IMF Executive Board Concludes 2024 Article IV Consultation with Luxembourg
IMF News, June 7, 2024
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- Published: June 7, 2024
Summary assessment and macroeconomic outlook
- On May 29, 2024, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV Consultation with Luxembourg.
- Luxembourg’s economy contracted in 2023 despite buoyant consumption, mainly due to weak external demand and residential investment.
- Growth projections:
- Gross domestic product: 2019: 2.9; 2020: -0.9; 2021: 7.2; 2022: 1.4; 2023: -1.1; 2024: 1.3; 2025: 2.5; 2026: 2.3.
- Total domestic demand: 2019: 4.9; 2020: -4.0; 2021: 10.9; 2022: -1.0; 2023: 2.4; 2024: 1.9; 2025: 3.3; 2026: 2.7; 2027: 2.6.
- Foreign balance (contribution to GDP growth): 2019: -0.3; 2020: 1.8; 2021: 0.0; 2022: 2.0; 2023: -2.6; 2024: -0.2; 2025: 0.6; 2026: 0.7.
- Inflation and prices:
- Headline CPI (harmonized) is expected to decline below 3 percent in 2024, before temporarily increasing in 2025 once administrative energy price measures expire.
- CPI (national definition), p.a.: 2019: 0.8; 2020: 6.3; 2021: 3.7; 2022: 3.2.
- CPI core (harmonized), p.a.: 1.2; 1.5; 4.2; 3.9; 2.8 (values listed as in source).
- Wage growth (overall economy): 5.1; 7.3 (values listed as in source).
- Labor market:
- Unemployed (average, thousands): 2019: 15.4; 2020: 18.7; 2021: 17.1; 2022: 14.6; 2023: 16.2; 2024: 18.6; 2025: 18.9; 2026: 18.3; 2027: 18.4.
- Unemployment rate (percent of total labor force): 5.4; 6.4; 5.7; 4.8; 5.2; 5.9; 5.5; 5.3.
- Total employment (levels and percent change): 463.3; 471.6; 485.1; 501.4; 512.7; 519.5; 529.6; 541.3; 553.4; 565.4; 577.5 (percent change examples: 3.5; 3.4; 2.2; 2.1; 2.4).
- Credit and asset prices:
- Credit growth turned negative as demand dropped and real estate prices declined.
- Nonfinancial private sector credit (end of period, percent change) examples: 5.0; 4.4; 4.7; 4.6 (as reported).
- Risks:
- Risks are tilted to the downside, mainly from external demand and supply shocks, and a disorderly correction of asset prices, including domestic real estate valuations.
Fiscal position and public debt
- Fiscal stance and assessment:
- The newly elected government approved a mix of temporary and permanent measures to reinvigorate growth and boost competitiveness.
- The moderately expansionary fiscal stance is judged broadly appropriate to support growth, though staff noted more targeted and temporary measures would have been more efficient.
- Public finance indicators (percent of GDP):
- General government revenues: 45.3; 43.5; 43.4; 46.8; 47.0; 47.9; 48.0; 48.2; 48.4; 48.7.
- General government expenditures: 43.1; 42.8; 43.9; 48.1; 49.2; 49.4; 49.5; 49.9; 50.2.
- General government balance: -3.4; 0.5; -0.4; -1.3; -2.2; -1.5; -1.6 (values listed as in source).
- General government cyclically-adjusted balance: -2.0; -0.5; -1.4; -1.7.
- General government structural balance: 1.1; 0.3; 0.2.
- General government gross debt: 22.4; 24.6; 24.5; 24.7; 25.7; 28.1; 28.8; 29.5; 30.1; 30.8; 31.4.
- Executive Directors’ fiscal guidance:
- Noting ample fiscal space and AAA credit risk rating, Directors commended commitment to fiscal discipline and broadly agreed with a moderately expansionary fiscal stance in 2024.
- Over the medium term, Directors emphasized the need for fiscal consolidation to address rising spending pressures from aging and climate transition, and to stabilize public debt.
- Policy measures recommended: improving spending efficiency and targeting, containing the wage bill, expediting pension reform, careful calibration of tax reforms to avoid revenue losses.
- Governance recommendations: complement EU rules with a medium-term objective, consider an operational expenditure rule, and enhance the role of the fiscal council.
Financial sector resilience and housing market
- Financial sector:
- The 2024 Financial Sector Assessment Program (FSAP) found the financial sector to be largely resilient against severe shocks.
- Directors noted the financial sector is resilient and well‑capitalized and commended progress on implementing FSAP 2017 recommendations.
- Suggested measures to bolster resilience: sectoral systemic risk buffers on real estate exposures; activating income‑based measures early in the recovery to tackle structural household indebtedness; considering gradually reducing the maximum LTV limit of 100 percent.
- Strengthening the macroprudential policy framework (including reducing potential inaction bias) and continued progress on supervisory, regulatory and oversight frameworks and AML/CFT risk mitigation were recommended.
- Housing market and affordability:
- Directors welcomed authorities’ measures to restore confidence in the housing sector.
- Emphasis on orderly rebalancing of the housing market and prioritizing steps to strengthen housing affordability, particularly by expediting measures to raise housing supply.
Structural reforms and productivity
- Directors emphasized sustained efforts to enhance productivity and growth, and welcomed authorities’ policy priorities:
- Research and development and innovation.
- Reskilling the labor force.
- Streamlining regulations.
- Facilitating market entry and exit.
- Labor market and wages:
- Directors agreed that enhancing wage flexibility would boost competitiveness and labor mobility.
Balance of payments and external accounts
- Balance of Payments (percent of GDP) indicators:
- Current account: 8.9; 8.6; 7.9; 7.6; 6.8; 7.0 (values listed as in source).
- Balance on goods: 0.1; -0.8 (values listed as in source).
- Balance on services: 33.7; 37.0; 37.3; 37.2; 34.4; 33.9; 33.5; 33.4; 33.2; 33.1.
- Net factor income: -27.7; -30.7; -30.2; -29.1; -26.9; -26.3; -25.6; -25.4; -25.2; -25.0.
- Balance on current transfers: -0.6.
- Exchange rates and external price indicators:
- U.S. dollars per euro (period averages): 1.12; 1.14; 1.18; 1.05; 1.08; … (as reported).
- Nominal effective exchange rate (percent change) and real effective exchange rate (percent change) example: -0.7; -3.0 (as reported).
Executive Board views and concluding points
- Executive Directors agreed with the thrust of the staff appraisal, welcomed Luxembourg’s economic resilience, strong buffers and the envisaged economic recovery.
- Directors emphasized continued policy prudence given geopolitical uncertainty and housing vulnerabilities.
- Key policy priorities reiterated by Directors:
- Maintain fiscal discipline while using targeted, temporary measures when expansionary policy is pursued.
- Pursue medium‑term fiscal consolidation and reforms to manage aging and climate transition spending pressures.
- Strengthen housing supply and affordability measures to rebalance the housing market.
- Bolster financial-sector resilience through macroprudential tools and supervisory enhancements.
- Advance structural reforms to enhance productivity, innovation, and labor-market flexibility.
Source: IMF Communications Department, Press Release No. 24/209, "IMF Executive Board Concludes 2024 Article IV Consultation with Luxembourg", June 7, 2024.