Abstract
The 2002 Article IV Consultation highlights that the financial sector of Luxembourg has continued to expand, with asset and liquidity management taking over from private banking as the main source of strong growth of the sector. Nonetheless, activity weakened in 2001. Structural reforms are proceeding. Progress has been made in removing legal obstacles to part time employment, introducing more flexible working time arrangements and work-week averaging, and expanding child care facilities. The authorities have adopted the legal and regulatory framework needed for the launch of an electronic commerce sector.
1. This supplement provides information on economic developments that has become available since the preparation of the staff report for the 2002 Article IV consultation with Luxembourg (SM/02/122). It reviews the economic outlook in the light of an updated and revised set of national accounts as well as newly released data on economic activity and consumer prices. The new information does not alter the thrust of the staff appraisal. A revised Basic Data Table is attached.
2. Real GDP growth for 2001 is now estimated to have been 3.5 percent instead of 5.1 percent, and CPI inflation in April 2002 was 2.1 percent. In 2001, private and public consumption grew faster than estimated previously, while investment and the trade volume rose more slowly, reducing the contribution of the foreign balance to growth. Value added in the financial sector is now estimated to have declined slightly. Unemployment turned out marginally higher at 2.6 percent. CPI inflation in April 2002 remained at the level of March, sustained mostly by rising energy prices. The next wage indexation will take place in June 2002.
3. Together with weakness in short–term indicators of economic activity and lackluster international stock markets, this new information has prompted the staff to lower its GDP growth forecast for 2002 and raise its inflation projection. Projected GDP growth has been reduced from 3.0 percent to 2.7 percent, the same as the latest projection by Luxembourg’s statistics office. Reflecting inflation in Luxembourg and elsewhere in the euro area that exceeded staff expectations somewhat during the first months of 2002, the projections for CPI inflation and the GDP deflator have been revised slightly upward to 2.0 percent in 2002. Staff projections for 2003 have remained broadly unchanged, leaving the staff somewhat more cautious on growth than Luxembourg’s statistics office, which expects GDP to increase by 6.6 percent.
4. On balance, these revisions do not significantly alter the staffs view on the evolution of the general government balance for 2002 and beyond. Lower GDP in 2001 led to a higher general government surplus as a share of GDP. However, the resulting positive carryover on the government financial balance in 2002 (in terms of its share of a lower baseline GDP) is offset by the downward revision of GDP growth.
Luxembourg: Basic Data
Contribution to GDP growth.
Including Statistical Office of the European Communities (Eurostat) and European Investment Bank (EIB).
Overall economy.
Data through 2000 reflect staff calculations.
Until 1998, Belgian six–month interbank money rate, later deposits in Euro.
Starting in 2000, provided by the OECD.
NPLs (non–performing loans) include doubtful but performing debts, non–performing debts and irrevocable debts.
Return on equity is calculated as net pre–tax income to Basle risk–weighted assets.
Liquid assets include cash, central bank deposits, interbank loans and securities.
Luxembourg: Basic Data
| Land Area | 2,586 square kilometers | |||||||
|---|---|---|---|---|---|---|---|---|
| Population (2001) | 443,200 | |||||||
| GDP per capita (2001) | US$42,881 | |||||||
| GNP per capita (2000) | US$38,894 | |||||||
| 1998 | 1999 | 2000 | 2001 | 2002 | 2003 | |||
| Est. | Proj. | Proj. | ||||||
| Volume changes, in percent | ||||||||
| Demand and supply | ||||||||
| Private consumption (real growth rate) | 4.0 | 2.7 | 3.5 | 4.8 | 3.8 | 4.3 | ||
| Public consumption | 1.4 | 7.2 | 4.4 | 7.8 | 3.7 | 3.3 | ||
| Gross fixed investment (real growth rate) | 2.8 | 21.9 | -5.9 | 3.3 | 0.0 | 6.7 | ||
| Inventory accumulation 1/ | -0.2 | -0.2 | 1.7 | -0.9 | 0.0 | 0.0 | ||
| Total domestic demand | 2.8 | 8.4 | 2.8 | 3.8 | 2.7 | 4.7 | ||
| Exports of goods and nonfactor services | 13.8 | 12.3 | 17.0 | 2.5 | 3.4 | 8.4 | ||
| Imports of goods and nonfactor services | 12.4 | 15.1 | 14.9 | 2.6 | 3.1 | 7.8 | ||
| Foreign balance 1/ | 3.3 | -1.1 | 4.8 | 0.3 | 0.9 | 2.2 | ||
| Gross domestic product | 5.8 | 6.0 | 7.5 | 3.5 | 2.7 | 6.0 | ||
| In thousands, unless otherwise noted | ||||||||
| Employment and unemployment | ||||||||
| Resident labor force | 179.6 | 183.7 | 188.2 | 192.9 | 195.8 | 198.5 | ||
| Unemployed | 5.5 | 5.4 | 5.0 | 4.9 | 5.6 | 5.6 | ||
| (As a percent of total labor force) | 3.1 | 2.9 | 2.6 | 2.6 | 2.9 | 2.8 | ||
| Resident employment | 174.1 | 178.3 | 183.2 | 188.0 | 190.2 | 193.0 | ||
| Cross–border workers (net) | 62.3 | 70.0 | 79.0 | 89.0 | 94.2 | 99.7 | ||
| Domestic employment | 236.4 | 248.3 | 262.3 | 277.0 | 284.3 | 292.7 | ||
| (Change in percent) | 4.3 | 5.0 | 5.6 | 5.6 | 2.6 | 2.9 | ||
| Of which: Employment in international organizations 2/ | 7.8 | 7.7 | 7.6 | 7.6 | 7.6 | 7.6 | ||
| Annual changes, in percent | ||||||||
| Prices and costs | ||||||||
| GDP deflator | 2.6 | 2.2 | 3.5 | 0.2 | 2.0 | 1.9 | ||
| Harmonized consumer price index | 1.0 | 1.0 | 3.2 | 2.7 | 2.0 | 1.8 | ||
| Average nominal wage growth 3/ | 2.4 | 2.5 | 4.6 | 5.2 | 3.4 | 3.8 | ||
| Nominal unit labor costs 3/ | 1.3 | 1.9 | 3.2 | 7.7 | 3.5 | 1.0 | ||
| (In percent of GDP) | ||||||||
| Public finances | ||||||||
| General government financial balance | 3.2 | 3.8 | 5.8 | 5.2 | 1.0 | 1.1 | ||
| General government gross debt | 6.3 | 6.1 | 5.7 | 5.7 | 4.9 | 4.5 | ||
| General government net financial assets 4/ | 44.9 | 48.2 | 51.0 | 51.8 | 50.5 | 47.8 | ||
| (In billion euro) | ||||||||
| Current account | ||||||||
| Trade balance | -2.1 | -2.4 | -2.6 | -2.7 | -3.0 | -3.3 | ||
| Nonfactor service balance | 3.7 | 4.6 | 6.0 | 5.8 | 6.3 | 7.1 | ||
| Factor income balance | 0.2 | -0.5 | -1.2 | -1.6 | -1.8 | -2.0 | ||
| Employee’s compensation | -1.6 | -1.9 | -2.3 | -2.9 | -3.1 | -3.4 | ||
| Net investment income | 1.8 | 1.5 | 1.1 | 1.2 | 1.3 | 1.5 | ||
| Transfer balance | -0.4 | -0.5 | -0.5 | -0.6 | -0.6 | -0.6 | ||
| Current account balance | 1.5 | 1.2 | 1.7 | 1.0 | 0.9 | 1.2 | ||
| (In percent of GDP) | 8.8 | 6.5 | 8.2 | 4.6 | 4.1 | 5.1 | ||
| (Annual changes, in percent) | ||||||||
| Exchange rates (averages) | ||||||||
| U.S. dollar per euro | -1.2 | -4.8 | -13.4 | -3.1 | … | … | ||
| Nominal effective rate | -0.2 | -0.3 | -1.0 | -0.1 | … | … | ||
| Real effective rate (CPI based) | -0.4 | -0.2 | -0.2 | 0.2 | … | … | ||
| Interest rates | ||||||||
| Short term 5/ | 3.8 | 3.0 | 4.4 | 4.3 | … | … | ||
| Long–term government bond yield 6/ | 4.7 | 4.7 | 5.5 | 5.1 | … | … | ||
| (In percent) | ||||||||
| Financial soundness indicators of the banking sector | ||||||||
| Capital adequacy | ||||||||
| Regulatory capital to risk–weighted assets | 12.6 | 13.4 | 13.4 | 14.2 | … | … | ||
| Regulatory Tier I capital to risk–weighted assets | 10.0 | 11.0 | 11.3 | 11.6 | … | … | ||
| Asset quality | ||||||||
| NPLs to gross loans 7/ | 0.5 | 0.5 | 0.5 | 0.5 | … | … | ||
| NPLs net of provisions to capital 7/ | 4.2 | 3.5 | 3.3 | 3.4 | … | … | ||
| Earnings and profitability | ||||||||
| Net interest income to gross income | 44.2 | 50.7 | 45.7 | 45.6 | … | … | ||
| Non–interest income to gross income | 55.8 | 49.3 | 54.3 | 54.4 | … | … | ||
| Return on assets | 0.6 | 0.4 | 0.4 | 0.5 | … | … | ||
| Return on equity 8/ | 15.6 | 10.1 | 11.1 | 12.1 | … | … | ||
| Liquidity | ||||||||
| Liquid assets to total assets 9/ | 79.1 | 77.7 | 77.8 | 77.0 | … | … | ||
| Liquid assets to total deposits | 225.1 | 232.5 | 218.5 | 244.2 | … | … | ||
Contribution to GDP growth.
Including Statistical Office of the European Communities (Eurostat) and European Investment Bank (EIB).
Overall economy.
Data through 2000 reflect staff calculations.
Until 1998, Belgian six–month interbank money rate, later deposits in Euro.
Starting in 2000, provided by the OECD.
NPLs (non–performing loans) include doubtful but performing debts, non–performing debts and irrevocable debts.
Return on equity is calculated as net pre–tax income to Basle risk–weighted assets.
Liquid assets include cash, central bank deposits, interbank loans and securities.
Luxembourg: Basic Data
| Land Area | 2,586 square kilometers | |||||||
|---|---|---|---|---|---|---|---|---|
| Population (2001) | 443,200 | |||||||
| GDP per capita (2001) | US$42,881 | |||||||
| GNP per capita (2000) | US$38,894 | |||||||
| 1998 | 1999 | 2000 | 2001 | 2002 | 2003 | |||
| Est. | Proj. | Proj. | ||||||
| Volume changes, in percent | ||||||||
| Demand and supply | ||||||||
| Private consumption (real growth rate) | 4.0 | 2.7 | 3.5 | 4.8 | 3.8 | 4.3 | ||
| Public consumption | 1.4 | 7.2 | 4.4 | 7.8 | 3.7 | 3.3 | ||
| Gross fixed investment (real growth rate) | 2.8 | 21.9 | -5.9 | 3.3 | 0.0 | 6.7 | ||
| Inventory accumulation 1/ | -0.2 | -0.2 | 1.7 | -0.9 | 0.0 | 0.0 | ||
| Total domestic demand | 2.8 | 8.4 | 2.8 | 3.8 | 2.7 | 4.7 | ||
| Exports of goods and nonfactor services | 13.8 | 12.3 | 17.0 | 2.5 | 3.4 | 8.4 | ||
| Imports of goods and nonfactor services | 12.4 | 15.1 | 14.9 | 2.6 | 3.1 | 7.8 | ||
| Foreign balance 1/ | 3.3 | -1.1 | 4.8 | 0.3 | 0.9 | 2.2 | ||
| Gross domestic product | 5.8 | 6.0 | 7.5 | 3.5 | 2.7 | 6.0 | ||
| In thousands, unless otherwise noted | ||||||||
| Employment and unemployment | ||||||||
| Resident labor force | 179.6 | 183.7 | 188.2 | 192.9 | 195.8 | 198.5 | ||
| Unemployed | 5.5 | 5.4 | 5.0 | 4.9 | 5.6 | 5.6 | ||
| (As a percent of total labor force) | 3.1 | 2.9 | 2.6 | 2.6 | 2.9 | 2.8 | ||
| Resident employment | 174.1 | 178.3 | 183.2 | 188.0 | 190.2 | 193.0 | ||
| Cross–border workers (net) | 62.3 | 70.0 | 79.0 | 89.0 | 94.2 | 99.7 | ||
| Domestic employment | 236.4 | 248.3 | 262.3 | 277.0 | 284.3 | 292.7 | ||
| (Change in percent) | 4.3 | 5.0 | 5.6 | 5.6 | 2.6 | 2.9 | ||
| Of which: Employment in international organizations 2/ | 7.8 | 7.7 | 7.6 | 7.6 | 7.6 | 7.6 | ||
| Annual changes, in percent | ||||||||
| Prices and costs | ||||||||
| GDP deflator | 2.6 | 2.2 | 3.5 | 0.2 | 2.0 | 1.9 | ||
| Harmonized consumer price index | 1.0 | 1.0 | 3.2 | 2.7 | 2.0 | 1.8 | ||
| Average nominal wage growth 3/ | 2.4 | 2.5 | 4.6 | 5.2 | 3.4 | 3.8 | ||
| Nominal unit labor costs 3/ | 1.3 | 1.9 | 3.2 | 7.7 | 3.5 | 1.0 | ||
| (In percent of GDP) | ||||||||
| Public finances | ||||||||
| General government financial balance | 3.2 | 3.8 | 5.8 | 5.2 | 1.0 | 1.1 | ||
| General government gross debt | 6.3 | 6.1 | 5.7 | 5.7 | 4.9 | 4.5 | ||
| General government net financial assets 4/ | 44.9 | 48.2 | 51.0 | 51.8 | 50.5 | 47.8 | ||
| (In billion euro) | ||||||||
| Current account | ||||||||
| Trade balance | -2.1 | -2.4 | -2.6 | -2.7 | -3.0 | -3.3 | ||
| Nonfactor service balance | 3.7 | 4.6 | 6.0 | 5.8 | 6.3 | 7.1 | ||
| Factor income balance | 0.2 | -0.5 | -1.2 | -1.6 | -1.8 | -2.0 | ||
| Employee’s compensation | -1.6 | -1.9 | -2.3 | -2.9 | -3.1 | -3.4 | ||
| Net investment income | 1.8 | 1.5 | 1.1 | 1.2 | 1.3 | 1.5 | ||
| Transfer balance | -0.4 | -0.5 | -0.5 | -0.6 | -0.6 | -0.6 | ||
| Current account balance | 1.5 | 1.2 | 1.7 | 1.0 | 0.9 | 1.2 | ||
| (In percent of GDP) | 8.8 | 6.5 | 8.2 | 4.6 | 4.1 | 5.1 | ||
| (Annual changes, in percent) | ||||||||
| Exchange rates (averages) | ||||||||
| U.S. dollar per euro | -1.2 | -4.8 | -13.4 | -3.1 | … | … | ||
| Nominal effective rate | -0.2 | -0.3 | -1.0 | -0.1 | … | … | ||
| Real effective rate (CPI based) | -0.4 | -0.2 | -0.2 | 0.2 | … | … | ||
| Interest rates | ||||||||
| Short term 5/ | 3.8 | 3.0 | 4.4 | 4.3 | … | … | ||
| Long–term government bond yield 6/ | 4.7 | 4.7 | 5.5 | 5.1 | … | … | ||
| (In percent) | ||||||||
| Financial soundness indicators of the banking sector | ||||||||
| Capital adequacy | ||||||||
| Regulatory capital to risk–weighted assets | 12.6 | 13.4 | 13.4 | 14.2 | … | … | ||
| Regulatory Tier I capital to risk–weighted assets | 10.0 | 11.0 | 11.3 | 11.6 | … | … | ||
| Asset quality | ||||||||
| NPLs to gross loans 7/ | 0.5 | 0.5 | 0.5 | 0.5 | … | … | ||
| NPLs net of provisions to capital 7/ | 4.2 | 3.5 | 3.3 | 3.4 | … | … | ||
| Earnings and profitability | ||||||||
| Net interest income to gross income | 44.2 | 50.7 | 45.7 | 45.6 | … | … | ||
| Non–interest income to gross income | 55.8 | 49.3 | 54.3 | 54.4 | … | … | ||
| Return on assets | 0.6 | 0.4 | 0.4 | 0.5 | … | … | ||
| Return on equity 8/ | 15.6 | 10.1 | 11.1 | 12.1 | … | … | ||
| Liquidity | ||||||||
| Liquid assets to total assets 9/ | 79.1 | 77.7 | 77.8 | 77.0 | … | … | ||
| Liquid assets to total deposits | 225.1 | 232.5 | 218.5 | 244.2 | … | … | ||
Contribution to GDP growth.
Including Statistical Office of the European Communities (Eurostat) and European Investment Bank (EIB).
Overall economy.
Data through 2000 reflect staff calculations.
Until 1998, Belgian six–month interbank money rate, later deposits in Euro.
Starting in 2000, provided by the OECD.
NPLs (non–performing loans) include doubtful but performing debts, non–performing debts and irrevocable debts.
Return on equity is calculated as net pre–tax income to Basle risk–weighted assets.
Liquid assets include cash, central bank deposits, interbank loans and securities.