Affaires économiques
Conjunctural report and economic perspectives
On the occasion of its annual economic conference, the Chamber of Commerce took stock of 2020, a year devastated by the health and economic crisis, and companies' expectations for 2021, a year marked by great uncertainty and considerable volatility, whether regarding new health restrictions or the hope for a positive impact due to the arrival of vaccinations. The challenges for companies are many, and are of unparalleled scope. Although the situation at the end of the year is difficult for many citizens and entrepreneurs, solutions exist to safeguard the economic fabric, to prepare for recovery, and to get back on track for a vigorous and qualitative growth.
The COVID-19 pandemic and the resulting economic crisis have had a profound impact on the year now drawing to a close. The persistence of the virus, pending a potential positive effect due to vaccines in 2021, leaves room for uncertainty over the future development of the global socio-economic environment. Unlike the financial crisis, which impacted the economy following certain failures in the international financial system which then had a significant knock-on effect at the international level, the socio-economic crisis we are currently experiencing results from the effects exerted by the pandemic on both supply and demand markets globally.
The uncertainty and volatility inherent in the unpredictable nature of the pandemic, as well as its very heterogeneous impact on the different economic sectors, make it difficult to establish reliable projections, especially in Luxembourg, an open economy largely dependent on developments abroad. At the start of the crisis in the spring, the forecasting institutes were counting on a difficult year in 2020, but also on a rapid return to a ‘new normal’ at the end of the year and a rigorous recovery in 2021. Now at the end of 2020, it turns out that the second wave of the pandemic and the related health restrictions will impact our economy and many businesses as well in 2021. The shock on supply and demand induced by the pandemic is likely to produce harmful effects, even beyond 2021 and 2022 for certain sectors particularly affected (business tourism, events, travel agents, etc.).
The fact that the pandemic often impacts different economic sectors unevenly also makes it more difficult to put in place effective solutions. While the aid initially put in place by the Governments, in Luxembourg and abroad, applied indifferently to many sectors, it quickly appeared that certain sectors of activity were much more severely affected than others and therefore required more targeted support measures, including in particular the sectors undergoing the imposed closures. The 2021 state budget, which will be voted on this week, is heavily influenced by business aid measures. These must be maintained and even extended to ensure the survival of companies that were viable before the crisis and to establish solid post-COVID recovery. Direct and indirect aid, refundable or not, loans guaranteed by the State, partial unemployment, investment subsidies, etc. significantly increase public deficits and indebtedness while tax revenues also decline. However, there are no other options than to pursue a counter-cyclical budgetary policy in the current situation.
As for medium-term macroeconomic forecasts, the scenario of a K-shaped recovery, and therefore largely unequal depending on the activities of the sectors considered, seems realistic in the absence of an evolution in V- or W-shaped recovery. While some sectors will benefit from good momentum, others will undergo a profound transformation which may go as far as the complete destruction and overhaul of the pre-COVID-19 business model. The medium-term economic development will largely depend on the success of the vaccination campaigns which started in December in certain European countries and throughout the world. The more or less widespread arrival of vaccines from early 2021 therefore bodes well, although it will probably take several months to see the first lasting effects on society and the economy.
Global economic outlook: A slow and uncertain recovery
The economies of all countries have suffered the full brunt of the economic shock induced by the health and economic crisis. The indicators are mostly in the red, despite a rebound in activity in the third quarter, and signs of a lasting and stable recovery remain largely absent at the end of 2020. With the exception of China, which returned to growth in the second quarter of 2020, countries are experiencing a recession in their economy. The United States registered a drop in GDP of -4.6%. The United Kingdom, the second most affected European country after Spain, is down 10.3%. Compared to the drop in the GDP in the euro zone, which should be around -7.8%, Belgium and France are particularly affected, with a respective decline of -8.4 and -9.4%. In comparison, Germany (-5.6%) and particularly Luxembourg (-4%) are resisting better.
While the coronavirus is still circulating and some countries reintroduced a partial or total lockdown, extending aid to companies is a safety net to protect the economic fabric, employment, and the investment capacity of businesses.
Luxembourg’s economy is resisting, but for how long?
Although weakened by the crisis, Luxembourg is doing better than the rest of the EU. This can be explained, in part, by the structure of its economy, which is largely oriented towards services and finance (which accounts for more than a quarter of its GDP), a sector which has been doing well so far. The relative health of public finances has enabled the rapid implementation of direct and indirect aid measures for businesses and households. After rising in April and May, the unemployment rate remains higher than at the start of the year but stable at around 6.3%. According to STATEC forecasts, assuming that the pandemic is contained, growth should start to rise again in 2021, without however returning to its pre-crisis level. Confirmation of this trend hinges on factors that are difficult to predict, such as the trajectory of the pandemic, the additional costs it will impose on the economy, the robustness of sectors and consumer confidence.
The results of the 2nd annual edition of the ‘Barometer of the Economy’ survey (published in French every six months) are rather encouraging. However, the survey was conducted in September, at a time when the probability of a second lockdown, partial or complete, with further closures in certain sectors, seemed low.
The survey results are therefore imbued with the relative optimism that reigned after the first lockdown. While a decline in profitability and investment forecasts might have been feared, the majority of respondents who participated in the latest edition of the ‘Barometer of the Economy’ anticipated a stable situation over the next six months. At European level, the Eurochambres 2021 survey reflects the general pessimism of companies, both in terms of indicators relating to domestic consumption, exports, employment, investments and their confidence in the future. In the eyes of the 58,400 entrepreneurs from 29 European countries who took part in the survey, the major challenge for the year to come, after managing the effects of the pandemic, will be the cost of labour. The same is true for Luxembourg entrepreneurs, for whom the cost of labour overshadows the lack of qualified labour as a main challenge.
During the 3rd quarter of 2020, the evolution of the real GDP was +0.5% compared to the same quarter of 2019 and +9.8% compared to the 2nd quarter of 2020. Thanks to this strong recovery recorded by STATEC and assuming that the GDP in the 4th quarter of 2020 is equal to that of the 3rd quarter, the decrease in GDP in 2020 would be ‘only’ by 1.4%, which is much more favourable than all forecasts since the start of the pandemic.
While most sectors recorded encouraging growth in the 3rd quarter of 2020 compared to the 2nd quarter, the fact remains that their performance remains below that of 2019, particularly for industry, and for ‘commerce, transport, accommodation, and restaurants and food services’, but also financial and insurance activities.
The challenges of 2021: Sector-specific fortunes
While there is no doubt that the economy is weakening in general, the various sectors of the Luxembourg economy have been, and still are, affected by the crisis in different ways.
The sectors that have been severely weakened as a result of a partial, or even total, cessation of business activities are the Horeca industry, events, tourism, certain retail outlets in town centres and in certain shopping centres, travel agents and cultural activities. This category also includes the more than 30,000 self-employed in the country who, in addition to experiencing an at-risk-of-poverty rate that is twice as high as salaried employees in normal times, often work in the sectors that have been made highly vulnerable by this crisis. As a result, the Chamber of Commerce calls for the same compensation measures for the self-employed as salaried employees. The self-employed could benefit from a policy of staggered aid, for example, rather than a hard stop of all aid.
These different sectors face various difficulties. The decision to extend the closure of cafes and restaurants until January is hitting the Horeca sector hard. Many establishments are deprived of a significant portion, if not all, of their revenue, which will inevitably lead to a significant increase in the number of bankruptcies and an increase in unemployment. Establishments that manage to survive the closures will face an uncertain return of clientele due to the climate of insecurity. To counteract this grim development, the aid announced by the Government will have to be released and made available as soon as possible.
The Horeca sector, like almost all sectors in great difficulty, will suffer in 2021 from the combined effect of an increase in labour costs and a more or less serious shortage of cash. In this context, the Chamber of Commerce calls for more administrative support for the sectors particularly affected by the crisis, for example, by the establishment of a moratorium for interest-free late payments of debts to public administrations, accompanied by modified payment deadline terms for companies' reimbursement capacities. The tourism sector, which is suffering - like the passenger transport sector - from a marked drop in business tourism, must also be supported.
Other sectors are characterised by a certain resilience. This is particularly true of the financial sector, whose continuous diversification and development over the past decades have given it a certain strength. Faced with the duration of the crisis, we must however expect delayed effects and a shift in the impact on the banking and insurance sectors from customers who can no longer honour their commitments (bankruptcies, etc.) following the crisis. This risks lowering their income, while the costs (of regulation, etc.) continue to rise. The increase in risk provisions will lead to a decrease in the financial sector’s contributions to State tax revenues.
The industrial sector stands out due to its definite recovery, which bodes well for good performance in 2021, provided that external demand remains sustainably high and that competitiveness and attractiveness can be maintained. Nothing is less certain, however, in a volatile environment marked by structural challenges impacting the industrial sector, including the digital and energy transition. Construction is still facing dynamic domestic demand and this good performance should also continue in 2021, if the planned investments are maintained. The same is true of the ICT sector, due to the acceleration of the use of the Internet and the Cloud.
To get through this crisis, the companies most affected by the health restrictions (partial or complete lockdowns, current or future) must also benefit in 2021 from public support measures. In general, the economy must be supported by a counter-cyclical budgetary policy, based on high public investments and by a pro-business and stimulating environment, the main vectors of which, in this case digitalisation and simplification, strengthen competitiveness and the appeal of the Grand Duchy. On this basis, the recovery must be resolutely prepared now, in order to allow our economy to get back on track in terms of qualitative and vigorous growth. A proactive political strategy in this direction is necessary to prepare our society for the many challenges of the future, to diversify our economy, to quickly stabilise our public finances, to consolidate Luxembourg’s Triple A rating, and to rebuild financial reserves to face the next exogenous and endogenous shocks (problem of financing social security systems).