After expanding to 1% in 2024, real GDP growth in Luxembourg is projected to pick up to 1.7% in 2025 and 2.0% in 2026. Growth is expected to be mainly supported by domestic demand in 2025 while the contribution from net exports is due to turn positive only in 2026. Headline inflation is set to decelerate thanks to a gradual reduction of energy inflation. Windfall revenues led to a substantial surplus of the general government balance in 2024, which is expected to turn to a deficit in 2025.
| Indicators | 2024 | 2025 | 2026 |
|---|---|---|---|
| GDP growth (%, yoy) | 1,0 | 1,7 | 2,0 |
| Inflation (%, yoy) | 2,3 | 2,1 | 1,8 |
| Unemployment (%) | 6,4 | 6,6 | 6,4 |
| General government balance (% of GDP) | 1,0 | -0,4 | -0,5 |
| Gross public debt (% of GDP) | 26,3 | 25,7 | 26,2 |
| Current account balance (% of GDP) | 2,3 | 0,8 | 0,3 |
Growth to slightly rebound in 2025
Real GDP expanded by 1% in 2024 thanks mainly to a positive contribution of net exports while investment decreased significantly following a fall in construction projects (both dwellings and non-residential) and equipment acquisitions. In terms of real gross value added, the human health and social work activities together with public administration sectors contributed the most to growth while the construction, financial and insurance activities sectors contributed negatively.
In 2025 and 2026, economic growth is expected to accelerate, as the fallout from trade restrictions initiated by the hike in US tariffs is foreseen to be more than compensated by the recovery of investment. The consumer confidence indicator points towards a mild recovery in consumption supported by an expansionary fiscal stance and falling interest rates, which underpin investment. A wage indexation that occurred in May 2025 should further support private demand, while the recent increase in the number of transactions in both new and existing construction and in mortgage demand indicate a recovery in investment in dwellings which is set to further accelerate in 2026. Credit to companies is projected to pick up from the current low level, benefiting both from lower short-term interest rates and from the realisation of delayed equipment investment projects. On the net exports side, while a financial services recovery started in 2024 thanks to a pick-up in investment fund revenues, uncertainty surrounding global trade is set to weaken the prospects of the sector and weigh on the contribution from net exports throughout 2025. In 2026, domestic demand is expected to continue to support the economy, while a stabilising international trade situation should support exports.
Labour market set to recover slightly
Following a slowdown in 2024, employment growth is forecast to accelerate to 1.3% in 2025 as leading indicators signal that the labour market will become tighter and 1.7% in 2026. The unemployment rate is expected to peak at 6.6% in 2025 before edging down to 6.4% in 2026 as employment recovers somewhat.
Inflation expected to normalise in 2025
Headline inflation is set to drop to 2.1% in 2025 owing to decelerating food and services prices while energy prices are expected to rebound slightly following the end of the energy price cap and the introduction of a new tariff on electricity grids. Headline inflation is projected to further decrease to 1.8% in 2026 as the inflation of energy, food and services are forecast to decelerate. Consequently, HICP inflation excluding energy, food, alcohol and tobacco is expected to decrease to 2.0% in 2025 and, to 1.8% in 2026.
General government balance to turn in a deficit over the forecast horizon
In 2024, the general government balance turned to a surplus of 1.0% of GDP from a deficit of 0.8% of GDP in 2023. Total revenues increased sharply in 2024, in spite of the budgetary impact of measures to support households’ purchasing power, the competitiveness of enterprises and the construction sector. Measures included an upward adjustment of personal income tax brackets following several wage indexations and a reduction in social security contributions for companies, which have been estimated to shave off revenues. Windfall revenues from taxes on income and wealth, notably from corporate taxes, and a surge in the property income from state-owned assets mostly explain the buoyant revenues collection. Expenditure growth slowed down compared to the previous year on the back of a less inflationary environment, in which the automatic indexation of wages and social transfers was not triggered. The implementation of the provisional so-called twelfths’ system in the first part of the year also contributed to the slowdown of expenditure.
In 2025, the general government balance is projected to turn to a deficit of 0.4% of GDP, also on the back of an expansionary fiscal stance. In spite of the expected rebound in economic activity, revenues from direct taxes are projected to come in at a slower pace than in the previous year, due to lower windfall revenues and to the impact of the additional set of government measures to support households and companies, including a further indexation of tax brackets and a reduction of the corporate income tax rate. Moreover, the implementation of the wage agreement in the public sector and of the automatic indexation of wages and social transfers is projected to put upward pressure on public expenditure, the growth of which is set to accelerate.
The deficit is set to slightly widen to 0.5% of GDP in 2026, as expenditure growth is expected to outpace revenue growth. Public investment is projected to remain at a high level over the forecast horizon and support the digital and green transition. The interest rate expenditure increased to 0.3% of GDP in 2024, and it is expected to remain stable at this level in 2025 and 2026.
In spite of the large government surplus, in 2024 the debt-to-GDP ratio increased to 26.3%. Government debt as percent of GDP is then expected to decline to 25.7% in 2025 before increasing again to 26.2% of GDP in 2026.