Economic Overview
Luxembourg’s economy is characterized by its financial system and a high degree of international openness. The financial sector is the main driving force behind the Grand Duchy’s economy, representing about one-third of the country’s GDP, making Luxembourg vulnerable to external shocks. Economic performance has been weaker than expected, with a slow recovery underway. GDP growth in 2024 is estimated at 0.5%, below the EA average for the third consecutive year, despite strong public consumption. Mortgage demand began recovering in H2 2024, and house prices have stabilized, but new construction remains weak. Credit growth to the private sector is negative due to low demand, ongoing deleveraging, and tighter credit standards. While banks' asset quality has worsened, it remains manageable. GDP growth is projected to reach 2% in 2025 and 2.5% in 2026-27, driven by the private sector, supported by lower interest rates, housing market recovery, and pent-up domestic demand (IMF).
Luxembourg is the wealthiest country in the world in terms of GDP per capita (PPP) and has the highest current account surpluses as a share of GDP in the eurozone. Luxembourg benefits from substantial fiscal space owing to its low level of public debt and comfortable liquidity position. It generally maintains a healthy budgetary position; however, the budget deficit turned negative in 2023 and 2024 (0.7% and 0.6% of GDP, respectively). Expenditure growth slowed compared to the previous year, due to a less inflationary environment where the automatic indexation of wages and social transfers was not warranted. Revenue growth remained robust despite measures to support households' purchasing power, the competitiveness of enterprises, and the construction sector. The overall impact of these measures on revenues was estimated at 0.5% of GDP, including an upward adjustment of personal income tax brackets following several wage indexations and a reduction in social security contributions for companies. In 2025, the deficit is projected to rise to 0.8% of GDP due to new measures supporting economic recovery and households' purchasing power. Despite the economic rebound, direct tax revenues are expected to grow more slowly as the government implements measures like a corporate income tax cut. The near phase-out of energy price mitigation measures helps limit expenditure growth, despite rising price pressures and increased spending on public employee compensation and social transfers. The deficit is expected to decrease to 0.6% of GDP in 2026, with revenue growth outpacing expenditure growth. Interest rate expenditure is expected to rise due to higher refinancing rates and growing debt, reaching 0.4% of GDP in 2026. The debt-to-GDP ratio is projected to increase from 25.5% in 2023 to 27.5% in 2026, driven by budget deficits and social security fund-related stock-flow adjustments (data EU Commission). Headline inflation is set to drop to 2.3% in 2024 as a result of decelerating goods prices, primarily of energy, but also of food and industrial goods. It is projected to rebound slightly to 2.4% in 2025 as the acceleration of energy inflation (following the phase-out of most of the energy-related measures) is expected to more than offset the deceleration in food prices. Headline inflation is then forecast to drop to 1.8% in 2026 as inflation of energy turns negative and that of services and foods moderates further. Consequently, HICP inflation excluding energy, food, alcohol and tobacco is expected to rebound temporarily from 2.6% in 2024 to 2.7% in 2025 before decreasing to 2.1% in 2026 (data EU Commission).
Outside the public sector, employment growth has been slow, and the unemployment rate has continued to rise, exceeding the long-term average of 5.5% in 2024. The unemployment rate is expected to remain stable this year, then gradually decrease to 5.8% in 2026 as employment recovers slightly. The working opportunities attract a large number of border workers: almost 200,000 workers cross every day the French, Belgian, and German borders. Despite being the countries with the highest income per capita (USD 151,145 at PPP in 2024 – IMF), around 18.8% of residents live below the poverty line, according to the latest data available from Statec (in Luxembourg, the poverty line is calculated at 60% of the median standard of living, i.e. EUR 2,518 per month per adult in 2023).
| Main Indicators | 2023 (E) | 2024 (E) | 2025 (E) | 2026 (E) | 2027 (E) |
| GDP (billions USD) | 85.78 | 91.21 | 96.99 | 101.97 | 106.21 |
| GDP (Constant Prices, Annual % Change) | -1.1 | 1.3 | 2.7 | 2.5 | 2.3 |
| GDP per Capita (USD) | 129,810 | 135,321 | 141,080 | 145,410 | 148,488 |
| General Government Balance (in % of GDP) | 0.5 | -0.5 | -1.6 | -1.4 | -1.6 |
| General Government Gross Debt (in % of GDP) | 25.7 | 26.7 | 27.8 | 28.4 | 29.1 |
| Inflation Rate (%) | 2.9 | 2.5 | 2.6 | 2.3 | 2.0 |
| Unemployment Rate (% of the Labour Force) | 5.2 | 5.8 | 5.9 | 5.6 | 5.4 |
| Current Account (billions USD) | 5.82 | 6.26 | 6.80 | 7.20 | 7.44 |
| Current Account (in % of GDP) | 6.8 | 6.9 | 7.0 | 7.1 | 7.0 |
Source: IMF – World Economic Outlook Database , October 2021
Country Risk
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