As a result of the general economic stagnation in 2023, better-than-expected growth at the beginning of 2024, and the ongoing reduction in inflation have set the stage for a gradual expansion of activity during the forecast period.

Return to Growth Amid Accelerating Private Consumption

According to the European Commission's spring forecasts, GDP growth in 2024 is expected to be 1.0% in the EU and 0.8% in the euro area. In 2025, GDP is forecasted to increase to 1.6% in the EU and 1.4% in the euro area.

Inflation as measured by the Harmonised Index of Consumer Prices (HICP) in the EU 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 fall from 5.4% in 2023 to 2.5% in 2024 and 2.1% in 2025.

According to Eurostat's preliminary flash estimate, GDP grew by 0.3% in the first quarter of 2024, both in the EU and in the euro area. This growth, which was widespread across all member states, marks the end of the prolonged period of economic stagnation that began in the last quarter of 2022.

This year and next, economic activity is expected to be largely driven by a steady expansion of private consumption, as continued real wage growth and employment support an increase in real disposable income. However, a strong propensity to save is still partially holding back private consumption.

Conversely, investment growth appears to be moderating. Slowed by the negative housing construction cycle, it is expected to recover only gradually. While credit conditions are expected to improve over the forecast period, markets currently expect a more gradual path of interest rate reductions than anticipated in winter.

In a resilient global economy, trade recovery is expected to support EU exports. However, as domestic demand in the EU picks up, an acceleration in imports will largely offset the positive contribution of exports to growth.

 Inflation Will Continue to Decline

HICP inflation has continued to fall rapidly from the peak of 10.6% (annual) recorded in October 2022 in the euro area. It is estimated that in April this year, it will have reached 2.4%, the lowest value in the past two years.

Based on the lower-than-expected results from the first few months of this year, inflation is forecasted to continue to decline and reach the target somewhat earlier in 2025 than anticipated in the interim winter forecasts.

Deflation is expected to be driven primarily by non-energy goods and food products, while energy price inflation will rise, and services inflation will only gradually decrease alongside moderating wage pressures. Inflation in the EU as a whole is expected to follow a similar trajectory, although it will remain somewhat higher.

Labor Market Remains Strong Despite Modest Growth

Despite the slowdown in activity, the EU economy created over two million jobs in 2023, with activity and employment rates among people aged 20-64 reaching new record highs of 80.1% and 75.5%, respectively, in the last quarter of the year. Many EU labor markets remain tight.

In March, the EU unemployment rate was 6.0%, the lowest level ever recorded. This strong labor market performance is due to both a strong labor supply (supported, among other factors, by migration) and demand for labor.

Employment growth in the EU is projected to slow to 0.6% this year and to 0.4% in 2025. The EU unemployment rate is expected to remain generally stable, around its historical low.

In line with the forecasted continued deflation, nominal wage growth in the EU has begun to slow, after reaching a record high of 5.8% in 2023. This slowing trend is expected to continue.

Phasing Out Exceptional Energy Support Measures to Reduce Public Deficits

After a significant reduction in 2021 and 2022, the decline in the EU's public deficit halted in 2023 due to weaker economic activity. It is expected to resume falling in 2024 (3.0%) and in 2025 (2.9%), mainly due to the gradual phasing out of energy support measures.

In the context of higher debt servicing costs and slower nominal GDP growth, the EU's debt-to-GDP ratio is projected to stabilize this year at 82.9%, before increasing by approximately 0.4 percentage points in 2025.

High Uncertainty Amid Geopolitical Tensions

Uncertainty and downside risks affecting economic prospects have further increased in recent months, mainly due to Russia's prolonged war of aggression against Ukraine and the conflict in the Middle East.

Moreover, widespread geopolitical tensions continue to present risks. Additionally, persistent inflation in the US may lead to further delays in interest rate reductions, both in the US and globally, resulting in somewhat tighter global financial conditions.

Domestically, deflation may prove slower than anticipated, which may prompt EU central banks to delay rate cuts until inflation in the services sector stabilizes.

Some member states may also adopt additional fiscal consolidation measures in their 2025 budgets (measures not accounted for in these forecasts), which could influence economic growth in the following year.

At the same time, a decline in the propensity to save could stimulate consumption growth, while investment in housing construction could recover more quickly. Climate change-related risks increasingly affect prospects.

 Context

These forecasts are based on a set of technical assumptions regarding the evolution of exchange rates, interest rates, and commodity prices, based on information available as of April 25.

For all other source data, including assumptions regarding public policies, these forecasts take into account information available up to April 30, inclusive.

Unless new policies are announced and detailed accordingly, the projections assume the maintenance of current policies.

The European Commission publishes two sets of detailed forecasts each year (in spring and autumn) and two sets of interim forecasts (in winter and summer). The detailed forecasts cover a wide range of economic indicators for all EU member states, candidate countries, EFTA countries, and other major advanced and emerging market economies.

The interim forecasts include annual and quarterly GDP and inflation values for all member states for the current and following year, as well as aggregate data for the EU and the euro area.

The European Commission's summer 2024 economic forecasts will update the GDP and inflation projections from this publication and are expected to be presented in September 2024.