OECD: Luxembourg economy to grow on consumption, finance

Luxembourg's economic growth will strengthen to almost 4% by 2019, driven as people in work earn and spend more, as well as by the country's financial industry, the Organisation for Economic Cooperation and Development (OECD) said.

Growth will be 3% this year and jump to 3.8% in 2018 and 3.9% the year after, the Paris-based OECD said in its latest global economic outlook on Tuesday.

"Private consumption will benefit from firming wage growth, while private investment will be boosted by the continuing reduction in corporate income tax rates in 2018," the OECD said.

"Activity will also be supported by continuing accommodative monetary conditions in the euro area and robust financial services exports."

The European Central Bank's monetary policy, which includes buying €60 billion worth of assets each month, has "played a key role in supporting both consumption and investment demand by ensuring favourable financing conditions", its President Mario Draghi said on November 20.

ECB asset purchases

The bank said last month that, from January, that will halve to €30 billion and continue until the end of September 2018, or beyond, if necessary, until there is a "sustained adjustment" in price rises towards the ECB's inflation target of below but close to 2%.

The OECD said Luxembourg house prices were rising because of "supply bottlenecks" that neede to be addressed.

"Weak incentives to use the land available for consstruction should be strengthened by a reform of land planning and complemented by the introduction of time-limited building permits and increased taxation of non-used constructible land," the OECD said.

"Existing fiscal measures that stimulate housing demand, such as the tax deductibility of mortgage interest, should be withdrawn."

House prices in Luxembourg increased by 7.7% in 12 months with the average price per square metre for a flat reaching €6,000.

The average price for a family home was more than €600,000.

That's according to a report in June from Statec, the country's statistics office and the Observatoire de l'habitat, in collaboration with the Luxembourg Institute of Socio-Economic Research.

The financial sector is "the main driver of economic growth" in Luxembourg, and it brings risks, the OECD said. 

"Strong financial linkages between subsidiaries of foreign banks in Luxembourg and their parents abroad, possibly even outside the European Union regulatory and supervisory framework, may transmit external shocks into the domestic economy," it said.

There were more than €4 billion worth of net assets under management in Luxembourg investment funds at the end of September, according to the Association of the Luxembourg Fund Industry.

The OECD said Luxembourg's financial centre might become "even more" appealing in the wake of the UK's decision to leave the EU, which is set to happen in March, 2019, especially if it "keeps its attractiveness to the associated highly qualified international labour force".