Conjoncture Flash August 2026: Despite the turbulent environment, economic activity holds steady

The turbulence linked to the international environment has been clearly reflected in business surveys over the past few months, both in the eurozone and in Luxembourg. Economic activity in the eurozone, however, held up well in the 2^nd quarter and has shown moderate but steady growth over the past few quarters.

Economic activity in the eurozone held up well in the 2^nd quarter of 2026, with GDP growing by 0.4% quarter-over-quarter. This result was better than expected (the initial consensus among analysts had projected a 0.2% increase), given the negative signals posed by the energy inflation shock linked to the conflict in the Middle East and the deterioration in business sentiment surveys observed during the spring. Economic activity rebounded in France, rising 0.2% (after a 0.1% decline in Q1), supported by a rebound in aerospace exports and capital goods. A similar increase was recorded in Germany¹ , driven there as well primarily by exports and, to a lesser extent, by household consumption, while investment declined. Spain (+0.7%) also maintained a pace of growth similar to the average observed over the previous four quarters, remaining a major contributor to overall growth. Ireland, whose GDP growth is particularly volatile, has had a significant impact on the eurozone’s GDP figures in recent quarters. Unlike in the 1^st quarter, when it weighed heavily on eurozone growth² , it is making a positive contribution this time around. Excluding Ireland, the change in eurozone GDP stands at 0.3% quarter-over-quarter, a result identical to that of the previous three quarters. Beyond the volatility linked to Ireland’s performance, the underlying trend in the eurozone is therefore one of growth that is certainly moderate (with notable differences across countries) but relatively steady.

This picture contrasts with the significant fluctuations observed in business and consumer sentiment surveys over the same period. The views of economic actors have clearly reflected the upheavals of a destabilized international environment, marked in recent months by the consequences of the war in Iran (and in particular rising energy prices). Despite a brief lull in June and July following the signing of a memorandum of understanding between the United States and Iran, tensions between the two parties have since escalated significantly. The number of ships transiting the Strait of Hormuz, which had temporarily rebounded, has fallen back to its lowest level, and there are currently no concrete signs of a breakthrough on the horizon.

[1] Germany’s first-quarter 2026 growth figure was also significantly revised upward to +0.4% (compared with just +0.1% in the previous estimate).

[2] Ireland’s GDP had fallen by 7.0% quarter-over-quarter. Excluding Ireland, the eurozone would have posted a 0.3% increase in the 1^st quarter (rather than stagnation).

Confidence indicators

Sources: S&P Global PMI, STATEC

And in Luxembourg?

In Luxembourg, business³ and consumer confidence indicators—which, like those in the eurozone, had slumped during the spring—are recovering slightly as summer begins, but it would be risky to bet on the start of a turnaround.

Luxembourg’s GDP figures for the 2^nd quarter are not yet available, but various trends are emerging from the available short-term indicators. There are some fairly positive signs regarding household consumption, with retail sales volume up compared to the 1^st quarter (excluding gas stations and mail-order sales) and a sharp rebound in new car registrations (following near-stagnation in Q1). Net issuance in UCIs remained relatively high, against the backdrop of a stock market that continues to perform strongly (see below). Industrial production rose for the 3^rd consecutive month in May, and construction output continued to follow the slight upward trend that began in late 2025. In the non-financial services sector, production figures (turnover by volume), available for April and May, are mixed: they show a somewhat more positive trend than in the 1^st quarter in the transportation and warehousing, hospitality, and real estate sectors, but are down in the information and communication services and business services sectors.

[3] The business confidence indicator combines the results of several questions from business surveys conducted among companies in the manufacturing, construction, retail trade, and other non-financial services sectors. Financial sector participants are not covered by a dedicated business survey.

Environment

Precipitation in Luxembourg

Source: Agrarmeteorologie Luxemburg

Dry conditions

Much of Europe experienced several heat waves from May through August, a phenomenon from which Luxembourg was not spared. Daily temperatures recorded in Luxembourg City were particularly high in June (20.1 °C, nearly 3 degrees above the normal temperature for that month—1995–2025 average) and July (21.3 °C, 2.5 degrees above the seasonal norm). This year, the high temperatures were accompanied by particularly low precipitation: over the first seven months of the year, precipitation was more than 30% below normal levels (-60% from April through July).

The impact of this drought on economic activity is difficult to assess at this time. In the business survey of construction professionals, the July 2026 survey (the most recent one) shows that a slightly higher number of companies cited weather conditions as a factor limiting their activity (about 10% of companies, compared with only 5% in July 2025). Furthermore, low water levels in rivers and streams are likely to disrupt the supply chains of certain industries, particularly for materials transported or shipped via the Moselle River. Finally, the anticipated decline in yields for certain agricultural crops is likely to drive up food prices.

Inflation 1/2

Food Inflation 

Source: Eurostat

Food inflation: risks of a rise are intensifying

Food inflation remains moderate and continues to slow, both in Luxembourg (1.3% in July after 2.8% in January) and in the eurozone (0.8% after 2.2%). This trend is due in particular to easing pressure on meat prices (+2.5% year-over-year in July in the eurozone, compared with 5.3% in January). Meat price increases were particularly sharp between 2021 and 2023 due to the delayed impact of soaring production costs and reduced livestock herds. Other products that had contributed to food inflation in recent months, such as coffee and chocolate, are also exerting significantly less pressure than at the beginning of the year.

Upward risks, however, remain significant. Droughts and heat waves in 2026 have already affected harvests in Europe, while low water levels in the Rhine and Danube rivers are disrupting freight transport and driving up certain logistics costs. Added to this is the rise in nitrogen fertilizer prices, linked to the closure of the Strait of Hormuz. Finally, meteorological agencies are forecasting a strong to very strong El Niño event by the end of the year, which could exacerbate pressures on agricultural commodities, particularly tropical crops. In this context, STATEC projects food inflation of 2.1% in 2026, rising to 2.4% in 2027.

Inflation 2/2

Restaurants, Cafés, and Similar Establishments*

Sources: Eurostat, STATEC (*excluding cafeterias)

Slightly higher pressure on restaurant prices

Restaurant prices rose sharply in 2022 and 2023, both in Luxembourg and in the euro area. Since 2025, their growth has been around 4% in the euro area, a rate significantly higher than that observed before the pandemic (1.7% per year between 2010 and 2019). In Luxembourg, the increase was still limited to 3% in 2025, but it has since caught up with that of the euro area, reaching 3.9% in July.

Despite this convergence, restaurants contribute more to inflation in the eurozone than in Luxembourg, particularly to inflation in the services sector. This is due to their greater weight in the household consumption basket (8.6% in the eurozone versus 7.2% in the Luxembourg CPI; or 18.3% of services in the eurozone versus 16% in Luxembourg). Households in the euro area also spend a higher proportion of their food budget (food products, restaurants, cafeterias, and cafés) on meals eaten away from home. This share averages 37%, compared with 34% in Luxembourg. Since the health crisis, residents of the Grand Duchy have reduced this proportion by 2 percentage points compared to 2019. Conversely, several eurozone countries have seen a marked increase in dining-out spending, notably Spain and France, where the share of meals eaten away from home in the food budget has risen by about 8 percentage points since 2019.

Labor market

Hours Worked by Temporary Workers

Sources: IGSS, STATEC (seasonally adjusted data)

Recovery in temporary employment

In Luxembourg, the number of hours worked by temporary workers increased by 10% between the 1^st quarters of 2025 and 2026, breaking the downward trend observed since early 2022. Construction (accounting for nearly 40% of total hours worked by temporary workers in 2025) is the main driver of this recovery, posting a year-over-year increase of nearly 20% in the 1^st quarter of 2026. The leading indicator nature of temporary work—an early signal of increased labor demand—suggests a certain recovery in employment in the construction sector (following a stabilization between Q1 and Q2 2026, according to preliminary data). The “transportation and warehousing” sector is also contributing significantly to the rise in temporary staffing hours, with a 40% increase compared to the 1^st quarter of 2025. Manufacturing (+5%) and financial and insurance activities (+74%, though accounting for only 4% of temporary staffing hours last year) are contributing to a lesser extent. In contrast, declines are being recorded in information and communication (-80% year-over-year, following a peak around the turn of 2025) and in retail (-9%).

Despite this recent recovery, the total volume of temporary agency hours remains 18% below its level at the start of 2019 (though it has more than doubled in transportation and healthcare).

Construction

Prices of Construction Services

Sources: European Commission, Eurostat, STATEC

Note: For Luxembourg, construction prices are extrapolated based on semi-annual data.

A (still) moderate acceleration in construction prices

The outlook for construction service prices had risen significantly starting in March, in response to inflationary fears linked to the war in Iran. Over the past few months, these concerns have not intensified further in Luxembourg, but price expectations remain at a significantly higher level than at the beginning of the year. In the eurozone and neighboring countries, however, they have recently eased slightly.

Observed construction prices, after skyrocketing in 2021–2023 due to post-COVID supply chain issues and the energy crisis linked to the war in Ukraine, slowed in 2024. They have been gradually accelerating again since the beginning of 2025. As a result, construction prices rose by 2.7% year-over-year in the 2^nd quarter of 2026, following a 2% increase at the end of 2025. These observed prices correlate closely—albeit with some lag—with the projected trends from business surveys, which point to a further acceleration ahead. In the eurozone, prices followed a very similar trend to that in Luxembourg, though price growth was more pronounced in the last quarter, particularly in Germany (+5% year-over-year in Q2 versus +3.3% in Q1).

Financial sector

Assets of UCIS in Luxembourg

Source: CSSF

Strong rebound in investment fund valuations

After briefly falling in March due to stock market turbulence linked to the conflict in Iran, investment fund asset valuations have rebounded strongly. Net assets under management for collective investment undertakings (UCIs) in Luxembourg posted notable year-over-year growth of 16% at the end of June.

Equity valuations surged, driven by hopes of de-escalation in the Middle East and strong corporate earnings (particularly in the technology and AI sectors). Statements from the Federal Reserve, meanwhile, led to a significant appreciation of the dollar against the euro, and European stock markets were buoyed by falling oil prices. As a result, net inflows increased particularly in dollar-denominated money market assets and in most equity funds in June.

Stock market valuations continued their upward trend throughout the summer. The eurozone remains buoyed by banking and oil stocks, despite significant fluctuations in Brent crude prices. Interest rates also continued to rise, driven in particular by the ECB’s key rate hike in June.

International

U.S. Public Debt

Source: U.S. Department of the Treasury

U.S. public debt continues to rise

In less than a decade, U.S. federal public debt has doubled, surpassing 40,000 billion USD, with 80% held by creditors outside the federal government and 20% by U.S. federal entities. The budget deficit, nearing 6% of GDP—fueled by tax cuts and spending increases—coupled with rising sovereign bond yields, is contributing to the continued growth of U.S. government debt. This situation also fuels a vicious cycle: rising debt increases the interest burden, which widens the budget deficit, which in turn fuels further growth in public debt.

This sustained flow of U.S. sovereign debt issuance competes with the financing needs of eurozone economies. This pressure compounds structural and cyclical factors, notably rising inflation expectations and downwardly revised growth forecasts in the wake of the war in Iran. Taken together, these factors are contributing to tighter financing conditions in the eurozone and keeping sovereign yields at historically high levels. This pressure is further intensified by expectations of an increase in the ECB’s key interest rates by the end of the year.