## IMF Executive Board Concludes 2024 Article IV Consultation with Luxembourg

_IMF News, June 7, 2024_

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## Bibliographic details
- Published: June 7, 2024

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### 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.*

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## References

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_Source: https://www.imf.org/en/news/articles/2024/06/07/pr-24209-luxembourg-imf-executive-board-concludes-2024-art-iv-consultation_