Wage rises may set country back
(JB) Two indexation-linked wage increases during the next six months could have negative effects on the country's competitivity, according to the Central Bank of Luxembourg (BCL).
At a BCL presentation, the institution's head of economics and research Jean-Pierre Schoder said that following the revision of indexation in October 2011, prompting an increase in paypackets around the country, a second review should take place in April 2012.
However, he warned of the flipside of increasing wages which could reduce the country's global competitiveness and endanger its long-term sustainability as a financial hub.
GDP growth for 2011 is expected to be recorded at around 4% in 2011 and to then fall in 2012 to 3%.
Mr Schoder said: “This is a very disturbing factor in Luxembourg because of the importance of the financial sector to the economy.”
The economist said that in terms of the labour market, unemployment rates are expected to continue growing to 6.8% in July, especially penalising those aged 25 and under. The current youth unemployment rate is set at 13%.
Furthermore, the presentation drew attention to the risk of abuse to the pension system. Without necessary reforms, BCL said that contributions would sustain just 60% of the pension pot by 2060.
In terms of public finances, BCL welcomed the relatively low level of indebtedness of the Grand Duchy, less than 25% of GDP, however it called on the government to be vigilant in order to not follow the Irish example, which went from 25% in 2007 to over 100% in 2011.
Finally, the BCL warned that businesses were likely to see a decline in exports during coming months because of a slowdown in GDP growth in partner countries such as Germany, Belgium and France.