Luxembourg

LUXEMBOURG is a stable, high-income economy. It is the richest country in the OECD and has the highest GDP per capita, currently estimated at $116,752. With over 2,800bn euros in assets under management and the largest private banking centre in the eurozone with 300bn euros, it is the world’s second largest investment fund centre after the US, and the global leader in terms of offering cross-border funds.

As a major financial centre for private equity, its funds invest directly in European companies. Furthermore, Luxembourg is the leading microfinance fund centre internationally and its funds provide liquidity that ultimately helps micro entrepreneurs to set up and expand their small businesses in developing economies as well as in some of the EU member states.

Luxembourg boasts of an international financial centre which accounts for about 28pc of GDP and plays a key role in its economy. But over 65pc of the economy is still made up of other industries and services. Besides highly diversified banking sector (private, depositary, retail, commercial and corporate banking) and leading investment fund industry, it also plays host to global industry leaders. The industrial sector, initially dominated by steel, has become increasingly diversified to include chemicals, rubber, and other products. Growth in the financial sector has more than compensated for the decline in steel. The financial centre contributes around one third of the Luxembourg state budget.

Economic output in Luxembourg is projected to continue growing strongly this year. National statistics office, Statec, predicts a 3pc growth in Luxembourg GDP in 2014, up from 2pc last year. Growth will slow to 2.4pc in 2015, and then recover only partially to 2.9pc in 2016, as a result of the change in the EU value-added tax (VAT) from January 1, 2015. While the headline rate of VAT will be hiked, the two VAT rates will be cut by 2pc from January 1. As a result, the standard VAT rate will be raised to 17pc, still the lowest within EU.

Persistently weak inflation and good employment prospects are expected to boost households’ purchasing power and underpin consumption in 2014. Receding energy and non-processed food prices have driven inflation down to 1pc in 2014 from to 1.7pc in 2013 but will bounce back to around 2pc in 2015, partly in response to the VAT hike, and then level out in 2016. The unemployment rate is expected to only slightly decrease in 2016 to 6.1pc after peaking at 6.2pc in 2015, partly reflecting a slow but sustained increase in structural unemployment. The IMF is projecting 7.1pc unemployment for 2014 and 6.9pc next year.

In 2015, public finances will be strongly marked by the VAT revenue shortfall, estimated at around 1.5pc of GDP, due to the change in EU regulation on e-commerce. The consolidation measures included in the draft budget, amounting to slightly above 1pc of GDP, are expected to only partially offset the fiscal loss. The structural fiscal balance is estimated to narrow from a surplus of 1.25pc of GDP in 2014 to a surplus of 0.5pc of GDP in 2015 and to weaken further in 2016.

Switzerland

SWITZERLAND is a modern market economy with low unemployment and a highly skilled labour force. Its economy benefits from a highly developed service sector, led by financial services, and a manufacturing industry that specialises in high-technology, knowledge-based production.

The country depends heavily on foreign trade for its wealth. The global financial crisis of 2008 and resulting economic downturn in 2009 stalled export demand and put Switzerland in a recession. Switzerland’s economy began to recover in 2010 after the Swiss National Bank (SNB) effectively implemented a zero-interest rate policy to boost the economy and prevented appreciation of the franc. The franc’s strength made Swiss exports less competitive and weakened the country’s growth outlook. GDP growth fell below 2pc per year during 2011-13.

Switzerland had traditionally maintained an elaborate banking system with a high degree of bank secrecy which was considered a safe haven for foreign investors. Under pressure of the OECD money-laundering task force, Switzerland reluctantly started to tighten its money-laundering rules. It will abandon its long-prized banking secrecy in 2017 when it will start exchanging account details with other countries.

Under the revised regulations, there will be a CHF100,000($104,000) cap on cash transactions and serious tax offences will be considered as a violation of money-laundering rules. For generations, investors have paid Swiss banks high fees to hide their money from tax authorities around the world, providing a lucrative stream of revenue for them. In 2013, Switzerland still held $2.3trn or 26pc of global offshore assets. The SNB has introduced negative interest rates and has imposed an interest rate of -0.25pc on sight deposit account balances of over 10m Swiss francs. The introduction of negative interest rates makes it less attractive to hold Swiss franc investments, and helps prevent exchange rate appreciation.

Meanwhile, the Swiss economy grew by 0.6pc in the third-quarter of 2014 up from a revised expansion of 0.3pc in the second quarter and 0.5pc in the first-quarter, boosted by private and public consumption and exports. More recent indicators suggest that growth is slowly picking up in the fourth-quarter. Weaker demand for Swiss goods and lower capital investment are likely to cause the economy to slow in the final quarter of the year. The Swiss government expects the economy to strengthen over the next two years, though at a slower pace than previously forecast.

The SNB currently forecasts growth of just below 1.5pc this year due to the lacklustre performance of euro-area and emerging-market economies. The growth is projected to pick up gradually in 2015 and 2016.

Published in Dawn, Economic & Business, December 22th , 2014