The economic context of Luxembourg

Economic Indicators

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 Sectors of Industry

The government has been aiming at economic diversification 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 131.6 thousand hectares (FAO). It contributes only 0.2% to the GDP and employs less than 1% 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 636 million) accounted for only 0.1% of the total EU production value in 2023.

The industrial sector (10.5% of the GDP and 9.6% 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 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% 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 89,5% of the active population) represents 80.6% 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 investment fund managers. The financial sector is the economic engine of the country, representing more than one-fourth of GDP and a significant portion of the country’s tax revenues. 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)	0.9	9.6	89.5
Value Added (in % of GDP)	0.2	10.5	80.6
Value Added (Annual % Change)	1.5	0.5	-1.6

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

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

 

 

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)