Following a year of modest growth in 2025, the Luxembourg economy is set to enter a phase of acceleration. Despite an unstable international environment and persistent inflationary pressures, the Commission’s forecasts point to a gradual strengthening of economic activity, driven by the financial sector. Real gross domestic product (GDP) growth is expected to rise from 0.6% in 2025 to 1.6% in 2026 and 2% in 2027. This trajectory is dependent on the high volatility of the stock markets, exacerbated by geopolitical tensions.
Private consumption is expected to experience a temporary slowdown, with growth forecast at 1.6% in 2026, before rebounding to 2.1% in 2027. Whilst uncertainties linked to international conflicts are easing, household confidence is showing signs of fragility, having fallen significantly at the start of 2026.
The labour market and inflation
The labour market remains below its historical average. Employment growth is estimated at 1.3% in 2026 and 1.5% in 2027. The unemployment rate is expected to stabilise at around 6.6% in 2026 before falling slightly to 6.5% the following year.
Inflation remains a short-term concern. It is expected to rise to 2.7% in 2026 (compared with 2.5% in 2025), driven by rising energy prices and the wage indexation scheduled for May 2026, which will push up the cost of services. However, a decline is expected for 2027, with a projected rate of 1.8%.
Persistent public finance deficit
The general government balance slipped into a deficit of 2% of GDP in 2025, compared with a surplus the previous year. The European Commission attributes this widening deficit to a fall in tax revenue (measures to support purchasing power and a reduction in corporation tax) and an increase in expenditure, particularly on the public sector wage bill and investment.
The deficit is expected to narrow slightly to 1.2% in 2026, supported by a recovery in tax revenues and an increase in social security contributions. Nevertheless, public debt continues to rise, climbing from 26.5% of GDP in 2025 to 30.2% in 2027, reflecting the funding requirements for the government’s social, digital and environmental agendas.
European growth stalls
Whilst the EU appeared to be on track for moderate growth and disinflation in early 2026, the surge in energy commodity prices has radically altered the outlook, forcing the Commission to revise its forecasts downwards for both the EU and the eurozone.
For the EU, GDP growth is expected to slow to 1.1% in 2026 (compared with 1.5% in 2025), before picking up slightly to 1.4% in 2027. The euro area is following a similar trajectory, with growth forecast at 0.9% in 2026 and 1.2% in 2027. At the same time, inflation is rising again. It is expected to reach 3.1% in the EU and 3% in the euro area in 2026, an increase of one percentage point compared with previous forecasts. A slowdown is expected in 2027, with rates of 2.4% and 2.3% respectively. This is subject to a fall in energy prices.
The labour market, whilst resilient, is beginning to show signs of a slowdown. After creating more than a million jobs in 2025, employment growth is expected to fall to 0.3% in 2026. The unemployment rate is expected to stabilise at around 6% by 2027. Public finances are also feeling the impact of the crisis. The EU’s public deficit is expected to rise from 3.1% of GDP in 2025 to 3.6% in 2027. At the same time, public debt continues to rise from 82.8% in 2025 to 85.3% in 2027 for the EU and from 88.7% in 2025 to 91.2% in 2027 for the euro area.