Economy loses some steam in Q2

GDP growth edges down: GDP growth inched down to 0.6% on a seasonally and calendar-adjusted quarter-on-quarter basis in the second quarter from 0.7% in the first quarter. The result marked the third consecutive expansion and remained above the Euro area average. On an annual basis, GDP declined 0.1% in Q2, improving from the previous quarter's 1.8% contraction.

Fixed investment and exports drag on GDP growth: In sequential terms, fixed investment fell 3.0% in Q2 (Q1: +3.0% qoq s.a.) as the construction sector remained subdued. Moreover, government consumption growth moderated to 1.0% in Q2 (Q1: +1.3% qoq s.a.). That said, private consumption rebounded 0.2% in the second quarter (Q1: -0.5% qoq s.a.), likely partly due to the new salary indexation from May bolstering workers’ incomes. On the external front, exports of goods and services flatlined in the second quarter (Q1: +5.8% qoq s.a.). Meanwhile, imports of goods and services deteriorated, contracting 0.1% in Q2 (Q1: +5.8% qoq s.a.).

GDP growth to accelerate but remain weak: Our panelists expect Luxembourg’s economy to expand at a faster rate in 2025 compared to 2024: Looser financing conditions should underpin a rebound in fixed investment and bolster the all-important financial sector, which accounts for roughly a quarter of total GDP. Moreover, exports of goods and services are expected to rebound from last year amid stronger EU demand and a favorable base effect. That said, 2025 economic growth is set to remain weak by its pre-pandemic standards; private spending growth is forecast to decelerate on the back of a higher unemployment rate.

Panelist insight: Commenting on the outlook, EIU analysts stated: “The main risks to the economic outlook are a resumption of upward inflationary pressures that would force the ECB to halt its current monetary policy easing cycle (this does not form part of our baseline forecast) and rising global trade uncertainty from the Trump administration, particularly if these spill over into restrictions on services.”

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