Rating Confirmation

S&P Global Ratings affirmed Luxembourg's sovereign credit ratings at AAA for long‑term and A‑1+ for short‑term foreign and local currency obligations, maintaining a stable outlook. The affirmation highlights the country's ample fiscal space and very high GDP per capita as buffers against ongoing economic stresses.

Economic Outlook

The agency notes that Luxembourg's real GDP remains fragile after emerging from a technical recession in 2023, with sluggish activity amid muted eurozone growth, energy price volatility, and a correction in real‑estate prices. S&P projects a modest 1.0% expansion of GDP in 2026, supported by strong employment, a June 2026 economy‑wide indexation, and consumption‑support measures addressing the current Middle‑East‑related energy price shock.

Fiscal Outlook

Luxembourg's public finances have deteriorated: the 2025 budget recorded a deficit of 2.0% of GDP, a reversal from the 0.9% surplus posted in 2024. S&P forecasts the deficit narrowing to 0.6% of GDP in 2026 but widening again to 1.0% in 2027. The pressure stems from increased defense spending to meet new NATO targets, accelerated infrastructure investment, and higher social‑security indexation.

Government Asset Position

The net government asset position was approximately 8% of GDP at the end of 2025. S&P expects this ratio to erode gradually, reaching about 5% of GDP by 2029, reflecting the cumulative impact of the fiscal trajectory.

Social Security Contribution Change

Effective 1 January 2026, Luxembourg raised the social‑security contribution rate to 25.5% from 24.0%, following negotiations with trade unions and other social partners in September 2025. This increase underpins the financing of higher defense outlays, infrastructure projects, and the broader indexation of social security benefits.

Rating Outlook

The stable outlook is premised on Luxembourg's capacity to absorb fiscal stresses without materially compromising its net asset position. S&P cautions that a significant deterioration in the budgetary path or a loss of resilience to the global shift toward a minimum corporate tax framework could trigger a downgrade.