This Survey is published on the responsibility of the Economic and Development Review Committee of the OECD, which is charged with the examination of the economic situation of member countries.

The economic recovery from COVID has slowed due to war-related uncertainty and inflationary pressures. Public support can help vulnerable households cope with the higher cost of living but should be well targeted and time-bound, and maintain incentives for energy savings.

Luxembourg has the highest per capita income levels in the OECD when measured by GDP, and the third-highest after Switzerland and Norway, when measured by gross national income (, panel A). Growth is jobs-rich, with the unemployment rate one of the lowest in the OECD. However, growth in GDP per capita has been below the OECD average since the global financial crisis (2008-09), following high growth in the early 2000s (, panel B). The economy proved resilient in face of the shock from the 2020-21 COVID-19 pandemic, and the recovery was broad-based. The Russian war of aggression against Ukraine and high inflation in 2022 have affected consumer and business confidence, stifling the economic recovery and making the outlook more uncertain.

Luxembourg announced ambitious climate targets to accelerate progress towards carbon neutrality in 2050. These objectives require significant mitigation efforts, as progress in the green transition has stalled in the past few years. The emissions reductions required in the next 30 years are greater than the declines of the 1990s, which were driven by reforms to the steel industry and the closure of coal power plants. At the same time, the targets can allow Luxembourg to benefit from the green transition. Owing to the specificities of Luxembourg’s economy, most of the efforts will need to be focused on the transport and housing sectors. The transition will require deep changes in the behaviour of households, whose high carbon footprint is due to car usage and home heating. Sustainably reducing emissions also requires tackling cross-border fuel sales for both freight and commuters. Furthermore, reforms in agriculture are needed to reduce pressures on biodiversity. A wide range of policy tools need to be used to increase public acceptability. A higher carbon price over the medium and long term would lead to lower fuel sales and greater energy efficiency. Better spatial planning policy could reduce urban sprawl and car dependency. Stricter regulations and enhanced incentives would facilitate more environmentally-friendly agricultural practices.