Luxembourg: Risk Assessment
Country Rating1
Rating: A1
Business Climate Rating1
Rating: A2
Risk Assessment2
The recovery has continued this year
The economy rebounded in 2010 driven by the strong growth of public-sector demand and exports. GDP growth benefited from the increased confidence of households and the rise of real wages. Low interest rates contributed to the recovery of investment. Construction, non-merchant services, and temporary employment were the main economic drivers. Manufacturing began to grow again, spurred by the dynamism in the steel industry. Financial services were relatively lifeless once again with investment funds alone achieving good performance spurred by the rebound in financial markets. Repercussions of the crisis nonetheless continued to affect companies with the bankruptcy rate remaining high throughout 2010.
The recovery is expected to continue this year with growth above the euro-zone average. The key economic drivers will include major investment projects undertaken by large companies and also exports of financial and B2B services. Fiscal policy is, however, expected to be slightly tighter.
Continued high sensitivity to changes in the international financial context
The financial sector (30% of value added) has come through the crisis relatively well and is expected to begin to grow again, benefiting from the increase in margins on interest income and the growth of demand deposits. The construction sector will likely rebound strongly thanks to the increase in residential and non-residential building permits. Air transport and telecommunications activity will also be dynamic. The economy nonetheless remains sensitive to shifts in the world financial context as a result of its specialization in financial services, a strongly internationalised sector in terms of both its activities and its ownership. They would also have to adapt to any changes apt to affect financial transparency and governance.
The extent of the deterioration in public sector finances remains limited
The moderate growth of the deficit in 2010 is attributable to the delayed effect of the crisis on public revenues and the implementation of a stimulus plan. It is expected to be partly eliminated this year thanks to the growth of tax receipts (particularly proceeds from personal income tax) and a slowdown in spending. Reform of the health system (carried out in 2010) and of pensions (expected this year) will contribute to consolidating public finances. Public-sector debt represents less than 19% of GDP, one of the lowest ratios in the euro zone.
Strengths
- Limited public sector debt
- High standard of living
- Major financial center
Weaknesses
- Economy — small in size and largely open — dependent on financial services (30% of GDP)
- Predominance of financial services, foreign group ownership
- Manufactured goods exports, largely intended for the construction and European automotive industries
- Competitiveness undermined by labor costs
- High cost and limited availability of housing