Developments in individual OECD countries: Luxembourg - Statistical Data Included

OECD Economic Outlook, Dec, 2001

Real GDP growth is projected to fall from 7 1/2 per cent in 2000 to 4 per cent this year owing to a sharp deterioration in exports and in financial markets. As the international situation improves, the economy should recover to around trend by 2003. With import prices falling and intervals between indexed wage increases lengthening, inflation should decline to 2 1/4 per cent by 2003.

Energy prices should be excluded from wage indexation arrangements to reduce the risk that any increase sets off a wage-price spiral, as occurred in 1999-2000.

Economic activity is set to slow sharply this year owing to a sharp deterioration in export markets whose growth is estimated to fall from 10 per cent in 2000 to only 2 1/2 per cent in 2001. This has a major impact on economic growth in Luxembourg since exports, adjusted for their (direct and indirect) import content, represent 60 per cent of GDP. In addition, the decline in international stock markets has driven down financial service prices, which are based on asset values, and hence the terms of trade. Industrial production and business expectations have also weakened markedly. Employment growth has slowed since mid-year but was still 5 1/2 per cent (year-on-year) in the third quarter of 2001. At the same time, the unemployment rate has stabilised at around 2 1/2 per cent.

Inflation has eased to around 2 3/4 per cent in recent months mainly owing to the fall in oil prices. Core inflation, on the other hand, has continued to rise to around 3 per cent. This is mainly attributable to a further acceleration of wage increases, which reached 6 per cent (year-on-year) following an index-linked rise in April. With consumer price inflation slowing, index-linked wage increases should become less frequent (they occur whenever cumulative price rises since the last threshold was breached amount to 2 1/2 per cent), contributing to a decline in core inflation. The next index-linked wage increase is expected in the second quarter of 2002.

Fiscal policy is set to ease substantially, complementing the reduction in interest rates decided by the European Central Bank (ECB). Personal income tax cuts amounting to 1.2 per cent of GDP have been implemented this year and further cuts of 0.6 per cent of GDP are planned for next year. In addition, corporate taxation is to be reduced by around 1 1/2 per cent of GDP in 2002. At the same time, large increases in public investment are planned for this year and next. As a result of these policies and the sharp slowdown in growth, the budget surplus is projected to decline from 6 per cent of GDP in 2000 to 3 per cent by 2002 and to remain broadly stable thereafter. In view of the high level of economic uncertainty, it is assumed that households will delay spending their tax cuts until 2002.

Economic growth is projected to slow sharply this year to 4 per cent and to remain weak in 2002, though recovering in the course of the year. As exports and financial markets improve, output growth of 6 per cent, slightly above the 1990s average, might be re-established in 2003. Employment growth is likely to decline with a lag, but lower inflows of cross-border workers (who account for two-thirds of employment growth) and immigrants should imply only a modest rise in unemployment. Inflation is projected to decline to around 2 1/4 per cent by 2003 as import price inflation falls and intervals between indexed wage increases lengthen.

The main risks surrounding these projections concern developments in trading partners' economies and in financial markets. Differences from anticipated developments would have a major effect on economic growth owing to the openness of the Luxembourg economy and its dependence on the mutual fund industry, which is the second largest in the world after that in the United States.

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Luxembourg: Demand, output and prices

                                    1998       1999
                               current prices    Percentage changes,
                                                volume (1995 prices)
                               billion euros

Private consumption                 7.3         2.1
Government consumption              2.9         7.7
Gross fixed capital formation       3.6        19.6
Final domestic demand              13.8         7.8
 Stockbuilding (a)                  0.1        -0.4
Total domestic demand              13.9         7.3

Exports of goods and services      21.5        13.3
Imports of goods and services      18.5        15.6
 Net exports (a)                    3.0        -0.3

GDP at market prices               17.0         6.0
GDP deflator                         -          2.5

Memorandum items
Private consumption deflator         -          1.4
Unemployment rate                    -          2.9
General government financial         -          3.6
 balance (b)

                               2000           2001      2002
                                Percentage changes, volume (1995
                                             prices)


Private consumption             3.1           3.5       4.0
Government consumption          4.8           3.4       3.0
Gross fixed capital formation  -3.0           5.5       4.0
Final domestic demand           1.7           4.0       3.8
 Stockbuilding (a)              0.2           0.0       0.0
Total domestic demand           1.9           4.0       3.8

Exports of goods and services  16.4           6.3       4.5
Imports of goods and services  13.8           6.8       4.9
 Net exports (a)                5.4           0.6       0.3

GDP at market prices            7.5           4.0       3.4
GDP deflator                    3.7           0.7       1.4

Memorandum items
Private consumption deflator    2.9           2.6       2.5
Unemployment rate               2.6           2.5       2.8
General government financial    6.1           5.3       3.2
 balance (b)

                               2003
                               Percentage
                                changes,
                                 volume
                                 (1995
                                prices)


Private consumption            4.0
Government consumption         3.0
Gross fixed capital formation  5.5
Final domestic demand          4.2
 Stockbuilding (a)             0.0
Total domestic demand          4.2

Exports of goods and services  8.5
Imports of goods and services  7.6
 Net exports (a)               2.7

GDP at market prices           5.9
GDP deflator                   3.5

Memorandum items
Private consumption deflator   2.2
Unemployment rate              2.8
General government financial   2.9
 balance (b)

(a)Contributions to changes in real GDP (percentage of real GDP in
previous year), actual amount in the first column.

(b)As a percentage of GDP.

Source: OECD.