Economy slips into contraction in the fourth quarter of 2025

Economy contracts in the final quarter of 2025: Luxembourg's GDP declined 0.1% on a seasonally adjusted quarter-on-quarter basis in Q4, following 1.2% growth in the prior quarter. Q4's reading was the weakest since Q3 2024. In annual terms, GDP increased 2.3% in Q4, following 3.2% growth in the prior quarter. For 2025 as a whole, GDP growth increased to 0.6% from 0.4% in 2024, remaining below the euro area average.

Contraction in the financial sector drags on the economy: Relative to the previous quarter's data, readings in Q4 softened for private consumption (+0.8% on a seasonally adjusted quarter-on-quarter basis vs +1.0% in Q3), government consumption (+1.1% vs +1.5% in Q3), investment (-10.1% vs +3.8% in Q3), exports of goods and services (-1.2% vs +1.0% in Q3) and imports of goods and services (-2.0% vs +1.5% in Q3). The decline in total investment was the steepest since Q3 2021, with fixed investment also contracting at its fastest pace since that quarter. From the production point of view, Q4’s decline in GDP was mainly driven by a shrinkage in the financial sector, which likely reflected higher risk surrounding Europe’s banking sector—particularly significant given Luxembourg’s role as a leading international financial center. Moreover, construction activities also contributed negatively in Q4.

GDP growth to roughly triple this year: Our panelists expect GDP growth to rebound in sequential terms in Q1. Looking further ahead, GDP growth in 2026 is forecast to roughly triple 2025’s rate and surpass the euro area average for the first time since 2021. The expansion should continue to be driven by domestic demand, supported by lower inflation, past interest rate cuts and the government’s 2026 budget, which includes higher tax deductibility for private pensions, tax relief for families and housing benefits. Persistent volatility in global financial markets and rising fuel prices, both influenced by the ongoing U.S.-Iran war, pose key downside risks.

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