Luxembourg: Financial sector hit
The international financial crisis is sharply reducing economic growth, initially in the financial sector, but subsequently in broader domestic demand. These effects should persist into 2010. Consequently, unemployment will rise further, while core inflation will fall slowly.
The automatic stabilisers should be allowed to operate during the downswing, but the government should aim to improve the structural balance over the medium term to secure fiscal sustainability. For 2009, these automatic stabilisers will be largely responsible for moving the budget into a deficit of more than 0.5% of GDP. On the spending side, a focus is to boost social welfare infrastructure. The main uncertainty is the duration and severity of the turmoil on the international financial markets, which will govern the extent of the slowdown in the all-important financial sector.