GDP contracts in the first quarter

GDP falls in Q1: Luxembourg’s economy continued to experience hiccups in Q1 2025 as GDP fell 1.0% on a seasonally adjusted quarter-on-quarter basis in the first quarter (Q4 2024: +1.3% qoq s.a.)—the worst result in the Euro area. This was the sixth change in direction over the last nine quarters. On an annual basis, economic activity declined 0.4% in Q1, contrasting the previous quarter's 1.9% growth and marking the sharpest downturn since Q4 2023.

Fall in exports and slower private consumption growth weigh on economic activity: Domestically, household spending—roughly 30% of GDP—fell 0.5% in seasonally adjusted quarter-on-quarter terms in Q1 (Q4 2024: +0.2% qoq s.a.), dragged by higher inflation. On the flip side, public spending growth accelerated to 1.2% (Q4 2024: +0.9% qoq s.a.), and total investment rebounded by 4.8% (Q4 2024: -1.2% qoq s.a.), bolstered by lower interest rates. On the external front, exports of goods and services contracted 0.4% in Q1(Q4 2024: +1.7% qoq s.a.), marking the worst reading since Q1 2024. In addition, imports of goods and services growth moderated to 0.1% in Q1 (Q4 2024: +1.7% qoq s.a.).

GDP growth to remain weak: Our Consensus is for GDP growth to pick up from 2024 in 2025: Looser financing conditions will fuel a rebound in fixed investment, buttress private consumption and bolster the crucial financial sector, which accounts for roughly a quarter of total GDP. Moreover, exports of goods and services are expected to grow at a faster pace amid stronger EU demand. That said, our panelists have slashed their 2025 GDP growth forecasts since January due to heightened uncertainty regarding global trade. As a result, Luxembourg’s economic growth is expected to remain weak by pre-pandemic standards. Escalating trade frictions and higher-than-expected inflation due to energy price spikes are downside risks.

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