Although business activity in Luxembourg rebounded at the start of the year, the situation on the labour market continued to deteriorate. A timid recovery can be expected over the coming quarters as employment lags behind changes in value added.

Employment in Luxembourg continued to slow, growing at an annual rate of just 0.8% in June, the lowest since the financial crisis of 2009-10 (compare also with the historical average of close to 3%).[1] While employment has slowed in virtually all sectors since the start of 2023 (with only employment in non-market services holding steady), three sectors in particular are driving the slowdown. These are construction, specialised, scientific and technical activities, and the financial sector.

The crisis in the construction industry has destroyed around 3,300 jobs since October 2022, more than 6% of the total (seasonally adjusted data). While the situation gradually worsened over the course of 2023, preliminary data for Q2 2024 nevertheless indicate some stabilisation, and this sector also recorded fewer job losses due to bankruptcy in Q2 (60% down on Q1).

Most of the slowdown in specialised, scientific and technical activities will have come from head office activities. Very dynamic in the past (+12% on average per year since 2015), employment here fell almost 2% over one year in early 2024. The loss of momentum in the financial sector is mainly due to a slowdown in fund management (+2.6% over one year in April 2024, compared with +8% on average per year since 2015).

Soaring unemployment held back by rising inactivity?

Given this gradual deterioration in employment, it is surprising that the unemployment rate has not risen further since the end of 2023. In fact, it even eased slightly at the turn of 2023-24 before rising again to 5.7% at the end of the spring.

This apparent paradox could be partly due to an increase in inactivity or in unemployment not reported to ADEM. A number of factors point to this, notably the decoupling between changes in the working population (the sum of resident employment and registered unemployed residents, stagnant since November) and trends in the total population (which has continued to rise). In addition, the unemployment rate recorded in the labour force survey – based on International Labour Organization criteria[2] – continued to rise in the first quarter of the year. ADEM recently recorded a fall in registrations by people not in receipt of unemployment benefit (500 fewer residents between November 2023 and May 2024 – based on seasonally adjusted data). Faced with a loss of entitlements and the lack of recruitment prospects, some disheartened job seekers may have moved into (apparent) inactivity.

Unemployment and employment trends in Luxembourg

Sources: ADEM, STATEC (latest figures: June 2024)

Employment set to recover somewhat in H2

If confirmed, the economic upturn in the eurozone and Luxembourg at the start of the year[3] should revive the labour market from the second half of the year onwards (employment typically lags two to three quarters behind fluctuations in value added). At present, however, there are few other signs of the hoped-for improvement in the labour market. In this respect, it is worth noting the improvement in the hiring outlook noted in the last two business surveys, at least in the retail trade, other non-financial services and construction (in June the outlook for industry fell to its lowest level since late 2023).

STATEC is forecasting employment growth of 1.3% for 2024 as a whole (the worst since the +1.0% in 2009), knitting in some recovery before the end of the year. The upturn in momentum in 2025, like that anticipated for GDP, is set to remain modest, bringing employment growth to 1.7%. Unemployment is set to rise slightly again to 5.9% (after the 5.8% forecast for this year).

[1] Employment growth in Luxembourg was in line with the eurozone on average over the second half of 2023 and into the first quarter of 2024, whereas the growth differential in favour of Luxembourg is usually largely positive. In addition, employment in most eurozone countries rebounded in the first quarter but slowed in Luxembourg. See Conjoncture Flash for June 2024.

[2] An unemployed person is a person who, during a given week, is simultaneously unemployed and available to take a job within two weeks while also actively looking for work over the last four weeks.

[3] See Chapters 1 and 2 of Note de Conjoncture 1-2024.

Activity

Confidence indicator in non-financial services

Sources: HCOB, S&P Global, STATEC (latest figures: June 2024)

Service activity picks up again

Business confidence in non-financial services improved in Luxembourg as the summer approached. Sentiment in Q2 improved in terms of recent demand, particularly in accommodation, legal and accounting activities, and head office and management consultancy activities. The short-term outlook for demand is more tentative, with assessments see-sawing in recent months. Opinions on the prices charged by these companies also indicate that the easing seen since the start of the year will continue.

The June PMI surveys in the eurozone showed an increase in services activity for the fifth month in a row, even though the pace of expansion has slowed slightly since peaking in April. On the industrial front, eurozone survey results are far less encouraging: activity is still contracting and new orders (particularly for exports) fell significantly in June.

Tourism

Overnight stays in tourist accommodation

Source: STATEC

A good start to the year for Luxembourg

During the health crisis, tourist patterns in Luxembourg and the European Union were relatively similar: dropping around 50% in 2020 (in terms of overnight stays), rebounding 25% in 2021 and then 50% in 2022. In 2023, on the other hand, overnight stays in Luxembourg virtually stagnated compared to the previous year, while an increase of 7% was recorded across the EU as a whole.

Luxembourg's results were more favourable over the first few months of 2024, with year-on-year growth of almost 15% from January to April (compared with EU growth of around 5% over the same period). Visitor numbers were also higher than in early 2019 (i.e. before the pandemic). According to the World Tourism Organization, worldwide tourist numbers in 2023 were still down around 12% on 2019, but are set to catch up this year, thanks in particular to an expected increase in tourists from and to Asia.

Real estate

SALES PRICES OF HOUSING

Source: Eurostat

Turning point in the Luxembourg housing market?

The number of property transactions in Luxembourg rose in Q1 2024 for the first time in two years. Sales of existing apartments performed well (up 25% quarter-on-quarter, seasonally adjusted), joining the upward trajectory in house transactions already seen in Q4 2023. On the other hand, off-plan sales of apartments continued to stagnate at historically low levels.

Property sales prices also stabilised in Q1 2024 (-0.3% quarter-on-quarter, up from -2.1% in Q4 23 and -6.6% in Q3 23). Prices for new apartments, which have fallen less than those for existing homes, were still down by 2.3% over one quarter.

While house prices are continuing to fall in Germany and France, the Grand Duchy has posted the sharpest fall in the eurozone since peaking in 2022. Note also that Luxembourg saw some of the highest price rises in previous years.

Inflation

Inflation in eurozone services

Sources: Macrobond, Eurostat (*business surveys)

Inflation in eurozone services remains elevated

Eurozone inflation has stabilised at around 2.5% since the start of the year. While inflation eased in food and non-energy industrial goods, energy prices stopped falling and prices for services even accelerated slightly, with the annual rate rising to 4.1% in May and June after stagnating at 4.0% from November to March. By mid-2024, services remain the main source of inflation in the eurozone and Luxembourg (although services inflation here slowed to 3.8% in June after rising 4.7% in January in reaction to the three indexation adjustments in 2023).

Leisure-related services have contributed most to services inflation in the eurozone, whereas the recent upturn coming mainly from transport-related services. The services whose contributions increased the most in the eurozone between March and June were as follows: combined passenger transport (+0.20 percentage points, free in Luxembourg since March 2020), paramedical services (+0.04 percentage points), transport-related insurance (+0.04 percentage points) and national tourist packages (+0.04 percentage points). However, business expectations for service prices in the eurozone remain relatively low.

Financial sector

Net issues by type of investment fund – Q1 2024

Source: EFAMA (equity and bond funds include ETFs)

More issues in bond funds and ETFs

In Q1 2024, net assets of European collective investment schemes rose 4.4% over one quarter (+11% over one year), reflecting growth on the stock markets. Net issues (+ EUR 106 billion) continued the trends seen in 2023, with strong net inflows into bond funds and equity ETFs, and net outflows from multi-asset funds.

Net issues in bond funds were historically high in Q1 2024, against a backdrop of slowing inflation and the expected lowering of key rates. Index funds (equity and bond ETFs) accounted for half of net issues in Europe (and more generally worldwide). This type of fund is mainly domiciled in the United States and Ireland, which accounts for 71% of European ETFs and has the highest net issuance on the continent.

As in 2023, Luxembourg stood out for its net outflows from investment funds in Q1 (- EUR 6 billion), particularly for equity funds and multi-asset funds. Net issuance was still negative in April (- EUR 5 billion) but moved into positive territory in May (+ EUR 9 billion).

Energy

Share of electric cars

Sources: SNCA, STATEC (latest data: June 2024)

Electric cars on the rise in Luxembourg

Electromobility continued to grow in Luxembourg in the first half of 2024. All-electric vehicles accounted for 27% of new registrations over this period, compared with 21% in the first half of 2023. This significant proportion is now being reflected in the make-up of the car market, with electric cars now accounting for 6% of total stock (around 28,000 vehicles), compared with just 1% in early 2021.

This growth in Luxembourg is being held back slightly by the export of electric vehicles abroad. More second-hand electric cars are exported abroad than are sold on the market in Luxembourg (800 exports in the first half of 2024 compared with 500 cars sold on the national second-hand market). This trend is due to the high proportion of electric cars registered for leasing, which are then sold abroad by leasing companies after the leases expire.

Public finances

Tax receipts (cash basis)

Sources: Tax authorities, STATEC

Tax revenues on a positive path

Revenues (excluding social security contributions) collected by the State in the first six months of 2024 rose 11.4% year-on-year. They were mainly driven by corporate tax balances collected in Q2 and by the rise in VAT rates.

The sharp rise in corporation tax in the first half of the year (+32% year-on-year) was mainly due to balances relating to previous tax years of a limited number of companies. These almost doubled on the previous year, while advances rose 9%. Growth in taxes on households slowed to 8.2% year-on-year (down from +12% in 2023), against a backdrop of lower inflation and adjustments to tax scales. VAT receipts rose 9.6% (compared with +0.1% in 2023), benefiting from the rise in rates. The subscription tax benefited from increased valuations of investment fund assets. On the other hand, registration fees on property transactions continued to fall (-23% after -52% in 2023).