Luxembourg flag Luxembourg: Economic and Political Overview

The economic context of Luxembourg

Economic Indicators

For the latest updates on the key economic responses from governments to address the economic impact of the COVID-19 pandemic, please consult the IMF's policy tracking platform Policy Responses to COVID-19.

Luxembourg’s economy is characterised by its fiscal 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 the country vulnerable to external shocks. After contracting following the outbreak of the COVID-19 pandemic, Luxembourg’s GDP returned to growth in 2021 (+5.5% according to the IMF), supported by private consumption and investment, as well as by the strong performance of the external sector. Assuming a normalization of the global sanitary and economic conjuncture, the IMF forecasts growth at 3.8% in 2022 and 3% in 2023.

Luxembourg is the second-wealthiest country in the world in terms of GDP per capita (the first in the EU - PPP) and has one of the highest current account surpluses as a share of GDP in the eurozone. It generally maintains a healthy budgetary position, nevertheless, the measures taken to address the pandemic, partially offset by an increase in revenues, caused the general government balance to slip into a deficit of -1% of GDP in 2021. In 2022, the general government balance is expected to turn to a surplus of 0.2% of GDP (EU Commission forecast), as revenues should continue to expand and crisis-related measures are phased out (although the IMF still sees a deficit of 0.2%). The public debt level is among the lowest in the region, though it increased to 26.3% in 2021 according to the IMF (from a pre-pandemic level of 22%). In 2022, the IMF forecasts a marginal increase to 26.7%, before the ratio returns to a downward trend in 2023 (26.8%). Higher global energy prices and the implementation of a carbon tax contributed to a rise in inflation, which stood at 2.7% in 2021. It is subsequently expected to moderate to 1.4% this year and 1.9% in 2023, as some energy price base effects fade out. In recent years, the country has implemented a policy of legal reforms to respond a criticism regarding the lack of transparency of its financial centre and its fiscal dumping policy towards multinationals. Luxembourg is cooperating with other countries to fight against fraud and fiscal evasion. Introducing an automated exchange of fiscal information among states, has put its banking secrecy de facto to an end. The country was taken off the list of uncooperative tax havens, established by the Global Forum on Transparency and Exchange of Information for Tax Purposes.

After rising following the outbreak of the pandemic, unemployment decreased to 5.6% in 2021, thanks to the government’s short-term work scheme that supported employment. The IMF expects unemployment to continue its decline in 2022 and 2023, at 5.5% and 5.4%, respectively. 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 one of the countries with the highest income per capita (USD 122,740     at PPP in 2021), around 105,000 residents live below the poverty line, according to the latest data available from Statec.

 
Main Indicators 201920202021 (e)2022 (e)2023 (e)
GDP (billions USD) 71.1173.21e83.7789.6895.41
GDP (Constant Prices, Annual % Change) 2.3-1.3e5.53.83.0
GDP per Capita (USD) 115,839116,921e131,302137,948144,013
General Government Balance (in % of GDP) 1.9-3.1e-1.0-0.20.0
General Government Gross Debt (in % of GDP) 22.024.826.326.726.8
Inflation Rate (%) 1.70.02.71.41.9
Unemployment Rate (% of the Labour Force) 5.46.35.65.55.4
Current Account (billions USD) 3.253.14e3.943.884.04
Current Account (in % of GDP) 4.64.34.74.34.2

Source: IMF – World Economic Outlook Database, October 2021

Note: (e) Estimated Data

Main Sectors of Industry

The government has been aiming at economic diversification for a few years and has been encouraging the development of sectors such as communication and information technologies, logistics, e-commerce and biotechnologies. The number of foreign citizens in the labour market outweighs the number of Luxembourgish nationals.

The agricultural sector is almost non-existent, as the country’s arable land is limited to 61,860 hectares. It contributes only 0.2% to the GDP and employs around 0.7% of the active population (World Bank, latest data available). The country's main crops are wine, wood, cereals and potatoes. According to data from Eurostat, Luxembourg’s overall agricultural output (EUR 404 million) accounts for only 0.1% of total EU output.

The industrial sector (10.7% of the GDP and 10.8% of the active population), has historically been dominated by the production of iron and steel. Numerous industrial sites of the mining district in Southern Luxembourg gave its development and its wealth to the country. In recent years, this sector has been diversified with the addition of chemical factories, plastic products and light engineering. Nowadays, the manufacturing sector represents only 4.6% of GDP (World Bank).

With the oil shock of 1973 and the crisis which followed, the Luxembourg economy turned to the development of a services economy like most developed countries. The tertiary sector (employing 88.5% of the active population) represents nearly 80.1% of the national wealth, with more than half of it attributed exclusively to financial and real estate services. Luxembourg is one of the world's largest money markets and the second-largest investment fund manager in the world. The financial sector is the economic engine of the country, representing around a third of GDP, 10% of employment and contributing 13.7% of fiscal revenues in 2020. It is the main centre of private banks in the Eurozone and home to many reinsurance companies. The Grand Duchy has sought to diversify its economy, currently over-dependent on the financial sector: it is trying to develop its assets to position itself as a centre for media and new information and communication technologies and to attract companies providing electronic services, including e-commerce. Nowadays, trade, transport, hotels and gastronomy sectors combined are the main employers (almost double the employees of the finance and insurance sectors).

 
Breakdown of Economic Activity By Sector Agriculture Industry Services
Employment By Sector (in % of Total Employment) 0.7 10.8 88.5
Value Added (in % of GDP) 0.2 10.7 80.1
Value Added (Annual % Change) 0.2 -4.8 -0.1

Source: World Bank, Latest Available Data. Because of rounding, the sum of the percentages may be smaller/greater than 100%.

 

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Indicator of Economic Freedom

Definition:

The Economic freedom index measure ten components of economic freedom, grouped into four broad categories or pillars of economic freedom: Rule of Law (property rights, freedom from corruption); Limited Government (fiscal freedom, government spending); Regulatory Efficiency (business freedom, labour freedom, monetary freedom); and Open Markets (trade freedom, investment freedom, financial freedom). Each of the freedoms within these four broad categories is individually scored on a scale of 0 to 100. A country’s overall economic freedom score is a simple average of its scores on the 10 individual freedoms.}}

Score:
76/100
World Rank:
18
Regional Rank:
11

Economic freedom in the world (interactive map)
Source: Index of Economic Freedom, Heritage Foundation

 
 

Country Risk

See the country risk analysis provided by Coface.
 

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Sources of General Economic Information

Ministries
Ministry of Economy
Ministry of Finances
Statistical Office
The National Statistical Institute of Luxembourg
Central Bank
Central Bank of Luxembourg
Stock Exchange
Luxembourg Stock Exchange
Economic Portals
Economic Portal (in French)
 

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Latest Update: April 2022

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