After experiencing a period of economic stagnation, which refers to a prolonged period of slow economic growth or no growth at all, in 2023, there was better-than-expected growth at the beginning of 2024, and a continued reduction in inflation, which indicates a gradual expansion of activity in the coming years.
The European Commission’s Spring Forecast predicts that GDP growth in 2024 will be 1.0% in the EU and 0.8% in the euro area. For 2025, GDP is expected to accelerate to 1.6% in the EU and 1.4% in the euro area. Furthermore, the Harmonized Index of Consumer Prices (HICP) inflation, a measure of inflation that is harmonized across all EU member states, is projected to decrease from 6.4% in 2023 to 2.7% in 2024 and 2.2% in 2025. In the euro area, it is expected to slow down from 5.4% in 2023 to 2.5% in 2024 and 2.1% in 2025.
The Forecast is meticulously crafted, based on technical assumptions about exchange rates, interest rates, and commodity prices as of April 25th. All other incoming data, including assumptions about government policies, takes into consideration information up until April 30th. The European Commission publishes two comprehensive forecasts (spring and autumn) and two interim forecasts (Winter and summer) each year, covering a broad range of economic indicators. The Summer 2024 Economic Forecast will update the GDP and inflation projections in this publication and is expected to be presented in September 2024.
“The EU economy perked up markedly in the first quarter, indicating that we have turned a corner after a very challenging 2023. We expect a gradual acceleration in growth over the course of this year and next, as private consumption is supported by declining inflation, recovering purchasing power and continued employment growth,” Paolo Gentiloni, Commissioner for Economy, said.
The steady expansion of private consumption will drive growth
Eurostat’s preliminary flash estimate shows that GDP rose by 0.3% in both the EU and the euro area in the first quarter of 2024, marking the end of a period of economic stagnation. Economic growth is expected to be driven by increased private consumption, but a strong propensity to save is holding back consumption. Investment growth is slowing down, and there is an expectation of a more gradual path of interest rate cuts, which can stimulate economic activity by making borrowing cheaper. A rebound in trade is set to support EU exports, but an increase in imports may offset this growth.
Inflation to continue declining
HICP inflation in the euro area has decreased significantly since reaching a peak of 10.6% (year-on-year) in October 2022. It is estimated to have dropped to a two-year low of 2.4% in April this year. With a lower-than-expected turnout in the first months of this year, inflation is projected to continue declining and reach the target slightly earlier in 2025 compared to the Winter Interim Forecast. The decrease in inflation is expected to be mainly driven by non-energy goods and food. In contrast, energy inflation is anticipated to rise slightly, and services inflation will decline gradually, along with a moderation in wage pressures. Inflation in the EU as a whole is expected to follow a similar path, though at a slightly higher rate.
The labour market remains strong despite modest growth
In 2023, the EU economy created over two million jobs, with record high activity and employment rates. The unemployment rate stood at a record low of 6.0%. Labour markets across the EU remain tight. Employment growth is projected to ease to 0.6% this year and 0.4% in 2025. Nominal wage growth has started decelerating after peaking at 5.8% in 2023.
“The EU economy has held steady in the face of exceptional challenges over the past years and we can now look forward to a return to modest growth rates, picking up further in 2025. Labour markets continue to hold up well with high employment rates, and private consumption is up,” stated Valdis Dombrovskis, Executive Vice-President for an Economy that Works for People.
The removal of special energy support measures is expected to decrease government deficits.
After experiencing a significant decrease in 2021 and 2022, the decline in the EU government deficit stopped in 2023 due to a weakening economic activity. However, the decline is expected to resume in 2024 (3.0%) and 2025 (2.9%), mainly because of the phase-out of energy-support measures. With higher debt servicing costs and lower nominal GDP growth, the debt-to-GDP ratio in the EU is projected to stabilize this year at 82.9% before increasing by around 0.4 percentage points in 2025.
Increased uncertainty amid geopolitical tensions
The economic outlook is facing increased uncertainty and downside risks due to Russia’s prolonged war of aggression against Ukraine and the conflict in the Middle East. Broader geopolitical tensions also pose risks. Additionally, persistent inflation in the US may lead to delays in rate cuts, resulting in tighter global financial conditions. Domestically, inflation may decline more slowly than expected, leading EU central banks to delay rate cuts until services inflation firms. Some Member States may implement additional fiscal consolidation measures in their 2025 budgets, impacting economic growth next year. On the positive side, decreasing saving propensity could boost consumption growth, and residential construction investment could recover faster. Climate change risks are also increasingly influencing the outlook.
“Government deficits should inch lower following the withdrawal of almost all energy support measures, but public debt is set to increase slightly next year, pointing to a need for fiscal consolidation while protecting investment. Our forecast remains subject to high uncertainty and – with two wars continuing to rage not far from home – downside risks have increased,” Commissioner Gentiloni added.
