Luxembourg

US trade policy turns the financial markets upside down

Originally, an accelerated recovery was the outlook for the Luxembourg economy in 2025. The economy is highly dependent on the financial services sector, which represents roughly 25% of the GDP. The country is one of the world's biggest investment fund centres, having EUR 7.3 trillion in assets under management in March 2025. Accordingly, the ECB’s restrictive monetary policy in the past had a negative impact on banking activity and economic development. The ECB lowered its deposit rate from 4% in mid-2024 to 2% in mid-2025, 2% being deemed the neutral level where monetary policy should no longer have a dampening effect on the economy. In view of the continuing weak economic growth momentum in the eurozone, two further interest rate cuts to 1.5% are expected by the end of this year. Although interest rates are likely to remain unchanged in the coming year, there is a possibility of two further interest-rate cuts if economic recovery remains slow. This gradual shift in the ECB's interest-rate policy from restrictive to slightly expansionary should give Luxembourg's financial sector more momentum, as the demand for loans should increase and activity should pick up, which would also boost its gross domestic product. However, headwinds in the shape of the US’ current trade policy are counteracting the trend. Although trade policy focuses on trade in goods, diverging statements on tariffs and postponements have caused considerable economic uncertainty, which is having a negative impact on global financial markets. The Eurostoxx 50 European stock market index suffered a 15% loss around Liberation Day and had not fully recovered by the beginning of August (still down 4%). Other trade talks including the EU-US trade agreement sparked more volatility. The financial market turmoil caused GDP growth to shrink at the beginning of 2025 and is likely to continue to weigh on economic activity until things settle down. Barring any other events, ECB monetary policy is likely to have a stronger influence on the financial markets after that and the expected stronger economic recovery is likely to materialise. This should be particularly evident in 2026.

On the demand side, modest economic growth should be supported by private consumption. Purchasing power is generally preserved in Luxembourg owing to the automatic indexation of wages (and pensions) to inflation. After a stronger decrease in inflation throughout 2024, the rate stabilised around 2% in the first half of 2025 and is expected to remain at that level until mid-2026, with a small decrease in the second half of that year. Nevertheless, this moderate trend is triggering wage increases. In May 2025, all wages and pensions were increased by 2.5%. The Statistical Office expects another similar wage indexation exercise in Q3 2026. State support to pay electricity bills will continue to be provided to those families in need until the end of 2025. In 2026, energy costs should therefore rise for low-income earners. The lower interest-rate environment should help private investment. However, given the greater geopolitical and trade uncertainty this year, investment activity should remain subdued and only significantly recover in 2026. Foreign demand is expected to be weaker in 2025. The main Luxembourg-based exports consist of financial services (45% of total exports) and other business services such as consulting and taxes (43%). As such, they are not directly impacted by US tariffs on EU products. Moreover, only 3% of total exports from Luxembourg go to the US. In this respect, it is mainly the steel sector that should be impacted as 30% of all goods exports to the US derive from the metal sector. Nevertheless, the main impact on exports should come from a lower demand for financial services due to stock exchange turmoil in Europe. In 2026, exports should pick up again if financial markets calm down.

Public and current accounts remain in good shape

In 2024, the public accounts profited from higher revenues mainly from corporate tax and the return to normal levels of VAT rates, after their reduction in 2023. In 2025, public accounts should remain balanced before possibly posting a small deficit in 2026 on back of a minor decrease in tax revenues, while expenditures will continue to be high due to wage indexation. Even with this small deficit, Luxembourg’s debt will be one of the lowest in the eurozone – below the 30% of GDP threshold – the political objective set by the 2018 coalition government agreement.

A high level of uncertainty prevails over trends in the current account surplus. Only a minor change is expected for 2025. A decrease in the trade in goods surplus due to lower exports and an increase of the primary income deficit caused by the repatriation of dividends from massive portfolio investments made in the country (30% of GDP in 2024) should be balanced out by a small increase of the substantial services surplus (36% of GDP). In 2026, the trade in goods balance is expected to stabilise while the trade in services surplus should further increase, which will take the current account surplus to its highest level since 2019.

Stable political outlook

Prime Minister Luc Frieden, from the Christian-Democratic Christian Social People’s Party (CSV) leads a government coalition with the liberal Democratic Party (DP). Together they have held 35 out of 60 seats in Parliament since the last general election in October 2023. The CSV is traditionally the country’s strongest party and has led 16 out of a total of 19 government cabinets since the end of World War II. The DP is in many ways the obvious coalition partner as its political programmes are a natural fit, and their cooperation has been tested five times in the history of modern Luxembourg. The opposition is led by the social democratic LSAP (11 seats), which forms a relatively united group together with the Greens (4 seats), the Pirate Party (3 seats) and the Left (2 seats). The national-conservative ADR (Alternative Democratic Reform Party) stands out with five seats, or 9.2% of the votes. However, compared to many other European countries, this party remains relatively small in Parliament. The government’s main goals are strengthening purchasing power, increasing housing supply, and making the economy more competitive. In concrete terms, the government plans to make private complementary pensions more attractive. The lack of housing has caused a sharp rise in prices. The coalition therefore plans to grant tax breaks (e.g., for capital gains on investments in rental properties or tax credits for first-time buyers). This would be offset by higher taxes elsewhere. In the spring of 2025, the government also announced a programme to reduce bureaucracy by simplifying administrative red tape that included reforms to alleviate the process when applying for a business permit. The coalition is expected to pursue its work for the full five-year term until the next general elections scheduled in 2028.

Last updated: August 2025