In 2017, the value-added of the financial sector dropped by 3.3%, weighing down the economic growth of the country.
This performance is rather disappointing in relation to the increased confidence in the sector, the upturn of the stock market and the eurozone’s result (-0.2%). Low rates, restructuring and regulatory adaptation continue to hamper the performance of the financial activities.
The eurozone financial sector’s confidence indicator has reached its highest levels since early 2011. Business forecasts, profits and demand development prospects have been pointing in the right direction for all players in the sector. Nevertheless, this renewed confidence is not reflected in the sector’s results in terms of added value, whereas these two are usually closely correlated. This stall has been particularly significant in the third quarter: while the confidence indicator continued to grow, reaching its highest level in seven years, the added value of the financial sector fell by 3.6% compared to the previous year.
The financial sector might have improved more in the eurozone than in Luxembourg in terms of volume, but Luxembourg’s performance is still better in terms of value and employment. The added value of the financial sector in the eurozone has dropped by 0.2% in volume and 0.5% in value (compared to -3.3% and +1.9% in Luxembourg). In a context of numerous restructuring activities, eurozone employment has also fallen by 0.9% whereas it is up 2.8% in Luxembourg.
Banks have also influenced the results of the sector, for instance the declining value-added in the financial sector in Luxembourg is primarily explained by the weak performance of the banks in 2017 (-6% of GVA in volume). They had to increase expenditure to adapt to digitalisation and the sector's growing regulations, while the outlook for their income was not as high as hoped. As a result, the net commission income only grew by 2.7% and the interest margin by 3.4%, while the operating costs increased to 4.9%. This increased expenditure primarily affects private banks and reflects investment in new technology infrastructures and costs incurred to ensure compliance with new regulations.
Despite the maintenance of income from investment funds, insurance and auxiliaries, the increased cost of financial services related to stock market prices has had a negative impact on the development of the volume of the funds and the auxiliaries, which ended up impacting the GDP.
The drop in value-added in the financial sector is therefore rather disappointing in relation to confidence indicators and available volume. A study will be developed in the next economic meeting report to attempt to explain the sector’s underwhelming performance.