The International Monetary Fund (IMF) recently concluded its Article IV mission to Luxembourg, evaluating the country's economic situation and offering recommendations for future policy directions. The IMF staff found that Luxembourg's economic fundamentals remain strong despite recent challenges, including maintaining high GNI per capita and low public debt levels. However, economic performance has been weaker than expected with sluggish GDP growth and rising unemployment.
In terms of outlook, the IMF projects a rebound in GDP growth to about 2 percent in 2025, driven by private sector activities and a return of confidence in the housing market. However, risks such as external demand weaknesses and financial volatility due to geopolitical uncertainties persist. Additionally, structural issues related to competitiveness and housing affordability need addressing.
Fiscal policy should focus on balancing spending pressures with strategic needs without significantly increasing debt. A national fiscal rule is suggested to enhance credibility and reduce uncertainty. On pension reform, action is needed to ensure long-term sustainability by adjusting retirement age and contribution rates.
The financial sector remains resilient but faces some vulnerabilities, particularly in real estate-related nonperforming loans. Prudential policies should stay flexible to maintain adequate loss absorption capacities. Long-standing structural challenges include labor market flexibility and housing supply constraints.
Overall, the IMF team thanked Luxembourg's authorities for their cooperation during the mission.