Press conference
“The government will maintain an attractive economic environment, not least by creating a competitive economic and fiscal framework.” This extract from the 2018-2023 governmental programme points to the new government’s aim to work towards creating a beneficial context for businesses. But will this intent come with sufficiently robust measures to maintain the Luxembourg economy in good health, while making it resilient to external shocks and enabling it to meet the dual challenges of ecological and digital transformation?
The international economic climate has been shaken by tensions about trade and, on the old continent, rising uncertainties linked to Brexit have caused a slow-down in the main economies. What should Luxembourg do in this troubled context to achieve sustainable growth based on the productive use of resources? In order to offer an answer, the Chamber of Commerce has analysed the main economic features of 2018, and gives an outlook for 2019 from the perspective of entrepreneurs. This forward-looking view is based on data from the annual “Eurochambers” survey which the Chamber conducted in the Grand Duchy. Additionally, we take a closer look at the main aspects of the government’s coalition programme.
Following this analysis, the Chamber of Commerce drew the following conclusions:
- When the Eurochambers survey 2019 was conducted (i.e. in September 2018), businesses interviewed were still confident about the European and international macroeconomic climate. Now, however, it appears that the top of the economic cycle has been reached and that developments within the coming months will be subject to international turbulence - particularly linked to political uncertainty, protectionist tendencies, and financial market volatility.
- In this more unsteady environment, Luxembourg’s entrepreneurs appear to be managing well, with two out of three business leaders believing the economic climate will remain largely unchanged in 2019 compared to 2018, even if – according to the survey - there has been a decline in their intention to invest, a fact driven by on-going uncertainties.
- The coalition agreement talks of helping the Luxembourgish economy transform itself, as concerns the “double transition” in ecological and energy-related terms on the one hand and all things digital on the other. This should be made possible by benefitting from administrative simplification, entrepreneurial skills and qualitative growth.
- The coalition agreement, however, fails to address the need to adapt working practices to the need for digitalisation. Furthermore, what businesses (especially SMEs) would appreciate in terms of greater flexibility regarding employment contracts is not at the center of attention of the agreement. Neither does it address the subject of managing increasing salary costs, nor the growing dependence of public finances on income generated by high levels of growth.
- Luxembourg’s future relies on the coordinated effort of all stakeholders. Policies must target long-term goals, must ensure the sustainability of the social security regimes, and public governance must manage a growth-model based on an efficient and productive use of all resources. Only by ensuring sustainable attractiveness, innovation and competitiveness can Luxembourg’s economy generate the added value needed to ensure a high quality of life.
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Where is the global economy headed?
Global growth is less well sustained in a current environment characterised by a high level of risk and uncertainty. Global growth peaked in 2017 and has started to somewhat decline. A fair number of the world’s large economies need to face up to uncertainties linked to fluctuations in world market prices of goods (sometimes linked to new customs barriers) as well as political risks on a global and European level. The economic climate is characterised by significant challenges, and economic stability in many countries will depend on medium-term political and socio-economic decisions.
What is the outlook for the major economies?
The outlook in the United States is a confident one - thanks to a growth rate of 2.9% in 2018 and 2.6% in 2019, even if one could expect a turn in the cycle sooner than later since the USA have seen rather impressive growth rates ever since the subprime crisis. An important factor playing a role regarding the development of the American economy is the change in their foreign economic policy, which can be characterised by trade tensions with main partners such as China and the European Union.
Also, optimism regarding the American economy has been tempered by factors such as a substantial public deficit that maintains despite the economic cycle having been relatively vigorous. Incidentally, this underlines the extremely pro-cyclical character of current American budgetary policy. Against a background of full employment, and a desire to limit immigration, the motors that drive growth are becoming weaker.
As for Japan, despite numerous efforts to relaunch the economy, the average annual rate of growth since 2012 has been 1.3%. A peak growth rate of 1.7% was reached in 2017 but a fall-off is predicted for 2018 (1.1%) and 2019 (1.0%). The country remains vulnerable to environmental and trade war threats due to its dependence on external demand. We can add to that the demographic challenge of an aging population resulting in a decline in both active and total population. Public debt (which remains at the abysmal level of 236.4% of GDP) and persistent deflationary pressures represent additional challenges
China continues its process of catching up. It had an average growth rate of 9% between 1990 and 2007, and this has cooled down somewhat to 6.9% in 2017, around 6.2% in 2018 and 5.9% in 2019. Costs of living have shot up, from USD 700 on average at the start of the 1990s to USD 13,000 now. The 2009 crisis pointed out the limits of the model which was sustained by cheap labour, substantial foreign investment, and high levels of manufacturing exports. This led the Chinese leadership to shift the economy towards a more sustainable growth model that is based more on services and domestic demand.
Meanwhile, the Eurozone saw a slowdown…
The eurozone accounts for about one-fifth of global GDP (18.4%) and reported a growth rate of 2.1% in 2018 and 1.9% in 2019. There has been a slowdown in growth despite dynamic private investment. In 2019 – after six consecutive years of growth - the EU will start out with all member states forecast to report positive growth rates during the two-year period from 2019 to 2020. The increase in oil prices has had an impact on the economy recently, just as the weakened exports of industrial products have.
Besides, tangible economic risks are emerging. These include protectionism, rising asset prices, and the effects of American customs tariffs on a range of products, with the possibility of these measures being extended to other products. In general, eurozone export growth in the first half of 2018 was only half as large as during the first semester of 2017. Europe is tightly linked to international value chains and thus quickly feels the impact of demand shocks, lower investment, or general uncertainty.
The date at which the UK leaves the European Union is approaching rapidly, and the threat of a “hard Brexit” scenario remains. Another general uncertainty within the eurozone concerns the possible change in monetary policy at the end of 2019, with repercussions on the zone’s budgetary and fiscal situation possible.
… and Luxembourg’s immediate neighbours are following these trends
As opposed to most EU or Eurozone countries, Germany is enjoying its longest period of economic expansion since 1966, even if there has been a certain slowdown recently, with growth at 1.7% in 2018 and 1.8% in 2019, compared to 2.2% in 2017.
As does the Eurozone, so does Belgium. It is confronted with a slowdown in growth, going from 1.7% in 2017 to 1.5% in both 2018 and 2019 and which are linked to a drop in domestic demand. On a positive note, employment growth remains sustained.
Like Belgium and the rest of the eurozone, France has seen a general slowdown in growth, going from 2.2% in 2017 to 1.7% in 2018 and 1.6% in 2019 - against the backdrop of a decline in business sentiment and investment, with an impact on the household confidence index. The economic situation in France is also being impacted by the “Gilet jaunes” demonstrations. The effect on the macroeconomic environment and the attractiveness of France certainly influences the growth outlook for 2019 in a negative way.
Brexit: preparations continue but uncertainty persists
With Brexit just a few weeks away, we have already seen numerous repercussions: exports have fallen in the UK, investment is down, and the Sterling has fallen. British economic growth only reached 1.3% in 2018 with a rate of just 0.2% in the first half of the year, the lowest level since 2012. The figure for 2019 is likely to be around 1.2%. In the European Union the looming Brexit question will determine the economic outlook for 2019 and the years to come.
The new kind of relationship between the European Union and the United Kingdom will have an impact for every country with economic ties with the UK. For this reason, the Luxembourg Chamber of Commerce carried out a survey: “Brexit and its implication for Luxembourgish businesses.” Nearly two out of every three businesses who participated in this survey stated that they will be affected once the UK leaves the EU. Among the main concerns are the freedom of movement of goods and services, the period of uncertainty, the volatility of international markets and reduced labour mobility. Luxembourg business also fears more complex and more expensive customs tariffs and taxes, as well as new legal frameworks that are more difficult to work with.
Indeed a “hard brexit” would be the toughest option as regards the current links between the UK and the EU. Statec has sought to quantify the possible negative effects for Luxembourg, with the potential of a 2.5% drop in added value in the financial sector equating to a loss of 1% of GDP up to 2020 and a loss of 1,600 jobs - of which 600 would come directly from the financial sector. However, if we take a less mechanistic approach, there are some indications of mitigating factors for Luxembourg. Several major financial sector players have turned to Luxembourg, thanks to the expertise found here, as well as our AAA credit rating which is a real vote of confidence. Over the longer term, however, the exit of one of the largest EU economies, and one which has been resolutely open and supportive of world trade, will have less predicable effects.
Overall, Luxembourg’s economy appears to be on course
There is room for a certain optimism about the economic outlook in Luxembourg, with GDP growth set to be around 3% this year and next, even if estimates have recently be downgraded by Statec. Luxembourg has seen an upswing in domestic consumption, and the public sector budget situation has improved, sustained by growing revenue, particularly from businesses. Income from national and local corporation tax reached EUR 2.8bn in 2017, equating to a EUR 844m or 44% increase on the 2007 pre-crisis level. To this, one can add EUR 521m received from corporate wealth tax and EUR 972m from subscription tax.
The challenges Luxembourg must face revolve around the questions of growth, sustainability and externalities, and how to achieve the double transition towards a qualitative growth model that is less reliant on a ceaselessly rising resource consumption. Moreover, the Grand Duchy will be confronted with several increasingly pertinent questions of how to manage future demographics – particularly concerning the ageing population - and how to finance the social security system.
Luxembourgish businesses are quite optimistic about 2019
Many experts foresee growing tensions in 2019, but the Luxembourgish businesses surveyed in the 26th annual Eurochambers (EES2019) report are not so pessimistic, as seen by the messages coming from the survey. The Chamber of Commerce has identified six key points which can offer a reply to the question: “What do businesses expect from 2019?”
Thus, nearly 70% of businesses expect that the economic climate will remain broadly unchanged in 2019 compared to 2018, while one out of five businesses from the service sector and one out of seven manufacturing firms think things will improve. State decision makers have a major role to play in the creation and maintenance of a predicable, stable and supportive economic framework for businesses. Otherwise - in a context marked by uncertainty - businesses could reduce or postpone investment and hiring, which would not be ideal for the economy as a whole. The EES2019 survey points to a certain decline in business confidence, as nearly 30% of businesses plan to increase investment in 2019, compared to 40% in 2018.
But the risk of the economy losing steam is not the only worry for businesses. The survey again asked - for the fifth consecutive year - to identify a maximum of three major challenges for the current year and the year to come. For service providers, the most frequently cited challenges were invariably the lack of qualified staff, employment costs, and internal demand. This year, costs of energy and raw material enter into the top three of concerns of manufacturing firms, just behind the lack of qualified people on the labour market, as well as employment costs for 2018 and 2019. This is not surprising as - in today’s highly competitive environment - our businesses are penalised twice by rising energy and raw material costs: while higher prices make production more costly and reduce margins, Luxembourg is currently one of the very rare countries in Europe to “benefit” from an automatic salary indexation mechanism, without distinguishing between economic sectors or considering prices on international markets, particularly energy prices. Energy prices have a particular impact due to their higher weight in the basket of goods used to calculate the inflation index. Thus a 10% increase in energy prices has a 0.7 percentage point impact on the price index, which in turn could lead to an early triggering of the indexation threshold.
Employment costs were cited as being the second most important area of concern of businesses concerning the economic development - and this for the last five years. There is good reason for this, as there has been a growing gap in the relationship between salaries and productivity. This separation harms businesses’ cost-competitiveness. Weak domestic demand is driving businesses to look for markets abroad. Yet - even though currently nearly half of businesses expect their turnover linked to exports to rise in 2019 - the on-going erosion of cost-competitiveness could diminish these gains.
Other than employment costs, the lack of qualified staff is also a recurrent message from these surveys. This problem seems to have aggravated given the constant increase in the percentage of respondents who cite this as a problem:
However, according to EES2019, more than a third of businesses surveyed plan to hire new staff in 2019. If Luxembourg is to adapt in a sustainable manner to this potential brake on its development, the country must fight on two fronts: training of the talented people already in the country and attracting qualified people from abroad. The “Third Industrial Revolution” and “Work 4.0” reports also shone a light on the need for more flexible working practices in terms of both geography and working times, within the different sectors and at the level of each business. Changes are needed to face up to the chronic lack of qualified people.
Coalition agreement: good intentions, some strong points, but also uncertainties over financing and some questions remaining
“The government will maintain an attractive economic environment, not least by creating a competitive economic and fiscal framework.” These words in the 2018-2023 governmental programme seem to confirm the new government’s desire to work towards a supportive environment for businesses, whether they have been here for many years or are recent arrivals. The Chamber of Commerce supports the ambition of more qualitative growth, resource efficiency, productivity and digitalisation within businesses and administrations.
Next steps include quickly putting in place real investment incentives, plus an efficient impatriate tax regime to attract skilled people, researchers and start-ups. Promoting immaterial assets is also important as this is at the heart of qualitative growth. Steps taken regarding business taxation are particularly welcome, and the Chamber of Commerce hopes that the agreed percentage point reduction will be a solid basis for an ambitious roadmap towards re-establishing tax competitiveness in an ever-changing global context. Attractive and predictable taxes are key to maintaining the country’s AAA credit rating and making Luxembourg a particularly welcoming place for international investors.
Confronting the lack of qualified personnel in a sustainable way represents another one of the major challenges which is why the education system of tomorrow should foster the development of skills and sense of initiative among young people, working closely together with the private sector. The Chamber of Commerce will not cease in its efforts to contribute to the “digital skills offensive”, by offering training at all levels including university courses and life-long learning options. This work will always complement efforts made by the public sector.
The Chamber of Commerce also endorses declarations made related to administrative simplification and the modernisation of legislation linked to entrepreneurship and business start-ups. The general intention to update business start-up law is also welcome as it would help move towards digitalisation and boost our international competitiveness. Administrative simplification must become a transversal objective, with digitalisation as its engine.
The Chamber of Commerce would also like to underline its support for efforts to ease the strains on transport infrastructure, and the willingness to re-evaluate current policies related to the housing market, notably the supply of rented social housing. The Chamber of Commerce will follow closely the debate around Luxexpo the Box, and will invite the government to be proactive in this question which is fundamental for our SMEs and our ambitions in the meetings, incentives, conferencing and exhibitions (MICE) sector.
To guarantee investor confidence, the Chamber of Commerce encourages stronger measures to be taken in the area of sustainability for our social protection system. The Chamber of Commerce would like to stress again that businesses work hard to facilitate modern family lives and a harmonious work/life balance. Businesses, particularly SMEs, expect that greater flexibility in the way work is organised will become true via deals worked out between each employer and each employee, and not by pre-determined national structures. They don’t want this subject to become bogged-down in a debate with social partners but that agreements reflect businesses’ day-to-day reality.
The Chamber of Commerce does regret that the government’s programme leaves some questions open with practical, precise modalities still to be defined. There are also several ambitious promises which would need to be budgeted for, and this would require sustained high economic growth to be viable.
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Methodology
The Eurochambers survey 2019, is…
- … a qualitative survey on the economic outlook coordinated by Eurochambers, the European Chamber of Commerce and Industry Association which represents more than 20 million businesses in Europe
- … an annual survey, of which the 2019 version is the 26th
- … a survey run in Luxembourg by the Chamber of Commerce in October, with the cooperation of TNS-ILRES, of more than 1,000 manufacturing and services enterprises with more than ten employees
- … a representative survey thanks to 528 enterprises having participated, of which 79% have between 10 and 49 employees.
