal of data is already available. The differences are much more significant for 2022, with growth ranging from 1.8% to 5.2%.

Decline in unemployment expected to continue while inflation to remain relatively high

Statec reported inflation is currently in a phase of marked acceleration. After growing 2.5% over one year in the third quarter, it rose to 3.6% in October and then 4.5% in November, mostly driven by higher energy prices.

This is expected to be gradually absorbed over the course of 2022, bringing inflation to 2.5% for the whole year (as in 2021). The result would be little different in the lower scenario (2.4% in 2022).

Meanwhile, a low scenario configuration would have a more significant impact on wages, limiting the average wage cost increase to 2.7% in 2022, compared to 3.4% in the central scenario.

In terms of public finances, revenues recovered faster than expected in 2021, which should bring the public balance back on track (after a deficit of 3.5% of GDP in 2020), while most countries in the euro area will still experience a significant deficit this year. In 2022, Statec's central scenario posts a surplus of 1.4% for Luxembourg but half that in the lower scenario.