World economies
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.