{ "title": "Luxembourg: Staff Concluding Statement of the 2024 Article IV Mission", "publication": "IMF News, March 26, 2024", "sourceUrl": "https://www.imf.org/en/news/articles/2024/03/26/mcs-luxembourg-staff-concluding-statement-of-the-2024-article-iv-mission", "canonical": "https://www.imf.org/en/news/articles/2024/03/26/mcs-luxembourg-staff-concluding-statement-of-the-2024-article-iv-mission", "overlayPath": "/en/news/articles/2024/03/26/mcs-luxembourg-staff-concluding-statement-of-the-2024-article-iv-mission/index.md", "summary": "Despite robust consumption growth, the Luxembourgish economy contracted in 2023 due to weak external demand and residential investment.", "publishDate": "2024-03-26", "sections": [ { "heading": "Overview", "content": "- Despite robust consumption growth, the Luxembourgish economy contracted in 2023 due to weak external demand and residential investment.\n- Growth is expected to rebound in 2024; headline inflation will continue subsiding but remain somewhat above the ECB’s target.\n- The moderately expansionary fiscal stance is broadly appropriate to reinvigorate growth, but more targeted and temporary measures would have been more efficient.\n- The 2024 Financial Sector Assessment Program (FSAP) found the financial sector to be largely resilient against severe shocks.\n- An early pension reform is recommended to ensure long-term sustainability and intergenerational equity." }, { "heading": "Context", "content": "- New government took office amid a challenging economic context driven by a steep rise in interest rates and elevated uncertainty.\n- GDP contracted by 1.1 percent in 2023, driven by external demand and residential investment.\n- Unemployment increased and vacancies dropped from historical records.\n- Robust disposable income growth, following several wage indexation tranches and fiscal support, boosted private consumption.\n- Headline inflation is subsiding; underlying inflation, while declining, remains high.\n- Credit growth turned negative as demand dropped and credit standards tightened.\n- Real estate prices declined but remain overvalued.\n- Banks’ profitability increased, boosted by higher net interest margins; capital and liquidity buffers remain higher than in EU peers.\n- Asset quality is deteriorating notably (especially in real estate related exposures), albeit from low levels.\n- Authorities announced a package of measures to support purchasing power and housing demand." }, { "heading": "Outlook and risks", "content": "- Growth:\n - Expected to rebound moderately in 2024 along with receding inflation pressure.\n - Fiscal support to households, unwinding of high savings, and continued disinflation will boost consumption and residential investment.\n - With expected monetary policy easing and improving confidence, growth is projected to strengthen further in 2025, converging to its potential in the medium term.\n- Inflation:\n - Headline inflation will decline below 3 percent this year but is expected to rebound next year, once administrative energy price measures expire.\n - Core inflation is forecasted to remain somewhat above the ECB target until 2026.\n- Risks (tilted to the downside):\n - External: rising geopolitical tensions, renewed supply chain disruptions, sharp global slowdown, global financial instability.\n - Uncertainty from changes to international taxation and/or financial regulations.\n - Domestic: potentially disorderly correction of asset prices, including overvalued housing prices.\n - Upside: more resilient global economy, faster unwinding of excess savings, pent-up demand for residential real estate." }, { "heading": "Fiscal policy — findings and recommendations", "content": "- Assessment:\n - Moderately expansionary fiscal stance broadly appropriate given negative output gap, weakening labor market, and high uncertainty.\n - Rapid growth of households’ real disposable income and consumption, and saving rates well above pre-pandemic levels, warranted more targeted fiscal support to help disinflation.\n - Several measures are permanent and have worsened the medium-term fiscal outlook.\n- Public debt outlook:\n - Country has ample fiscal space; public debt is one of the lowest among AAA rated countries.\n - Under announced policies, staff project public debt to increase by 6-7 percentage points of GDP by 2029.\n- Policy recommendation — gradual consolidation:\n - Staff recommend a gradual fiscal consolidation to stabilize public debt over the medium term.\n - Illustration: a consolidation of about 0.2 percent of GDP per year for the next five years would keep the debt at around 30 percent of GDP by 2029.\n- Tax policy guidance:\n - Support regular adjustments of tax brackets for inflation but recommend they be done in a budget-neutral manner.\n - Advise against retroactive changes to the tax schedule without compensatory measures.\n - Warn that intended reduction of the corporate income tax (CIT) rate could potentially result in lower revenues, without necessarily attracting new businesses.\n - Recommend streamlining tax expenditures (e.g., interest rate deductibility).\n- Expenditure-side guidance:\n - Pressures from rising ageing costs, defense requirements, and investment needs in the digital and climate transition.\n - Authorities’ intention to contain spending, including the wage bill, is welcome and should be underpinned by specific measures.\n - Example: improve spending efficiency, including social protection spending.\n- Fiscal framework:\n - Plan to strengthen national fiscal framework, complementing the EU Economic Governance Framework, is commendable and should be expedited.\n - Suggest setting a national MTO based on a structural fiscal balance that considers ageing costs, in line with new EU methodology.\n - Recommend using net primary expenditure path from national MTO as an operational limit.\n - Consider strengthening the role of the fiscal council in assessing budgetary forecasts and monitoring compliance.\n - Legislating a national framework would help maintain credible commitment to the AAA rating.\n- Pensions and health:\n - General pension scheme’s reserves are comfortable (about 32 percent of GDP), but long-term sustainability is not guaranteed.\n - Pension costs projected to rise significantly (to about 18 percent of GDP by 2070 for general and special schemes).\n - Revenues expected to plateau as net migration flows slow down.\n - Institutional safeguards and stabilizers for the general scheme are not expected to be triggered before 2027 when annual contributions are forecasted to no longer cover annual pension expenditures.\n - Planned public consultation on pensions is welcome.\n - Action needed to address rapid deterioration of the balance of the National Health Fund (Caisse nationale de santé)." }, { "heading": "Financial sector — findings and recommendations", "content": "- Cyclical and stock vulnerabilities:\n - Cyclical systemic risks have abated somewhat, but higher interest rates exposed stock vulnerabilities, especially related to real estate.\n - FSAP analyses suggest households’ debt servicing capacity would be constrained under the IMF’s baseline scenario, especially for lower income households and those with variable rate mortgages.\n - In a severe adverse scenario (higher interest and unemployment rates), credit risk could spread to more affluent households, including recent mortgage borrowers.\n - Real estate companies face higher bankruptcies and could experience further debt servicing challenges.\n- Resilience:\n - Financial sector largely resilient against severe shocks.\n - FSAP shows in the baseline scenario the banking system can sustain the impact of high interest rates, with a small share of weak banks.\n - In the adverse scenario, banks overall have enough capital and liquidity buffers to absorb severe shocks; share of weak banks in total assets would double but recapitalization needs would remain easily manageable.\n - All banks can sustain significant retail deposit outflows; only a few would need to dip into liquidity buffers, mainly due to potential weakness in some foreign parent banks.\n - Investment fund and insurance sectors have sufficient liquidity buffers to withstand large shocks and minimize second-round effects on international securities markets and spillbacks on the economy.\n - Majority of money market funds could absorb significant increase of interest rates (up to 300 basis points); larger shocks would expose vulnerabilities in a few funds.\n- Macroprudential recommendations:\n - Increase minimum macroprudential capital requirements to absorb unexpected losses on real estate exposures, preferably through sectoral systemic risk buffers.\n - Use banks’ capital headroom to do so; mitigate risk of constrained credit supply by banks’ profitability and comfortable capital headroom.\n - Continuously monitor real estate risks with focus on valuation and concentration; ensure adequate provisioning and sound lending practices.\n - Early in the recovery cycle, activate income-based measures such as a debt-service to income limit under stress and consider gradual reduction of the maximum loan-to-value (LTV) limit of 100 percent.\n - Enhance institutional framework to reduce potential inaction bias by reducing the role of government in macroprudential decisions; strengthen communication and coordination with other policies (e.g., housing).\n- Supervisory and regulatory improvements:\n - Consider legal amendments to protect procedural safeguards to future-proof independence of Commission de Surveillance du Secteur Financier (CSSF) and Commissariat aux Assurances (CAA) from potential government influence.\n - Enhance home-host cooperation given large cross-border connections, particularly on:\n - information sharing for bank subsidiaries and branches;\n - risk-based onsite supervision of investment funds’ foreign delegates;\n - monitoring cross-border flows for money laundering/financing of terrorism risks.\n - Finalize draft Memorandum of Understanding to formalize division of responsibilities between CSSF and Banque centrale du Luxembourg (BCL) on liquidity supervision of Less Significant Institutions.\n - Incorporate group links between depositaries and investment fund managers as risk factors into CSSF’s supervisory risk assessment.\n - Increase enforcement powers of CSSF in investment funds with higher fines and harmonization between types of funds.\n - Continue strengthening the financial safety net framework." }, { "heading": "Housing sector — findings and recommendations", "content": "- Current situation:\n - Slump in housing sector prompted government measures, both temporary and permanent, to stimulate housing demand.\n - Supply constraints mean demand-boosting measures could further deteriorate households’ indebtedness and affordability and may create moral hazard and promote risk taking.\n- Recommendations:\n - Allow an orderly rebalancing of the housing market while expediting supply-side measures.\n - Frontload public investment in social and affordable housing in cost-efficient ways, with greater involvement of the private sector.\n - Expedite plans to reduce red tape.\n - Over the medium term, help-to-buy policies should be better targeted." }, { "heading": "Structural policies", "content": "- Competitiveness and wage dynamics:\n - Key reforms needed to maintain competitiveness and break the self-reinforcing spiral between cost of living and wages.\n - Recommended measures:\n - Lower housing supply-demand imbalances by reducing reliance on demand-support policies and boosting supply.\n - Increase flexibility of the wage indexation system.\n - Continue efforts to expand labor force participation, reduce skill mismatches, and remove obstacles to foreign workers.\n - Complement announced transition to individual taxation with means-testing of family benefits.\n- Productivity:\n - Broad slowdown in productivity growth since the Global Financial Crisis warrants sustained policy efforts.\n - Investment in the non-financial corporations’ sector fell by 3 percent of GDP.\n - Empirical analysis suggests financial sector expansion and high labor cost linked to automatic wage indexation may have contributed to investment decline.\n - Policies to foster wage flexibility, catalyze technology innovation, and increase R&D spending can help rekindle productivity growth.\n - Recent laws facilitating entry and exit of companies are welcome and should improve allocative efficiency and competition." }, { "heading": "Closing", "content": "- The IMF team thanks Luxembourg’s authorities and other interlocutors for constructive and insightful discussions.\n\nSource: Luxembourg: Staff Concluding Statement of the 2024 Article IV Mission, March 26, 2024.\n\n---\n\n\n References\n\n- Luxembourg and the IMF\n- IMF Policy Advice -- A Factsheet\n- Mission Concluding Statements\n- PRESS CENTER\n- https://www.imf.org/en/home\n\nSource: https://www.imf.org/en/news/articles/2024/03/26/mcs-luxembourg-staff-concluding-statement-of-the-2024-article-iv-mission" } ], "bullets": [ "[Markdown version](/en/news/articles/2024/03/26/mcs-luxembourg-staff-concluding-statement-of-the-2024-article-iv-mission/index.md)", "[Structured JSON version](/en/news/articles/2024/03/26/mcs-luxembourg-staff-concluding-statement-of-the-2024-article-iv-mission/index.json)", "[Bundle manifest](/en/news/articles/2024/03/26/mcs-luxembourg-staff-concluding-statement-of-the-2024-article-iv-mission/bundle-manifest.json)", "Published: March 26, 2024", "Despite robust consumption growth, the Luxembourgish economy contracted in 2023 due to weak external demand and residential investment.", "Growth is expected to rebound in 2024; headline inflation will continue subsiding but remain somewhat above the ECB’s target.", "The moderately expansionary fiscal stance is broadly appropriate to reinvigorate growth, but more targeted and temporary measures would have been more efficient.", "The 2024 Financial Sector Assessment Program (FSAP) found the financial sector to be largely resilient against severe shocks.", "An early pension reform is recommended to ensure long-term sustainability and intergenerational equity.", "New government took office amid a challenging economic context driven by a steep rise in interest rates and elevated uncertainty.", "GDP contracted by 1.1 percent in 2023, driven by external demand and residential investment.", "Unemployment increased and vacancies dropped from historical records.", "Robust disposable income growth, following several wage indexation tranches and fiscal support, boosted private consumption.", "Headline inflation is subsiding; underlying inflation, while declining, remains high.", "Credit growth turned negative as demand dropped and credit standards tightened.", "Real estate prices declined but remain overvalued.", "Banks’ profitability increased, boosted by higher net interest margins; capital and liquidity buffers remain higher than in EU peers.", "Asset quality is deteriorating notably (especially in real estate related exposures), albeit from low levels.", "Authorities announced a package of measures to support purchasing power and housing demand.", "Growth:", "Inflation:", "Risks (tilted to the downside):", "Assessment:", "Public debt outlook:", "Policy recommendation — gradual consolidation:", "Tax policy guidance:", "Expenditure-side guidance:", "Fiscal framework:", "Pensions and health:", "Cyclical and stock vulnerabilities:", "Resilience:", "Macroprudential recommendations:", "Supervisory and regulatory improvements:", "Current situation:", "Recommendations:", "Competitiveness and wage dynamics:", "Productivity:", "The IMF team thanks Luxembourg’s authorities and other interlocutors for constructive and insightful discussions.", "[Luxembourg and the IMF](http://www.imf.org/external/country/LUX/index.htm)", "[IMF Policy Advice -- A Factsheet](https://www.imf.org/en/about/factsheets/imf-surveillance)", "[Mission Concluding Statements](https://www.imf.org/en/news/searchnews)", "[PRESS CENTER](http://presscenter.imf.org/)", "[https://www.imf.org/en/home](https://www.imf.org/en/home)" ], "alternates": { "markdown": "/en/news/articles/2024/03/26/mcs-luxembourg-staff-concluding-statement-of-the-2024-article-iv-mission/index.md", "json": "/en/news/articles/2024/03/26/mcs-luxembourg-staff-concluding-statement-of-the-2024-article-iv-mission/index.json", "bundleManifest": "/en/news/articles/2024/03/26/mcs-luxembourg-staff-concluding-statement-of-the-2024-article-iv-mission/bundle-manifest.json" }, "generatedAtUtc": "2026-09-26T02:51:47.120Z" }