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Growth is projected to strengthen significantly to 4% by 2019, boosted by dynamic domestic demand and growth in the domestic financial sector, which will foster exports. Wage growth, which is projected to pick up following automatic wage indexation at the beginning of the year, is a factor behind higher inflation. The unemployment rate is declining slowly, but, at around 6%, remains high, at least by Luxembourg standards.
Fiscal space is appropriately being used for tax reform, introducing welcome incentives for labour market participation, such as an optional individual taxation for married or co-habiting workers. Further pension reform would help to ensure long-term fiscal sustainability, and increases in taxes on transport fuels would promote green growth. The strategic focus of the government on digital technology and renewable energy is welcome, but needs to be complemented by policies facilitating the relocation of labour and better aligning the supply of skills with labour market needs.
The high dependence on financial sector developments entails risks, and hence efforts to diversify the economy are welcome. The low level of interest rates, together with the constrained supply of housing, may contribute to strong house price increases. Risks associated with increasing house prices and high household indebtedness should be closely monitored and, if necessary, addressed by additional macro-prudential measures.
Economic Survey of Luxembourg (survey page)