The New Year has brought some much-needed relief for our barometer. It's picked up six points and is cautiously optimistic at +18. This rally is largely because of increased confidence in Luxembourg.
Locally, we’ve seen increased industrial production. This has brought the manufacturer’s sentiment more in line with recent trends. Despite Statec revising projections downwards, GDP growth is still expected to reach 3.5% in 2017 and 4.5% in 2018. Headline inflation is expected to decrease to 1.4% in 2018, down from 1.7% last year. This is mainly because of oil-price related effects fading away and the introduction of state subsidies for child-care at the end of the year. The year-on-year growth of salaried employment in Grand Duchy has stabilised at a little over 3%, and we expect this to remain more or less the same in 2018. Consequently, unemployment should decrease. Finally, turning to the budget. We expect the surplus remain at around 1.5% of GDP for 2017 and 2018. This is partly attributable to the new index tranche and to the collection of large amounts of outstanding corporate income tax in 2017.
Turning to the Eurozone, despite the slight drop in the ZEW index, down -1.9 points, confidence in the Eurozone remains high. The composite PMI reached numbers not seen since 2011, standing at 58.1 at the end of the year and growth projections are confirmed at 2.6% for 2017. According to the ECB, unemployment should continue to decline and fall below 8.5% by the end of the year. The ECB also revised its inflation projections downwards, to 1.5% for 2017 and 1.4% in 2018.
The positive environment we are currently seeing has improved business confidence in the Eurozone. This in turn led to businesses hiring more staff in December to keep pace which is likely to continue into 2018. This level of job creation is the highest we’ve seen in the last 17 years, with employment increasing in Spain, Italy, Ireland, Germany, and France. However, with demand outpacing supply for many goods and services, inflationary pressures could build. With inflation largely driven by higher oil prices, the stabilisation of energy prices and the continuing appreciation of the euro against the dollar remain a double threat.