How the international environment has changed in the first half of the year

The global economic scene in the first half of 2025 looked unstable. The US and the euro zone were moving at different rhythms, and the general background was determined not so much by internal factors as by external ones - above all, the threat of duty increases from Washington. At first glance, the GDP figures suggest moderate growth: the euro zone added only 0.1% in the second quarter, while the US added 0.7% after a slump at the beginning of the year. But a closer look reveals that these figures mask sharp fluctuations in imports and exports in anticipation of trade barriers.

For example, much of the euro area's growth in the first quarter was fuelled solely by Ireland, where GDP grew sharply due to the activity of multinationals. In the second quarter, as the situation stabilised, the eurozone economy slowed sharply. Germany, a key exporter in general, moved into contraction by -0.1%, hurt by a pullback in export orders.

The US, for its part, built up imports at the beginning of the year and then cut back - and this is what boosted its GDP growth in the second quarter. But in essence, both regions are being proactive in trying to minimise the impact of the expected deterioration in trade conditions. Domestic demand in the US, including investment and consumption, is showing clear signs of slowing. Even in the labour market, the situation is deteriorating: the revision of spring data showed a much lower rate of job creation, which cost the director of the Bureau of Labour Statistics his job.

Against this background, business confidence remains weak. In the US, industrial and service sector sentiment is deteriorating, while in the eurozone the services activity index has been rising steadily for several months. Consumer sentiment in both economies is cautious, but in the eurozone it is showing a slow recovery - with a strong contrast between the countries: Germany is showing a clear upturn, while France is rather deteriorating.

The car market in Europe remains under pressure. New car sales in the euro zone fell by 2.5% year-on-year, with France (-8%), Belgium (-11%) and Germany (-5%) particularly affected. Spain is a rare exception, where sales were up 14%. Luxembourg also showed a weak but positive result: +1% after falling in 2024. Nevertheless, sales are still well below the pre-pandemic level: by 15% in Luxembourg and 20% on average in the eurozone.

An interesting trend was the surge in mortgage lending in Luxembourg in the second quarter. The number of new loans grew by 33% year-over-year, fuelled by lower rates, relaxed terms and government subsidies. The recovery was particularly noticeable in the floating rate loan segment - these grew by almost 50% and now account for almost half of all new loans. This is the first such change in three years. The average variable rate in June became even lower than the fixed rate, and this trend is expected to continue.

Green funds continue to feature prominently in the Luxembourg financial market. By mid-year, funds that take environmental or social factors into account (so-called Article 8 funds) accounted for 61% of total assets. Funds with a clearly defined sustainable purpose (Article 9 funds) remain less prominent, at just 3%. However, the growing interest in sustainable investments is accompanied by controversy: since 2022, Article 8 funds have quadrupled their share of defence investments. And while Article 8 funds are attracting new capital, the more stringent Article 9 funds continue to lose money - for the seventh consecutive quarter.

The construction sector is slowly recovering. The general mood of companies has improved, especially in building construction, although specialised work remains stagnant. Companies are still complaining about a lack of demand, but the share of such complaints is declining. This is accompanied by moderate employment growth in the sector. In industry, the number of jobs rose slightly in the second quarter, following a decline at the beginning of the year. The main contributions came from the food industry, metallurgy and energy. In construction, job cuts continue, but their pace is slowing down.

Inflation in Luxembourg slightly accelerated in the second quarter - to 2.1% in annual terms. This is due, among other things, to the automatic indexation of wages. But it is forecast to fall to 1.4% in 2026, thanks to falling energy prices and government measures to reduce electricity tariffs (by 9%). Prices for services and food, on the other hand, will continue to rise, but moderately. The next wage indexation is scheduled for the third quarter of 2026.

Against this backdrop, a key development was the new trade agreement between the EU and the US, which provides for a single maximum tariff of 15% on European goods. This removes much of the uncertainty related to inflation that mutual duties would have caused. In addition, Europe has said it intends to import $250bn worth of US energy a year until 2028 - three times as much as it will import in 2024. So far, the growth is coming at the expense of liquefied natural gas, with imports up 60% in six months. In the long term, however, such volumes seem difficult to achieve, especially for oil.

Luxembourg's economy, like Europe as a whole, is moving with an eye on global turmoil. Countries are trying to adapt to the unstable US trade policy, with domestic markets - from real estate to labour - showing cautious signs of stabilisation. But as long as there is still a high dependence on external conditions, it is too early to talk about a lasting recovery.