Low-cost growth Consumer prices - trends and forecasts Over recent months, oil prices have continued to fall and the 3.5 international climate has deteriorated slightly. Faced with lacklustre underlying inflation and sluggish wage trends, inflation 3.0 forecasts had to be downgraded, both in Luxembourg and elsewhere. 2.5

Oil prices lighten the bill but push back wage indexation 2.0 A barrel of Brent last peaked at EUR 80 in June 2014. Since then, 1.5 the price has collapsed by 60% to less than EUR 30 per barrel. Prices have fallen about 25% since October 2015. One direct 1.0 consequence of this is falling heating oil and petrol prices for consumers. A litre of heating oil now costs 38 cents including taxes, % in variation Annual compared to 76 cents in June 2014, giving savings of EUR 1,500 for 0.5 a delivery of 4,000 litres, despite the VAT hike. Similarly, a full tank of 60 litres now costs EUR 20 less. This drop in oil prices is having a 0.0 moderating effect on the inflation rate, which fell 0.75 percentage 2011 2012 2013 2014 2015 2016 2017 points in 2015, and, if prices remain at current levels, it will fall a euro zone Luxembourg further 0.63 percentage points in 2016. Sources: STATEC, Eurostat, European Commission (Winter Forecast) On top of this direct impact, which is instantaneous and easily quantifiable, we can also expect an indirect impact on consumer Inflation more moderate than expected prices that will only materialise after several quarters. The more and the longer oil prices fall, the more substantial this indirect All the inflation forecasts drawn up in the final quarter of 2015 now impact will be. The current sluggishness in underlying inflation1 seem outdated. The European Commission is the only international may indeed be due, at least in part, to this kind of moderating organisation to have published an update on its eurozone inflation effect via falling costs in the transport of goods, for example. forecasts since then: at 0.5% for 2016, the downward adjustment is Similarly, knock-on effects through lower than expected price rises a half-point lower compared to November. However, the forecast and the ensuing wage restraint could explain the current and future from the European Central Bank due on 24 March suggests that moderation in inflation. Compared to other countries, the impact there may be a further adjustment. In Germany, the Bundesbank due to wage trends is more institutionalised in Luxembourg (and has revised its 2016 forecasts down ¾ of a percentage point Belgium) due to automatic index-linking. The sharp fall in oil prices (compared to December), to 0.3%. In Luxembourg, STATEC has just has pushed back the next wage indexation adjustment, which in revised its inflation forecasts down by about one percentage point turn has pushed back the price rises generally observed after an (compared to November), to 0.2% on average for 2016 as a whole. 2 adjustment. According to the latest forecasts , the next wage adjustment could take place in early 2017, after having been announced successively for the end of 2015 (August 2015 forecast) and for the second quarter of 2016 (November 2015 forecast). This ______rather significant postponement shows the high degree of 1 Year-on-year, inflation excluding energy and non-processed food is close uncertainty generated by volatile oil prices and this also applies to to 1% in the euro zone and Luxembourg. the present forecast. 2 Updated 17 February 2016: http://www.statistiques.public.lu/fr/actualites/economie- finances/prix/2016/02/20160217bis/20160217bis.pdf

Conjoncture Flash | February 2016

International (1/2) Euro zone: weakening momentum in late 2015…

Euro zone – GDP in volume terms Euro-zone GDP rose 0.3% during the final quarter of 2015, rd 3.0 indicating a certain slowdown that had already been felt in the 3 quarter (also up 0.3%, compared to 0.5% per quarter over the first 2.5 half of 2015). Growth thus stood at 1.5% over 2015 as a whole, the 2.0 best performance since 2011, but some areas are still flagging, particularly in investment (which is key to a sustainable recovery). 1.5 Investment is recovering, albeit timidly, among non-financial 1.0 companies but not among households (residential property

In % 0.5 remains fairly sluggish across the euro zone). While certain specific phenomena may partially explain the weak performance in the 4th 0.0 quarter, particularly in terms of private consumption (the attacks in -0.5 France, lower energy consumption due to relatively mild temperatures), other, more recent, elements point to a lasting -1.0 slowdown… -1.5 10 Q3 11 Q1 11 Q3 12 Q1 12 Q3 13 Q1 13 Q3 10 Q1 14 Q1 14 Q3 15 Q1 15 Q3 Quarterly var. Annual var.

Source: Eurostat International (2/2) … and worrying signs in early 2016

Stock-market indices Overall, the various short-term indicators published since the start of 2016 paint a negative picture. In a climate of increased volatility, 105 the European stock markets fell sharply, penalised by bank stocks 100 (against a backdrop of disappointing results and worries surrounding non-performing bank loans, particularly in Italy) and 95 companies linked to the energy sector, and sovereign risk premiums took off again. Euro-zone economic surveys were also 90 affected (the composite PMI fell in February, as did the ZEW index 85 and the consumer confidence index in January and February). 1 Jan 2016 100 = Chinese foreign trade figures also continued to indicate falling 80 trade, and oil prices remained at a rock bottom USD 30 per barrel. 75 These developments were partially included in the OECD’s interim forecasts (published on 18 February), which in particular 70 highlighted the increased risk of financial instability, and are now predicting just 1.4% growth in the euro zone in 2016 (compared to 1.8% last November). 01/01/16 08/01/16 15/01/16 22/01/16 29/01/16 05/02/16 12/02/16 19/02/16 Eurostoxx 50 Stoxx 600 - Banks

Source: Macrobond Manufacturing Rebound set to remain isolated

Industrial output Industrial output in Luxembourg took everyone by surprise in late 115 2015. Fourth-quarter figures (with estimates for December) indicate that it rose some 3% over one quarter (up 2% over one year), whereas the euro zone has been stagnant. The October and 110 November figures indicate that Luxembourg’s rebound was mainly due to substantial gains in IT and electronic products, in glass and 105 ceramic manufacturing and in iron and steel (although this last category remains marked by extremely low output levels, 20% down on those for 2011). This rebound in late 2015, which

data) 100 somewhat offset the drop in the 3rd quarter, is not likely to become a sustainable trend in the short term: while confidence among 95 manufacturers held up well up to January 2015 in Luxembourg (although output did not seem to be accelerating significantly) but 90 it has crumbled in Europe – where output figures have been falling January 2010 = 100 (seasonally adjusted since November – which is a negative sign for the outlook of Jul-10 Jul-11 Jul-12 Jul-13 Jul-14 Jul-15

Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Luxembourg manufacturing. Luxembourg euro zone

Sources: Eurostat, STATEC Conjoncture Flash | February 2016

Financial sector UCIs: a very good year in 2015

Main European players in UCIs Over 2015 as a whole, net assets of Luxembourg UCIs rose 21% compared to 2014 (after rising about 12% a year over the previous 30 two years). Valuation adjustments due to financial market trends were positive but less significant than in 2014 (related to the 25 downward trend in equity indices worldwide since mid-2015, partly caused by the depreciation of the euro). New cash inflows (or 20 capital investment, i.e. issues less redemptions) rose some 20% on the previous year. 15 Compared to other countries active in investment funds, 10 Luxembourg has performed relatively well, increasing its market share to almost 28% of European assets over the first three

As a % of total European net assets net European total % of As a 5 quarters of 2015 and thus reaffirming its leading position. 06 Q1 07 Q1 08 Q1 09 Q1 10 Q1 11 Q1 12 Q1 13 Q1 05 Q1 14 Q1 15 Q1

Luxembourg France Germany Ireland United Kingdom

Source: EFAMA Labour market Momentum growing on the labour market

Tension indicator on the labour market The ratio between new job offers and new unemployment claims, which indicates tension on the labour market, remained favourably 1.6 -20 oriented in late 2015/early 2016. While the number of new -10 unemployment claims stagnated at a little under 1,900 per month 1.4 (seasonally adjusted figures), the number of vacancies notified to 0 ADEM continued to rise and stood at over 2,600 a month in late 1.2 10 2015, meaning that there are about 1.5 times more vacancies than claims, a level not seen since 2000. 1.0 20

claims 30 There has also been a favourable trend in domestic paid 0.8 employment, which continues to rise (up 2.8% over one year in Q4 40 2015, after 2.7%, 2.6% and 2.4% over the previous 3 quarters respectively), and the unemployment rate, which continues to fall,

0.6 50 Annual variation in % (inversed scale) reaching 6.5% in January 2016. Employment prospects also remained positive up to January 2016 for most sectors surveyed, Ratio of new joboffers/new unemployment Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 particularly construction and the retail trade. Tension indicator on the labour market* Idem, average 2000-2015 Number of jobseekers (right-hand scale)

Source: ADEM, *3-month sliding average

Inflation Inflation rate drops to 0.5%

Price trends in Luxembourg (% year-on-year) The rate of inflation in Luxembourg fell from 1.1% over one year in 2.5 0 December to 0.5% in January. This sharp drop is mainly due to the fall of underlying inflation (1.1% over one year in January -2 2.0 compared to 1.9% in December). This fall is mainly due to the -4 disappearance year-on-year of the effects of the VAT hike. The 1.5 -6 transport and hotel and catering sectors made less of a contribution than in December, as the VAT hike had strongly 1.0 -8 -10 boosted inflation in early 2015 via the prices of cars and alcoholic beverages. 0.5 -12 0.0 -14 Furthermore, food also contributed less to underlying pressures -16 than in December 2015. Food prices rose less than in late 2014- -0.5 early 2015 despite contrasting trends between products (fresh fish -18 prices rose sharply in January, a feature that was also observed -1.0 -20 internationally). Jul-14 Jul-15 Jan-14 Jan-15 Jan-16 Oct-14 Oct-15 Apr-14 Apr-15 Total Underlying Oil products (right-hand scale)

Source: STATEC Conjoncture Flash | February 2016

Transport Updrafts

Luxembourg airport: passengers and freight Indicators for air transport in Luxembourg posted very favourable trends last year. The number of registered passengers exceeded 750 230 2.7 million in 2015 (up about 10% over one year) and continued the 700 220 quasi-structural growth related to the expanding numbers of 650 210 destinations and passengers from Luxembourg airport. On the other hand, freight (up 4% in volume terms in 2015) seems to be 600 200 reacting more to cyclical trends overall and to the economic 550 190 recovery under way since 2013. 500 180 These positive developments in the air transport sector are also In thousands In 450 170 In thousands of tonnes of thousands In apparent in terms of added value in all transport activities, with a 400 160 much larger contribution to GDP growth in 2015 and, to a lesser 350 150 extent, to the rise in job creations in this sector. 300 140 07 Q1 08 Q1 09 Q1 10 Q1 11 Q1 12 Q1 13 Q1 14 Q1 15 Q1 Passengers (left-hand scale) Freight volume (right-hand scale)

Sources: Sources: ANA, STATEC (seasonally adjusted figures)

Trend chart

Average over the last Same period May-15 Jun-15 Jul-15 Aug-15 Sep-15 Oct-15 Nov-15 Dec-15 Jan-16 three months previous year Annual variations in %, except where otherwise indicated Activity Industrial output per working day, in volume -1.3 1.5 -4.0 3.5 -2.8 0.1 5.8 … … 1.0 3.0 Construction output per working day, in volume -5.9 3.9 9.3 -14.7 -1.4 -0.8 2.6 … … 0.1 0.4 Turnover by volume of total retail trade -4.1 2.8 1.6 -3.0 0.2 -0.4 0.9 … … 0.2 -0.9 Prices, wages Consumer price index (NCPI) 0.7 0.7 0.6 0.6 0.5 0.5 0.8 1.1 0.5 0.8 -0.3 Underlying inflation 1.4 1.5 1.6 1.7 1.8 1.7 1.8 1.9 1.1 1.6 0.7 Oil product index -8.1 -8.7 -10.5 -13.6 -16.4 -15.6 -13.1 -10.9 -10.3 -11.4 -12.3 Industrial producer price index -0.2 -0.5 0.7 -1.1 -1.5 -2.2 -1.5 -2.0 -3.3 -2.3 -1.1 Construction price index1 1.0 1.0 1.0 1.0 1.0 1.0 1.0 1.0 … 1.0 1.4 Average wage bill, per person (National accounts) 1.0 1.0 0.4 0.4 0.4 … … … … 0.4 3.5 Foreign trade Exports of goods (volume) -3.5 8.9 -1.5 10.3 10.7 5.2 13.1 … … 9.7 3.5 Imports of goods (volume) -4.3 -2.2 -4.7 -4.9 -2.7 -6.6 -5.1 … … -4.8 -1.1 Employment, unemployment Domestic number of employees 2.7 2.6 2.7 2.5 2.9 3.0 2.7 2.8 3.1 2.9 2.4 National employment 1.8 1.8 1.7 1.7 1.9 2.0 2.0 2.2 2.3 2.1 2.1 Unemployment rate (% of working population, seas. adj.) 6.9 6.9 6.9 6.9 6.7 6.7 6.7 6.7 6.5 6.6 7.0 Source: STATEC Data yellow coloured are estimates 1 Estimations based on half-yearly data Indicators Variation on previous quarter in % 2014 Q3 2014 Q4 2015 Q1 2015 Q2 2015 Q3 2015 Q4 Eurozone- Growth in volume of GDP (European Commission) 0.3 0.4 0.5 0.4 0.3 0.3 Luxembourg - Growth in volume of GDP (STATEC) 1.7 3.2 -0.2 1.4 0.9 … Annual variation in % 2011 2012 2013 2014 Forecast 2015 Forecast 2016 Luxembourg - Growth in volume of GDP (STATEC) 2.6 -0.8 4.3 4.1 3.2 3.4 GDP at current prices 2014: EUR 48 897 million st Minimum monthly salary (since 01/01/2015): EUR 1 922.96 Consumer price index (January) - base January 1 1948: 816.81 st Current account balance (2015 Q3): EUR 986 million Half-yearly average of the index linked to base as at January 1 1948: 827.50 Resident population (01/01/2015): 562 958 Estimated deadline for next salary indexation: 1st quarter 2017 National institute for statistics and economic studies For further information:

Tel: 247-84219 13, rue Erasme Bastien Larue [email protected] B.P. 304 Tel. 247-84339 www.statistiques.lu L-2013 Luxembourg Email: [email protected]

Véronique Sinner Tel. 247-84228 Email: [email protected]

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