Luxembourg economy stable but relies ‘too heavily’ on financial services

Fitch has maintained its AAA rating for Luxembourg and said the country’s economic outlook remains stable, echoing similar assessments made recently by DBRS, Moody’s and Standard & Poor’s.

Fitch cited the Grand Duchy’s “strong” governance metrics, high income per capita and “solid” growth potential and public finances.

It said the virtues of the economy had largely offset high structural unemployment and a continuing reliance on financial services.

On the latter point, it warned that a “severe sudden contraction of financial-sector activity in Luxembourg could have adverse consequences for the real economy, negatively impacting labour market conditions and public finances”.

Fitch said public finances were a “key strength” for Luxembourg, “with a five-year average fiscal surplus of 1.2% of GDP compared with a 0.3% of GDP deficit for the AAA median”.

The Grand Duchy has the lowest public-debt-to-GDP ratio for all countries rated AAA by Fitch, at 20.6%.

Luxembourg’s statistics body, STATEC, estimates the economy’s potential growth at 3.2%.

Fitch said the country’s five-year average real-GDP growth of 3.5% had “significantly outperformed” the AAA median, due largely to “strong net exports driven by the financial services sector”.

Fitch said the outcome of ongoing investigations by the European Commission on potential ‘state aid’ received by multinational corporations Fiat-Chrysler, McDonald’s and Amazon “could lead to these companies having to repay Luxembourg taxes retrospectively, resulting in one-off boosts to fiscal revenues”.

It also warned of the good and bad that could come from Brexit.

“There is potential for stronger growth if private consumption and investments perform better than expected, particularly if the economy benefits from financial corporations shifting some operations to Luxembourg following the UK’s Brexit vote,” it said.

It warned, however, that weaker global trade and growth as a result of “protectionist measures” from the world’s largest economies and “disorderly Brexit trade negotiations” impacting EU trade and growth were likely to affect financial markets and Luxembourg’s “small and trade-dependent economy”.