On May 30, 2025, the Executive Board of the International Monetary Fund (IMF) concluded its 2025 Article IV Consultation with Luxembourg. The board endorsed the staff appraisal without a meeting on a lapse-of-time basis.
Luxembourg's economic fundamentals remain robust, although recent performance has been described as lackluster. Public debt is low, and the financial sector is considered sound and well-diversified according to the 2024 Financial Sector Assessment Program (FSAP). GDP growth turned positive at 1% in 2024 after a contraction of 0.7% in 2023, primarily driven by public consumption. However, private domestic demand was weak due to tight financial conditions and low confidence in the real estate sector. The labor market is cooling after previous increases in labor costs. While there was an improvement in the headline fiscal deficit from one-off revenues, the underlying structural deficit widened due to shifts from temporary to permanent support.
An economic recovery is projected to gain momentum despite external challenges. Growth is expected to rise to 1.6% in 2025 and accelerate further in subsequent years, supported by improved confidence and recovering external demand. Inflation is projected to decline to about 2% in 2025 and remain stable over the medium term.
The IMF highlighted several risks facing Luxembourg's economy, including weaker external demand and financial market volatility influenced by trade policy uncertainty and geopolitical tensions. Despite these challenges, Luxembourg's external position remains strong but subject to volatility due to its unique economic characteristics as a small open economy with a significant share of cross-border workers.
The IMF recommends prudent fiscal policies with efficient use of fiscal space for more private sector-led growth. It suggests reviewing current measures' effectiveness while preserving savings from revenue overperformance or budget execution. Medium-term expenditure plans should accommodate future spending pressures through measures such as containing wage bill growth and enhancing spending efficiency.
Revenue resilience could be increased by diversifying revenue sources through tax reforms, reducing volatility and uncertainty of fiscal receipts. Strengthening the medium-term fiscal framework would enhance policy predictability.
In terms of financial stability, risks are manageable but require close monitoring due to solvency and liquidity risks in sectors like real estate. Authorities should ensure adequate provisioning and loss absorption capacity while overseeing nonbank financial sectors.
Macroprudential policy should remain flexible with appropriate capital buffers aligned with FSAP recommendations for household indebtedness management.
Structural reforms are needed for boosting private sector-led growth by addressing competitiveness constraints like wage indexation and increasing labor market flexibility.