Luxembourg’s economy is now expected to grow by just 1.0% in 2025, followed by a modest acceleration to 2.0% in 2026, according to updated projections from Statec. The national statistics bureau cited faltering momentum in early 2025 and ongoing volatility in the financial sector as key reasons for the downgrade, compared to its previous autumn forecast.

The report, on Wednesday 25 June 2025, highlighted that the first quarter of 2025 saw real GDP contract, following a sharp recovery in the final quarter of 2024. The downturn was primarily driven by renewed weakness in the financial sector, whose performance had been erratic in recent quarters. While industrial and construction activity showed tentative signs of improvement, Statec noted that output in both sectors remained well below levels seen prior to the energy crisis.

In the services sector, particularly non-financial services, business confidence had picked up during the second half of 2024 but showed only limited progress in early 2025.

Delayed wage indexation

Statec projected inflation in Luxembourg would remain just below 2% in both 2025 and 2026, aligning with broader eurozone trends. As a result, the next automatic wage indexation would only be triggered in the third quarter of 2026.

The statistics bureau attributed the mild inflation outlook to a combination of factors, including the partial removal of energy price caps and the May index bracket, which temporarily lifted price pressures in early 2025. Nevertheless, services and food prices remained relatively stable compared to other European economies.

Statec found that inflationary risks remained limited, with no significant upward pressure expected from recent trade tensions or global supply shifts. The weakening economic outlook within both Luxembourg and the eurozone was expected to further suppress inflationary dynamics.

Labour market to remain subdued

Employment growth continued to slow at the start of 2025, stabilising at a historically low level. Statec recorded a modest improvement in some employment indicators but reported that job creation remained weak, particularly in market-based sectors. The unemployment rate had edged higher in early 2025, though the pace of increase was slower than at the end of the previous year, partly due to reduced job losses in the construction sector.

Looking ahead, the bureau forecast a moderate recovery in job growth by 2026, alongside a gradual decline in unemployment. Employment gains were expected to be driven largely by the public sector, with private sector hiring showing only a slow rebound.

Wage cost growth was projected at 3.3% in 2025, before slowing to 2.3% in 2026. Statec attributed the 2024 slowdown in wage inflation to the timing of indexation and a temporary reduction in employers’ social contributions, which was set to end in 2025, contributing to an uptick in labour costs.

Public finances back into deficit

Following a 1.0% budget surplus in 2024, Luxembourg’s public accounts were expected to return to balance in 2025 before moving into deficit in 2026. Statec forecast a shortfall equivalent to 0.9% of GDP by that year.

The surplus in 2024 had been driven by a strong 10% rise in public revenue, supported by higher VAT and corporate tax receipts. Expenditure, by contrast, rose by just 6%, a slowdown from the 12% increase recorded in 2023, as subsidies and energy-related transfers were scaled back.

The return to deficit in 2026 was expected to stem from weaker tax revenue growth, including household tax cuts and an anticipated loss of momentum in corporate tax collections. Meanwhile, public spending was set to increase, driven by higher outlays on welfare, wages, public investment and transfers.