The time for recovery has not yet come
"Baromètre de l'Economie" first semester 2021
Four vital needs for the economy
In the spring of 2021, the results of the Economic Barometer illustrate the necessity of meeting four vital conditions in the coming months if the economic recovery is to be a success.
Do not stop assistance abruptly or prematurely
Assistance has been an essential lifebuoy in preserving companies, with, according to the latest figures from the Ministry of the Economy, 463 million euros paid to compensate for short-time working and 254 million euros distributed in non-refundable aid. This assistance will be as essential tomorrow as it is today, as the situation in sectors such as commerce and HORECA shows. It will allow companies to have the cash necessary to relaunch their business activities. That is why it must be withdrawn gradually.
Redirect accumulated savings towards the economy
In 2020, Luxembourgers saved 1.2 billion euros more than in 2019, as consumption fell in several business sectors. This imbalance will have to be corrected in the medium term and there will have to be measures encourage consumption to revive economic activity.
Move towards a skills-based recovery
The recovery will have to be economically strong, socially fair and environmentally sustainable. The dual ecological and digital transition will be at the heart of sustainable and shared prosperity. To achieve this, the development of skills, whether digital, organisational, technical or relating to leadership, is essential. Relaunch must rhyme with skills and skills need to be acquired in particular through well-calibrated training. Investment in skills should be encouraged by the state, especially in this fragile phase. Today, a third of companies do not know about the relevant public assistance and another third, while knowing about it, do not request it. In the recovery, the state should financially support continuing training much more, by increasing the co-financing rate, for example, from 15 to 25%. Companies, their sector representatives and chambers, and training organisations, are best able to define value-added and relevant training plans to reflect their individual skills needs. Encouragement and financial support - in short, an investment for employability and economic development - by the State is thus not to be confused with the genesis of public measures which would aim to put companies in a rigid straitjacket about how and who should be trained in what subject. The state must act as a facilitator.
Companies, privileged partners in the recovery
Beyond these vital needs, at this decisive moment when the recovery strategy is taking shape, it is essential to rely much more on economic actors (bottom-up rather than top-down approach) to define the action plans needed on digital transformation; skills (the importance of which this Barometer confirms); environmental transition (according to the principle of "technological neutrality"); or bankruptcy reform (according to the "second chance" logic). Significant progress, based in particular on the digitisation of public services, needs to be made in terms of administrative simplification, while companies must face increasingly restrictive procedures.
The Economy Barometer shows companies are still slowed down by the crisis
While the Easter bells rang well at the beginning of April, it will be at least several more months before we hear those of the recovery. Companies are taking action in the face of the crisis, in particular by preserving employment, but a health situation that has not yet been brought under control and an international environment which is still uncertain is weighing on their business activities and short-term prospects. For the economy as a whole, the peak of the crisis seems to be over. However, even if a rebound is in the making, it is premature to speak of a recovery. For certain specific sectors, primarily HORECA, but also transport, events and commerce, the economic situation is still far from being cleared up. The crisis has affected the training policy of companies, the subject of this Barometer, as well as their investments. Thus, assistance is still proving to be essential, whether for the affected sectors or to relaunch the investments and projects essential to competitiveness.
An uncertain economic context
By way of introduction to the presentation of the results and lessons to be drawn from the 5th Economic Barometer, Carlo Thelen, Director General of the Chamber of Commerce, took stock of the international economic situation, as well as of the challenges and opportunities that this holds for Luxembourg in the months to come.
The prospect of US growth reaching, thanks to the “Biden Plan”, some 7% in 2021 according to the United States Federal Reserve - the highest rate in 40 years - bodes well for the main economic partners of the United States who can expect an additional economic boost that is particularly welcome in the post-crisis period. Also, Luxembourg's exports to the United States, which fell last year to 276 million euros (against 405 million in 2019) should logically rebound in 2021, as should direct investment by the United States in Luxembourg. However, it is still too early to measure the potential impact for Europe and Luxembourg of the US administration's intention to introduce a 21% global corporation tax floor.
The Chamber of Commerce welcomes the recent progress observed in the deployment of vaccination campaigns in Luxembourg and internationally, although it considers that the battle against the virus is far from won. Another point that worries the Chamber of Commerce: the shortage of certain goods and products essential for economic recovery, such as semiconductors or even wood and other construction materials. We must also not lose sight of the impact of Brexit, which has passed a little under the radar.
Economic and cyclical developments will also depend to a large extent on how consumers react in the coming months. Will the road out of the crisis have a euphoric effect on consumption or, on the contrary, will it trigger precautionary reflexes leading consumers to save in order to be prepared for possible new crises? As the current situation is truly “unprecedented”, existing confidence indicators should be interpreted with caution. This uncertainty also affects the financial markets where we expect increased volatility in stock prices, which particularly exposes Luxembourg, given that a 10% increase (or decrease) in the main indices traditionally results in an increase (or decrease) in Luxembourg's GDP growth of around 0.3 points according to IDEA and STATEC.
Finally, it will be necessary to closely follow the evolution of the political situation both internationally and in Europe, with federal elections in Germany in September and regional elections in France in June with presidential elections in 2022. These elections cannot fail to have an impact on European policies even though the rapid implementation of the European recovery plan is more urgent than ever.
Presentation of the results of the 5th Economic Barometer
The Economic Barometer is already in its 5th edition, and for the past year, the economic situation has been strongly marked by the current health and economic crisis. 628 companies with 6 or more employees took part in the Barometer survey during the first half of April, commenting on their economic situation and on the subject of skills and training. The Barometer score, a summary of the 7 economic indicators, rose following the historic drops in the two editions of 2020, going from 46/100 to 54/100. However, this score remains below that before the crisis, which was 62 in the autumn of 2019. It is difficult to speak of a recovery whilst the level of business activity from just a little over a year ago have not yet been reached. Catching up, whether in terms of investments, profitability, training or confidence in the future, will probably not be in evidence before the next edition of the Barometer in autumn 2021. The coming months will be an enormous challenge for economic actors.
The last 6 months were difficult, and even dramatic, for some sectors
The developments in business activity over the past six months are remarkably similar to the expectations of business leaders expressed last autumn. If they were pessimistic, they were right to be. Over the past 6 months, business activity has fallen for 4 out of 10 companies and increased for only 2 out of 10 companies. The decline has certainly been less brutal than during the summer and last spring, but it is the 3rd quarter in a row seen by companies. The past six months have confirmed the disparate impact of the crisis on different sectors. Financial services companies are the only sector in which the majority have grown over the period, with a difference between the share of companies with an increase in activity and those with a decrease in activity of + 43%. For other sectors, whilst construction (-13%), non-financial services (-16%) and industry (-18%) have managed to limit the problems, this has not been the case for trade (-21%), transport (-40%) and, even less for HORECA (-88%).
Looking ahead to the coming months
Business executives believe that the next six months should see a slight return to a better situation with an increase in activity expected for 32% of companies, against a decline for 18% of them. Stability, at the crisis-induced low level, does, however, concern more than half of companies, which could characterise a cautious attitude. The sectors most affected over the past six months are also the least confident for the coming semester. Profitability follows a similar trajectory of expectation. After the sharp drop in corporate profitability since the start of the crisis, there are about as many companies anticipating an increase (24%) as a decline (22%) in the next six months.
The difficulties encountered by companies in turning a profit are having an impact on their ability to access credit. The cumulative number of companies having encountered difficulties in accessing credit over the past 12 months reached 22%, of which 47% in HORECA, 24% in trade and 23% in the construction sector. This percentage was only 12% of all companies when the 1st Barometer came out in June 2019.
Estimates also show a stabilisation regarding investments, following consecutive declines in the last two semesters. The good news comes from the industrial sector, where the percentage of companies anticipating a rise (21%) is higher than the percentage of those expecting a decline (14%). The same is true for companies with 50 or more employees. The assistance system for sustainable investments in the Covid-19 era may have contributed to these positive expectations. The year was also marked by an increase in investments in upgrading and in the environmental field, possibly connected to more restrictive regulations in this area. 31% of industrial companies plan to invest to meet standards during 2021 and 2022. 38% of managers consider that administrative procedures and formalities have become more complex in 2021 are undoubtedly another illustration of these additional constraints.
Some positive employment effects
A bright spot is more visible for employment. Nearly a quarter of companies are expected to see their workforce increase in the coming months, compared to 15% who expect the number of jobs to decline, even though employment was more resilient than business activity last year. The Luxembourg economy confirms its ability to create and maintain jobs. While unemployment rose sharply at the beginning of the crisis, reaching 6.9% in the second quarter of 2020, it had since fallen back to 6.1% by March 2021.
However, the crisis may also have had surprising effects. The lockdown has not affected the accelerated digitisation of the economy, with the percentage of companies launching or pursuing innovative projects not declining over the past 12 months. The number of companies involved in internationalisation projects has increased from 13% to 17%. Some companies have been able to reinvent themselves in order to sustain their business.
Skills, collateral victims of the crisis
Executives indicated, within the "Skills & Training" section, that they needed all types of digital, organisational, relational or technical skills for the development of their businesses. Despite this, companies had to resolve to limit their training spending because of the crisis. In fact, more than 36% of companies with 6 or more employees reduced their training budget between 2019 and 2020. This decrease particularly affected companies in HORECA (47%), non-financial services (40%), construction (39%) and commerce (38%). The industry and transport sectors are those with more stability in training their staff the most. The training of their employees is often essential to maintain their employability, in particular within the framework of professional certifications.
More than a third of the companies surveyed said they were not aware of the training assistance available. This was the case for 41% of companies with 6 to 9 employees. This shows that significant progress could easily be made to further develop vocational training and, at the same time, the skills of the workforce. Business leaders called for an increase in this assistance, an improvement in the nature of the offer, more support to detect the skills needed, and the establishment of a training plan, as the main avenues for developing training in Luxembourg.