IMF Executive Board Concludes 2021 Article IV Consultation with Luxembourg
IMF News, May 26, 2021
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- Published: May 26, 2021
Overview and Outlook
- IMF Executive Board concluded the Article IV consultation with Luxembourg on May 14, 2021.
- Luxembourg experienced a mild contraction in 2020 and a rebound in 2021:
- Real GDP: -1.3 percent in 2020; expected to rebound by about 4 percent in 2021.
- Drivers of resilience:
- Unprecedented policy support domestically and globally.
- Quick adjustment to teleworking.
- Large and multi-pronged government policy package in 2020, followed by more targeted stimulus in 2021.
- Medium-term outlook:
- Recovery expected, but output projected to remain below pre-crisis trend, partly reflecting impairment in corporate balance sheets and scarring in the labor market.
- Risks to the outlook:
- Tilted to the downside; dominated by virus dynamics in the near term.
- Upside: quicker containment of infection could accelerate activity recovery.
- Downside: prolongation of the health crisis into 2021 could delay recovery.
- Broader risks: tightening of global financial conditions, acceleration of de-globalization, revenue risk from changes in international taxation.
Executive Board Assessment
- Directors agreed with the thrust of the staff appraisal and commended the authorities’ timely and broad-based policy response that supported households and firms and limited economic fallout.
- Key policy guidance from Directors:
- Maintain targeted policy support until the recovery is firmly established; unwinding of policy support should be state contingent and well calibrated.
- As recovery strengthens, pivot fiscal policy toward:
- Further greening the economy.
- Digitalization.
- Closing infrastructure gaps.
- Preserve buffers to guard against fiscal risks from changing international taxation and reaching CO2 targets.
- Continue diversifying revenues while reducing the carbon footprint.
- Strengthen public investment management and the procurement framework.
- Financial sector guidance:
- Continue addressing rising risks in the financial sector in line with FSAP recommendations.
- Banking sector expected to remain resilient given large capital and liquidity buffers, but solvency risks could materialize if state support is withdrawn prematurely or recovery is delayed.
- Welcome intensification of oversight of the investment fund sector; encourage further strengthening of macroprudential surveillance and regulation of the sector.
- Monitor high household indebtedness; revisit loan-to-value limits and explore other tools in the legal framework if indebtedness continues to rise.
- Revisit macroprudential stance if pressures in credit markets reemerge as recovery gains ground.
- Recommend further strengthening the AML/CFT framework.
- Labor and social policy guidance:
- Commended authorities’ efforts to support employment, particularly vulnerable workers.
- As recovery strengthens, shift focus from preserving jobs to facilitating reallocation of workers to dynamic sectors, including through training programs.
- Encourage further steps to increase housing supply and improve inclusiveness in the housing market.
- Deepening the market for sustainable finance will help diversify the financial sector.
Key Macroeconomic Projections and Indicators (Table 1: Luxembourg: Selected Economic Indicators, 2019-22)
- Projections cover 2019, 2020, 2021, 2022. Values given as in source.
- Real economy (change in percent)
- Real GDP: 2.3; -1.3; 4.1; 3.6
- Domestic demand: 3.3; -4.4; 4.4; 3.5
- Foreign balance (contr. to GDP growth): 0.2; 1.3; 1.9; (no value for 2022 shown)
- Prices
- CPI (national definition): 1.7; 0.8; 1.8; (no value for 2022 shown)
- GDP deflator: 3.4; 2.5; (no values for 2021-22 shown)
- Public finance (percent of GDP)
- General government balance: 2.4; -4.1; -1.6; -0.6
- Revenue: 44.7; 43.7; 43.2; 42.8
- Expenditure: 42.3; 47.8; 44.8; 43.4
- Structural balance (percent of pot. GDP): 2.1; -3.3; -0.5; (no value for 2022 shown)
- General government gross debt: 22.0; 24.9; 26.7; 27.3
- Labor market (percent change)
- Total employment: 2.0; 1.6; (no values for 2021-22 shown)
- Resident labor force: 2.7; 2.8; 2.2; (no value for 2022 shown)
- Unemployment rate (percent): 5.4; 6.3; 6.7; 6.4
- Credit growth (percent)
- Growth of credit to the private non-financial sector: 7.2; 5.0; 11.3; 9.4
- Balance of payments (percent of GDP)
- Current account: 4.6; 4.3; 4.9; (no value for 2022 shown)
- Balance on goods: 3.8; 4.0; (no values for 2021-22 shown)
- Balance on services: 33.7; 33.1; 33.2; 33.5
- Net factor income: -33.4; -31.1; -32.7; -32.9
- Balance on current transfers: -0.7; -1.5; 0.3; (no value for 2022 shown)
- Exchange rates
- U.S. dollars per euro, period average: 1.1; ...
- NEER, CPI based (2010=100, +=appreciation): 101.5; 103.2; (no values for 2021-22 shown)
- REER, CPI based (2010=100, +=appreciation): 99.5; 100.8; (no values for 2021-22 shown)
- Potential output and output gap
- Potential output (change in percent): 3.2; 1.0; 3.1; 3.0
- Output gap: 0.6; -1.7; -0.8; -0.2
Policy Recommendations and Priorities (summarized)
- Maintain targeted, state-contingent, and well-calibrated policy support until recovery is firmly established.
- Pivot fiscal policy toward greening the economy, digitalization, and closing infrastructure gaps as recovery strengthens.
- Preserve fiscal buffers to guard against international taxation changes and CO2 target-related risks.
- Continue revenue diversification while reducing carbon footprint.
- Strengthen public investment management and procurement.
- Intensify oversight and macroprudential regulation of the investment fund sector.
- Monitor and address high household indebtedness; consider loan-to-value limits and other legal tools if indebtedness rises.
- Revisit macroprudential stance if credit market pressures reemerge.
- Strengthen the AML/CFT framework.
- Shift labor policy from job preservation to facilitating worker reallocation to dynamic sectors via training.
- Increase housing supply and improve housing market inclusiveness.
- Deepen the market for sustainable finance to diversify the financial sector.
IMF Executive Board press release: IMF Executive Board Concludes 2021 Article IV Consultation with Luxembourg (Press Release No. 21/138; May 26, 2021).
