Note de conjuncture n

Transcription

1 Note de conjuncture n Growth accelerates in 2004, expected to slow down in 2005 STATEC has just published Note de Conjoncture No The first issue of the year serves as an "Annual Economic Report": it paints a general picture of 2004 and supplies an update of the forecasts for This issue deals in particular and in depth with the national and international economic situation, foreign trade, the labour market, inflation and wages. It includes additional chapters on activity within the sectors, the public finances, the demography of enterprises and new information and communication technologies. Detailed statistical appendices cover the main economic indicators and quarterly national accounts from 1995 to GDP grows by 4.5% in 2004 The upturn in the Luxembourg economy continues. Since the slowdown of 2001, growth has continuously improved. For 2004, growth in GDP has again been reviewed slightly upward, from 4.2% (according to the latest forecast) to 4.5% (according to the first national accounts estimates. In spite of these favourable figures, especially in Europe, the Luxembourg economy is still showing signs of recovery rather than rude health. Like most euro zone countries, its position in the economic cycle is not very high. Typical for the start of a cycle, the share of foreign exchange in GDP growth is quite high, whereas internal demand is soft, with the exception of public consumption. Capital formation (investment) in particular is not very dynamic, which it regularly was during previous growth cycles. Productivity started to grow again, but the rise remains lower than observed during previous recovery phases. Business in Luxembourg experienced sustained growth at the end of Annual GDP volume growth, therefore, is stated at 3.8% for the last quarter, marking a slowdown compared to the figures observed at the end of 2003 and beginning of 2004 (over 6%). These figures should be treated with prudence, however, as this is the first time STATEC has drawn up and published quarterly national accounts: this exercise, imposed by European directives, is not without complexity. What is more, the figures relating to the fourth quarter are provisional because they are based on statistics which are bound to change. Over the year as a whole, acceleration of growth manifested itself disparately among different sectors of activity. The sectors which contributed most to growth are financial services, business services, industry, transport and communications. However, construction, hotel and catering and retail seem to have remained on the sidelines of this expansion. Inflation was relatively moderate over the year 2004 as a whole (+2.2%), if the almost continuous rise in oil prices is taken into account. Oil prices continued to cause headaches at the start of 2005, on the contrary, and they are keeping overall inflation above 2%. Employment accelerated throughout 2004 and has continued to do so at the start of 2005, but is not yet enough to bring down unemployment. The labour market in certain sectors remains marked by a prudent recruitment policy, which partly explains the moderate increase in wages. Regarding public finances, revenue for 2004 shows a marked rise in indirect taxes and direct tax on households. In contrast, taxes collected from businesses have suffered the effect of the negative economic trends of previous years. As is the case since 2001, public spending rose more rapidly than revenue in 2004 and all public services have to face a financing shortfall equivalent to 1.1% of GDP.

2 The financial sector recovers confidence Overall, 2004 was very satisfying for the Luxembourg financial sector. Banking profits, excluding exceptional income, are up and are accompanied by a recovery in employment from the second quarter. Other professionals working in the financial sector have benefited from collective investment undertakings (in terms of both financial results and employment) and the insurance sector, already well-served last year, continue to expand. Business services, which are highly dependant on the financial sector, have also experienced accelerated growth (in both value-added and employment). These performances reveal an unequivocal recovery for all these sectors, which were deeply affected by the economic slowdown in Industry in Luxembourg remained dynamic in 2004, with production continuing to accelerate compared to the already satisfying results of The steel industry is holding its head up again after two years decline and the energy sector continues to benefit from its international development. The drop in industrial orders noted at the start of 2005 should, however, make itself felt in the coming months. Finally, transport and communications benefited from the recovery in air transport and the general development in the telecommunications sector. There is less optimism, however, for the construction industry, which fell back in 2004: output per working day fell by 1.1% after a modest increase in This trend masks huge disparities between construction activity, which is well placed, and civil engineering, which is suffering from the drop in public orders. The first data available on 2005 shows a continuation of this trend and does not seem to offer any hope. Moreover, construction prices have risen substantially, as have property prices (sales and rentals). The Luxembourg retail sector also seems to be having a rough year, in line with the disappointing results in the euro zone. Similarly, the current performance of the hotel and catering sector does not tally with the picture of well-sustained activity. Inflation boosted by oil prices Higher energy prices and a slowing down of underlying inflation influenced retail prices in The stabilisation of underlying inflation is particularly obvious in the average monthly figures, which went from 0.17% in 2003 to 0.12% in This renewed stability is explained by the absence in 2004 of specific inflationist sources that had been previously seen in previous years. Over the last two years, exchange rate performance has largely restricted the effect of soaring crude oil prices on consumer prices. In 2004, this moderating effect was, however, less pronounced than in 2003, given that as an annual average, the euro rose against the dollar by only 10% as opposed to 20% in The main categories of goods and services grouped within the national consumer price index (NCPI) have performed differently. Alongside increases due to energy, alcoholic beverages, tobacco and hotel and catering services have recorded rises above the NCPI. Prices in the communications category have been dropping for over five years, although the 2004 figures are more moderate. Wage increases accelerated in 2004 compared to 2003, due mainly to the increase in average wages in the financial sector, which rose after a fall in Many other branches, including the manufacturing industry, the hotel and catering sector, transport and communications, business services and public services witnessed a slowdown in wage costs, i.e. the rate of increase slowed in 2004 compared to With a real wage increase (i.e. outside index-linking) of 0.5% in 2004, the labour market proved that it has adapted somewhat to current macro-economic parameters, marked by historically high unemployment. In fact, this real wage increase is the lowest since 1985, after 1995, 1997 and 2003, which were also marked by relatively low growth and a similar position in the cycle (start of recovery).

3 From February 2005, oil prices started pushing up inflation as measured by the national consumer price index (NCPI). Year-on-year, the NCPI increase was down at 2.0% in January but soaring oil prices sent it up to 2.5% in April. Underlying inflation remains low, with an annual rate of 1.8%, a slight increase since the end of It is true that wage pressures remain moderate at the moment, with unemployment continuing to rise, in Luxembourg and neighbouring countries, and that from a macro-economic point of view, the Luxembourg economy is reporting an under-utilisation of productive capacity (as measured by the output-gap). Labour market: insufficient improvement Total domestic employment rose by almost 7500 or 2.5% in The large, particularly dynamic sectors to record higher than average growth were construction, trading, hotel and catering, transport and communications, business services, non-market services and personal services. As in the past, the new jobs are broken down into 1/3 for residents and 2/3 for cross-border workers. Working hours usually show a pro-cyclical profile, sometimes advanced. Employers have a tendency to play around with extending working hours before hiring. Thus, working hours started to drop as early as 2000 (by about 0.2%) at the top of the economic cycle. They dropped from 2001 to 2003 and moved upward again in The rises observed in 2004 were around 0.2%. Temporary work, an advance indicator, started to move strongly upwards again in 2003, when employment was at its lowest. As in 2003, temporary work in 2004 was more dynamic than the rest of the market, increasing by 8.9% (in terms of hours worked). The figures show that around 10% of temporary workers are working abroad while around 20% of user companies are not domiciled in Luxembourg is the fourth consecutive year for rising unemployment, after annual averages of 4.2% in 2004 and 2.5% in If people on work programmes or on a training course are taken into account, the larger unemployment rate obtained is 5.8%. Employment performance at the start of 2005, as published by STATEC, is based on estimates: annual growth in domestic employment was stable at about 3% at the start of 2005, due to a marked increase in activity in 2004 as a whole. During the first quarter of 2005, unemployment continued to rise at the same levels as at the end of 2004 (+10% year-on-year). Everything therefore would seem to point to a growth in activity at the end of 2004 and the start of 2005 that was not strong enough to absorb new jobseekers and those who lost their jobs as a result of restructuring, bankruptcy, redundancy and others. The data provided by ADEM indeed show a continual rise in unemployed persons in receipt of payments, reaching an annual average of 54% of all registered jobseekers in 2004 compared to 48% in Net migration falls off In 1999, population growth reached 1.5%, driven by the high increase in demand for qualified labour for the financial sector and other expanding sectors. Since then, it has regularly slowed, stabilising at 0.7% in 2003/2004. In 2004, for the first time since 1980, the rise in natural fluctuations outstripped that of net migration. This is due to the fact that outgoing flows (emigration) have continued to rise while incoming flows (immigration) have stabilised at between 12,000 and 12,500 persons since Therefore, net migration fell to 1,500 persons compared to 4,000 on average between 1990 and 1999.

4 Public finances: spending continues to rise faster than revenue After substantial drops in tax rates on households and businesses between 2001 and 2003, the situation remained unchanged in In contrast, indirect taxation on goods increased slightly, as did social security contributions on wages. These movements remain moderate, however, although perceivable impacts on some revenue items were observed. Total revenue from taxes and social security contributions rose by 5.7% in 2004, a slight acceleration compared to The highest increase was recorded in indirect taxes (+20%). Direct tax on households and social security contributions recorded increases of 8% in 2004, following +10% in Tax collected on income or corporate profits fell by almost 20% in 2004, equivalent to 300M EUR. This is the belated consequence of the drop in income in the financial sector in 2001 and Since 2001, public spending has increased faster than revenue, according to the public accounts drawn up by STATEC following the standardised European System of National Accounts (SEC95). In 2004, spending rose by 9.2%, driven in part by very dynamic capital formation over the last few years. This dynamism also raised the ratio between capital formation spending and GDP in the public sector to very high levels, both historically and compared to other European countries. Wage spending increased by 6.9% and intermediate consumption grew by 8.1%. Thus, the balance of revenue and spending over the entire public sector has once again deteriorated. In 2004, it grew to 282M EUR or -1.1% of GDP. It is negative for the first time since 1992, the deficit forecast for 2003 having been transformed into a surplus because of higher than expected tax revenue. Forecast: weaker growth in will remain the best year since 2000 in terms of global trade growth and GDP. It was particularly dynamic outside the euro zone, which was able to raise its growth rate thanks to the marked dynamism of emerging countries. According to the forecasts of the main international organisations, economic activity will slow down in 2005 and should take off again in However, given the current data, it is unlikely that growth will cease completely, in Europe or elsewhere. In the euro zone in particular, after GDP growth of 2% in volume in 2004, international experts expect it to slow down to 1.6% in 2005 and recover to 2% in The two main factors which will support activity are continuing high growth (albeit at a slower rate) in emerging economies and the progressive take-off of investments in Europe. However, there are risks and, according to the international organisations, they could tip the scales the other way: the slowdown experienced in 2004 is probably more accentuated than the present central scenario, published by the international organisations. The main risk factors cited are oil, both because of its high price and its intrinsic volatility, and global imbalances in exchange rates and balances of payment. The global slowdown predicted for 2005 will have an effect on the Luxembourg economy. In its last forecast, STATEC accepted that there would be a slight fall-off in growth for 2005, which was expected to fall from 4.2% to 4.0%. However, since then growth for 2004 has been revised upwards (to 4.5%) and the global environment has deteriorated. Therefore, a downward revision of the growth forecasts for 2005 would seem appropriate. An unfavourable scenario, also published in the latest Note de Conjoncture, forecasts a rise in GDP in volume of 3.1% in This figure is part and parcel of the downward trend for Luxembourg s prospects, published by the other national or international institutions since the end of On average, these forecasts predict a 3.6% rise in GDP in volume for Luxembourg in In contrast, activity should recover in 2006, in the wake of a firmer European economic situation. The unemployment rate should continue to rise in Luxembourg throughout Given the data from the first quarter the deseasonalised unemployment rate is at 4.5% - and the downward revision of growth in activity, it seems possible that unemployment will reach 4.6% as an annual average in The possibility of a drop in 2006

5 depends on the robustness of the economic situation, given that the usual lags between growth and employment/unemployment will only add to the problem. The prospects for inflation must also be revised upwards, due to oil prices. For the standardised national index, the average rate forecast for 2.2%, is up 0.2 points compared to the last forecast. Underlying inflation will remain moderate, at less than 2%, while the next indexation adjustment will be brought forward one quarter, coming to maturity during the fourth quarter of Table 1: Overview of the Luxembourg economy, mio EUR 1 GDP at current prices (million EUR) Rate of change in % (or otherwise specifie GDP in volume Final consumption by households Final consumption by general government Gross capital formation (excl. var. in stocks) Exports of goods and services Imports of goods and services Total domestic employment Inflation (implicit deflator of private consumption) Agerage wage costs Unemployment rate (registered unemployment, in % of the active population) Benchmark level for the first year for five-year periods. 2 Drawn up using the national accounting method 3 Series interrupted in 1997 Source: STATEC, ADEM, IGSS Table 2: GDP from a spending perspective: contributions to growth Iin % points of GDP growth 1 1. National final household consumption Collective consumption by general government Gross capital formation Variation in stocks and statistical adjustments t ti ti 5. Final national uses (1-4) Exports a) Goods b) Services c) Consumption by non-resident households Final demand (5+6) Imports a) Goods b) Services c) Overseas consumption of resident households Balance of exports and imports (6-8) GDP at market price, (7-8) Including collective consumption for private households 2 Excepting rounding errors Source: STATEC