Annual economic forecast conference
On Wednesday, 11 December, the Chamber of Commerce held its annual economic forecast conference, reinforced by the second edition of the new Economy Barometer publication that takes the pulse of Luxembourg businesses every six months. This year’s conference announced a business climate characterised by uncertainty, both internationally and nationally, in a world where environmental and digital transition are becoming preeminent. The current slowdown is expected to last throughout 2020, but not lead to a recession.
In the Grand Duchy, the country's structural problems are likely to worsen the situation of many companies, especially if the economic situation deteriorates further and more durably. Luxembourg's competitiveness and appeal are struggling to improve, while business costs are rising due to congestion related to production, stagnant productivity, over-regulation and excessive administrative procedures that have yet to be reduced. To remedy this, it is necessary to move definitively towards a model that favours and supports qualitative growth through effective public governance, efficient legal and fiscal frameworks, and increased agility in decision-making processes, in order to restore confidence, capacity for innovation, and profitability of companies, all essential vectors for maintaining social cohesion and the well-being of society in Luxembourg.
Responding to the concrete challenges faced by companies in terms of talent recruitment, spatial planning, bankruptcy legislation, production cost trends and taxation is becoming vital in the current economic downswing.
The business climate has been the focus of attention since the beginning of trade tensions between the United States and China and is not looking good at the end of 2019. Some of the risks anticipated last year have already materialised and uncertainties remain. China's growth has been on a slow downward trend for several years already, while the long phase of US economic expansion is coming to an end.
The slowdown is also a tangible reality in the European Union, heightened by an unstable political situation, with an endlessly unending Brexit. Germany, the driving force behind the European economy, is one of the countries most affected. German industry is wheezing and the whole country is suffering. The economic slowdown is less pronounced in Belgium and France, but still very present.
Businesses torn between confident optimism and a proven slowdown
An economy as open to the outside world as Luxembourg is logically affected by such a climate. The Chamber of Commerce's Economy Barometer shows a slowdown in business prospects between the first and second half of 2019. Activity in the second half of the year was below the forecasts made by these same businesses, while the transport sector expects its activity to decline over the next six months. The expected influence of the economic environment on companies in 2020, a key indicator in the traditional Eurochambres survey included in the Barometer, makes a nuanced observation: 18% of managers expect a positive influence and 12% a negative influence. The most optimistic sector is the non-financial services sector, with a positive differential of 18 points between companies in the sector expecting a positive influence and those expecting a negative impact. On the other hand, companies in commercial and industrial sectors for the most part expect an unfavourable economic environment in 2020.
The lack of skilled labour and labour costs are the two main structural challenges for businesses economic development. The first 365 days of the new coalition saw the emergence of many social measures, which also come with a cost in financial and organisational terms for companies, with no considerations made in their favour. The organisation of work in a 21st century digital economy needs to be more flexible at sectoral and company level to fully meet the needs of entrepreneurs and their employees. The road to accountability is no place for over regulation. The Government's main projects: tax reform, housing, the climate bill, and sectoral policy plans bring not only promises but fears that those same promises will be broken.
Financial leeway that fades away
The year is usually marked by the publication of several competitiveness reports, which are essential sources of information to assess the economy's ability to remain competitive and to identify areas for improvement. Some messages emerge when it comes to highlighting key projects in Luxembourg’s economy. These reports remind us of the absolute need to maintain a good position concerning the fundamentals of competitiveness, the business ecosystem, the stability of legislation, taxation, and labour costs, subjects on which Luxembourg most often tends to fall behind. Luxembourg is also one of the countries with high tax rates for companies and individuals.
The advantage that international talent represents for Luxembourg is highlighted by several indicators in competitiveness rankings. Managing growth seems increasingly difficult. Moreover, it threatens to be hampered by slow progress in housing and mobility, which – coupled with a lack of skilled labour – also explains the stagnation of productivity in Luxembourg over the last 15 years or so. Lacking qualitative growth, difficulties could prove exponential. As for companies, their room for manoeuvring is being reduced under the pressure of failed productivity gains; a sharp rise in labour costs, particularly in relation to neighbouring countries; and a high tax burden compared to Europe and the rest of the world.
Essential projects to stimulate the economy
Seven key projects will enable companies to face the challenges of 2020.
The 5th SME plan should make it possible to provide better support for some 32,000 SMEs on the subjects mentioned above: a second chance in the event of bankruptcy; digitalisation; talent; business parks; and also problems with business transfers, difficulties in accessing SME financing, and administrative burdens or over-regulation.
Every year, talent and recruitment needs become more important for companies, 54% of them having recently had a lot of difficulty recruiting and nearly 90% having had at least some difficulties. The solution will require targeted measures, in particular in terms of flexibility, and continuing education and qualifications, to meet the particular problems of certain sectors and companies, rather than a one-size-fits-all approach.
Digital transformation brings many opportunities. Becoming a ‘Digital Nation’ requires a transition to becoming a ‘Digital Economy’, an economy whose productivity increases thanks to digital because digital serves the economy; a ‘Digital Government’, which improves the efficiency of government processes and the quality of its interactions thanks in particular to the adoption of digital tools and the use of ‘Big Data’; and, a ‘Digital Society’, i.e. the use of digital by citizens and communities. While most companies feel that they are undergoing digitalisation, often they are not aware of all the potential offered by digital technology. They must therefore be made more aware of and better supported in their digital transition, and this effort must be generalised and involve both company managers and employees.
The draft bankruptcy law already dates back to 2013 and does not meet the needs of the economy in its current form. Meanwhile, the number of business bankruptcies is increasing every year. Bankruptcy legislation should now be based on the principle of a second chance, as is the case in most developed economies. This is what the Chamber of Commerce will propose in its work on the subject in 2020.
2019 and 2020 are pivotal years for Luxembourg's spatial planning, with the forthcoming publication of the four sectoral policy plans. Transport infrastructure, the construction of new housing, and the development of businesses via economic activity zones, will depend heavily on the choices made within these plans. More than ever, the Luxembourg of tomorrow is taking shape today. The Chamber of Commerce has taken up the subject, encouraging the Government and municipalities to implement a coherent territorial development strategy on the ground, with economic development at the heart of the strategy.
Luxembourg’s economy must lead its environmental transition by making it one of its main assets. This can only be achieved through better resource efficiency, clearer legislation, the promotion of the circular economy through public procurement, and sustainable mobility. The National Integrated Energy and Climate Plan (PNEC) will have a major impact on businesses, positive in terms of the environment, but potentially negative in the case of overly restrictive legislation. Climate action must be based on the positive participation of stakeholders, play more on incentives than on repression and must not lead to divisiveness that undermines social cohesion. Attention must be given to creating incentives for a more carbon-efficient economy and society, where the reduction of emissions on Luxembourg soil must imperatively take precedence over the simple relocation of emission sources.
Finally, the control of labour costs and taxation must be at the heart of future economic policies, as loss of competitiveness in these areas has been significant in recent years. In order to remove the obstacles to business development, it is necessary in particular to restore predictability in tax matters; to restore dialogue and trust between companies and the administration; to increase flexibility in the organisation of work; and, as a matter of urgency, to help businesses cope with the colossal negative externalities from project infrastructure.