Luxembourg is the second-wealthiest country in the world in terms of GDP per-capita (PPP). The economy, which is dependent on the banking, steel, and industrial sectors, maintains a healthy budgetary position and the lowest public debt level in Europe. The economy is characterised by an attractive taxation system.

The financial sector is the main driving force behind the small but high income economy, accounting for one-third of the country’s GDP. With $4 trillion of assets in custody in financial institutions, Luxembourg has the world’s second-largest investment fund asset after US. Introducing an automated exchange on fiscal information among states as of Jan 1 2017, Luxembourg has continued its cooperation with other countries to fight against fraud and fiscal evasion.

Economic expansion continued in 2017, mainly driven by exports from the financial sector. GDP growth, however, slowed slightly to an estimated 3.9 per cent but was still one of the highest in the eurozone. The economy seems to be heading towards five per cent growth in 2018, which should lead to a sustained and sharp increase in job creations as well as to a drop in the unemployment rate. Most economists, however, forecast below four per cent growth in 2018 and 2019.

To prepare the economy against shocks and improving job prospects for lower-skilled workers, the government’s diversification strategy aims at promoting economic activities, focusing key innovative industries such as logistics, information and communications technology, health and clean energy technologies and financial services technologies. While employment growth will remain solid and unemployment is expected to decrease only marginally from 6.5pc in 2015 to 6.2pc in 2018, the recovery of oil prices will cause inflation rise to 2.1pc in 2018.

Growth could be around 3.5pc in 2018 and 2019. OECD projects’ growth could be about four per cent by 2019 as investment will receive a boost, while favourable financial conditions and strong employment prospects are expected to outweigh the impact of higher oil prices. Private consumption will also benefit from firming wage growth.

Meanwhile, Luxembourg’s public finances seem to be in very good shape. The general government balance posted a surplus of 1.6pc of GDP in 2016, which is estimated to have fallen to 0.3pc in 2017. The reason is the impact of indexation which came into force at the start of 2017.

Although, buoyant revenue growth underpinned by strong underlying economic growth will be outpaced by growth in government expenditure in 2018, the general government fiscal surplus is projected to remain stable as a share of GDP in both 2018 and 2019, provided that there are no new structural upheavals. The main challenges remain, which include increasing future costs of population ageing and financial practices’ standardisation measures. Strong financial linkages between subsidiaries of foreign banks in Luxembourg and their parents abroad, even outside the EU regulatory and supervisory framework, may transmit external shocks into the domestic economy.

Switzerland

Switzerland is one of the steadiest economies in the world, tempting international investors as well as the world’s richest to deposit their money within the country. With a relatively small population, which is highly educated and specialised in the workforce, it maintains one of the lowest unemployment rates in Europe and its per-capita GDP is among the highest in the world. The economy benefits from a highly developed service sector, led by financial services and a manufacturing industry that specialises in high-technology, knowledge-based production.

It has the highest contribution of foreign trade to GDP. The most important trade partners are its neighbours in the eurozone, accounting for half of its exports. The economic and political stability, transparent legal system, exceptional infrastructure, efficient capital markets and low corporate tax rates make Switzerland one of the world’s most competitive economies.

However, the sovereign debt crises in neighbouring eurozone countries coupled with ongoing economic instability in Russia and other eastern European economies continue to pose significant risks.

Nevertheless, the economy has shown considerable resilience, most recently to the exchange rate appreciation in 2015. The current account surplus remains large. Fiscal policy is sound, and the federal fiscal rule has helped lower public debt. At the same time, unconventional monetary policies have helped return inflation to positive territory, but pose other risks. The unemployment rate at 4.9pc, though very low in comparison with the EU average, has drastically risen in recent years.

Recently, Switzerland responded to increasing pressure from neighbouring countries and trading partners to reform its banking secrecy laws, by agreeing to conform to OECD regulations on administrative assistance in tax matters, including tax evasion. The Swiss government has also renegotiated its double taxation agreements with numerous countries, including the US, to incorporate OECD standards. It is openly considering the possibility of imposing taxes on bank deposits held by foreigners.

In 2017, the economy succeeded in adapting to the strong franc. The overvaluation of the franc has continued to decrease. The country has lost nearly six per cent since the start of 2017, along with solid conditions of the world economy. The 2018 economic outlook seems promising. Real growth could rise from 0.9pc in 2017 to 1.8pc in 2018. Both dynamic exports based on a weaker franc and higher domestic demand should contribute to the rebound.

The economy will be supported by the strength of the eurozone and the weaker Swiss franc. Exports will be the driver of growth. The Economist forecast reveals that after estimated growth of one per cent in 2017, the economy is expected to pick up to 2.1pc in 2018 before decelerating to 1.7pc in 2019-22. The State Secretariat for Economic Affairs (SECO) has also revised its economic growth forecasts upwards, predicting 2.3pc growth for 2018.

Published in Dawn, The Business and Finance Weekly, February 12th, 2018