PUBLISHED June 28, 2026
Growth Accelerates Even as the Global Backdrop Worsens
According to the European Commission’s 2026 Country Report for Luxembourg, real GDP growth in Luxembourg is expected to accelerate in 2026 and 2027, despite a worsening international context and rising energy costs, as services exports support the economy. Meanwhile, the slowdown in private consumption and investment, following a drop in confidence and rising interest rates, is set to detract from economic performance. Real GDP expanded by 0.6% in 2025, supported by private and government consumption, while net exports contributed negatively as imports accelerated faster than exports.
The Finance Sector Once Again Carries the Economy
In terms of real gross value added, the main contributors to 2025 growth were the public sector and the finance and insurance sector, driven by increases in net activity. This is a familiar pattern for Luxembourg, whose economy is structurally built around its outsized financial services industry. While much of Europe worries about manufacturing exposure to the Middle East conflict, Luxembourg’s relative insulation comes precisely from this services-heavy structure, which is far less directly exposed to energy-intensive production and global goods trade disruption.
A Satellite Acquisition Distorts the Investment Picture
One quirky technical detail complicates Luxembourg’s 2026 investment outlook: the acquisition of a satellite in the third quarter of 2025 had a negative carry-over effect on investment growth. Due to this base effect, investment is expected to contribute negatively to GDP growth in 2026 unless additional major acquisitions are recorded. In 2027, investment is set to recover following the expected drop in interest rates — illustrating just how sensitive a small, open economy like Luxembourg’s can be to single large transactions that would barely register as a rounding error in a bigger country’s national accounts.
After remaining high in 2025, headline inflation is set to further increase in 2026 due to the energy crisis, before slowing down to below 2% in 2027. Headline inflation is set to rise to 2.7% in 2026, up from 2.5% in 2025, as energy prices rise following the conflict in the Middle East. Wage increases based on automatic indexation, expected in May 2026, are set to push service prices up further. In 2027, inflation is projected to decelerate to 1.8% due to a contraction in energy prices and lower food inflation.
After remaining high in 2025, headline inflation is set to further increase in 2026 due to the energy crisis, before slowing down to below 2% in 2027. Headline inflation is set to rise to 2.7% in 2026, up from 2.5% in 2025, as energy prices rise following the conflict in the Middle East. Wage increases based on automatic indexation, expected in May 2026, are set to push service prices up further. In 2027, inflation is projected to decelerate to 1.8% due to a contraction in energy prices and lower food inflation.
Following the deceleration of economic activity in recent years, employment growth has slowed and is expected to reach just 1.3% in 2026 — well below Luxembourg’s historic average — before accelerating to 1.5% in 2027. Slower-than-average growth in the country’s large cross-border workforce is expected to curb the unemployment rate, which is set to remain stable at 6.6% in 2026, before edging down to 6.5% in 2027 as employment growth recovers.
A revenue shortfall combined with large investment expenses pushed the general government balance into a larger-than-expected deficit in 2025, turning what had been a 0.9% of GDP surplus in 2024 into a 2.0% deficit. Total revenues declined by 0.6 percentage points of GDP to 47.1%, while public spending increased by 2.3 percentage points to 49.1% of GDP. The shortfall mainly reflects measures to support household purchasing power, enterprise competitiveness, and the construction sector — including an upward adjustment of personal income tax brackets to compensate for past wage indexations, a cut in the nominal corporate tax rate from 17% to 16%, and extended support for the construction sector.
In 2026, a lower deficit of 1.2% of GDP is projected, as revenue growth resumes in line with higher projected economic growth. Revenues from personal income taxes are expected to rise alongside labour market improvements and the absence of inflation indexation of tax brackets, while an increase in the social contribution rate from 24% to 25.5% is set to drive up social contribution revenues. The deficit is set to widen again to 1.5% of GDP in 2027, as expenditure growth outpaces revenue growth once more — though public investment is projected to remain high by recent standards throughout the forecast horizon, supporting the government’s social, digital and green agenda.
Following the deceleration of economic activity in recent years, employment growth has slowed and is expected to reach just 1.3% in 2026 — well below Luxembourg’s historic average — before accelerating to 1.5% in 2027. Slower-than-average growth in the country’s large cross-border workforce is expected to curb the unemployment rate, which is set to remain stable at 6.6% in 2026, before edging down to 6.5% in 2027 as employment growth recovers.
A revenue shortfall combined with large investment expenses pushed the general government balance into a larger-than-expected deficit in 2025, turning what had been a 0.9% of GDP surplus in 2024 into a 2.0% deficit. Total revenues declined by 0.6 percentage points of GDP to 47.1%, while public spending increased by 2.3 percentage points to 49.1% of GDP. The shortfall mainly reflects measures to support household purchasing power, enterprise competitiveness, and the construction sector — including an upward adjustment of personal income tax brackets to compensate for past wage indexations, a cut in the nominal corporate tax rate from 17% to 16%, and extended support for the construction sector.
In 2026, a lower deficit of 1.2% of GDP is projected, as revenue growth resumes in line with higher projected economic growth. Revenues from personal income taxes are expected to rise alongside labour market improvements and the absence of inflation indexation of tax brackets, while an increase in the social contribution rate from 24% to 25.5% is set to drive up social contribution revenues. The deficit is set to widen again to 1.5% of GDP in 2027, as expenditure growth outpaces revenue growth once more — though public investment is projected to remain high by recent standards throughout the forecast horizon, supporting the government’s social, digital and green agenda.
