Autumn 2024 Economic Forecast: A gradual rebound in an adverse environment

Following a prolonged and broad-based stagnation, the EU economy resumed growth in the first quarter of this year. As projected in spring, the expansion continued at a subdued, yet steady, pace throughout the second and third quarters, amidst further abating inflationary pressures. The conditions for a mild acceleration of domestic demand appear in place, despite heightened uncertainty.

This Autumn Forecast projects real GDP growth in 2024 at 0.9% in the EU and 0.8% in the euro area. For the EU, this is 0.1 pps. lower with respect to spring, while it is unchanged for the euro area. Growth in the EU is expected to pick up to 1.5% in 2025, as consumption is shifting up a gear and investment is set to rebound from the contraction of 2024. In 2026, economic activity is projected to expand by 1.8%, on the back of continued expansion of demand. Growth in the euro area is set to follow similar dynamics and attain 1.3% in 2025 and 1.6% in 2026. The disinflationary process that started towards end-2022 continued over the summer. Notwithstanding a slight pick-up in October, largely driven by energy prices, headline inflation in the euro area is set to more than halve in 2024, from 5.4% in 2023 to 2.4%, before easing more gradually to 2.1% in 2025 and 1.9% in 2026. In the EU, the disinflation process is set to be even sharper in 2024, with headline inflation falling to 2.6%, from 6.4% in 2023, and to continue easing to 2.4% in 2025 and 2.0% in 2026.

Household disposable income kept expanding at a healthy pace in the first half of the year, supported by expanding employment and continued recovery in real wages. By mid-year, the purchasing power of wages had recouped almost half of the loss caused by high inflation. 

Households, however, appeared reluctant to consume their extra income. With high inflation still fresh in mind, purchasing power remaining below its mid-2022 peak and the opportunity to reap greater financial returns from high interest rates, households kept saving an increasing share of their income. 

In the second quarter of 2024, the household saving rate stood at 14.8% - above expectations and more than 3 pps. above its pre-pandemic long-term average (see Box I.2.3). At the same time, investment disappointed, contracting by more than 2.5% in the first half of the year. More than half of the contraction was due to one-off transactions in intellectual property products. Net of this volatile component, the contraction was still deep and broad-based across asset categories. Elevated uncertainty is estimated to have weighed on consumption and especially investment (see Special Issue 3). A rebound in global goods trade and continued expansion of trade in services nudged exports of goods and services up by 0.5% in the first half of the year. Imports growth lagged considerably behind, and net external demand thus contributed positively to growth. Consumption is estimated to have gained strength in the third quarter, but investment to have further contracted.

Concerns over OPEC+ production cuts and the intensification of the conflict in the Middle East have driven recent volatility in Brent oil prices. Still, their gradual decline over the summer has put annual average futures’ oil prices on a downward path over the forecast horizon, pushed down by expectations of weak global oil demand, especially in China, and increased production by OPEC+ and the US. Compared to the spring assumptions, at the cut-off date of the forecast, futures oil prices were 7% and 10% lower in 2024 and 2025 respectively. Meanwhile, prices of gas have gone up since spring and are expected to be higher than assumed in the Spring Forecast in both 2024 and 2025, while wholesale prices of electricity are projected slightly higher in 2024 but lower in 2025.

Importantly, prices of both gas and electricity are expected to decline in 2026 from their 2025 levels.

After the strong deflationary impact of energy inflation tapered out, consumer inflation largely moved sideways in the first months of the year. It resumed its decline in August, under renewed downward pressures from energy and continued moderation in inflation of non-energy goods. Euro area inflation dropped to 1.7% in September, before rebounding to 2% in October, as an uptick in oil prices and strong base effects lifted energy inflation up again. Despite some expected volatility caused by base effects and expiring energy-related support measures, the disinflationary process appears solidly in place. Energy inflation is projected to only make a negligible contribution to headline inflation, despite a slight pick-up in 2026. Price pressures in non-energy goods are set to moderate further with inflation of food and non-energy industrial goods stabilising around historical averages by the end of the forecast horizon. Importantly, the strong inflationary pressures in services are set to remain strong until early 2025 and start moderating thereafter, driven by slowing wage growth and a projected pick-up in productivity, and supported by negative base effects.

In October, the European Central Bank cut its policy rate for the third time since the beginning of its loosening cycle in May. At the cut-off date of this forecast, markets priced the euro area deposit facility rate below 3% by the end of the year. By the end of 2025, the policy rate is expected to fall further to around 2%, some 60 basis points lower than expected in spring, and to stabilise around that level for the rest of the forecast horizon. Most central banks in non-euro area Member States are also expected to loosen the monetary stance, with somewhat more pronounced cuts in Poland and especially Romania. Long-term rates in the euro area (10-year) decreased in recent months, but by far less than short-term rates. They are now expected to stay slightly above 2% over the forecast horizon, with the downward adjustment since spring largely reflecting lower inflation expectations. Meanwhile, bank lending data for the euro area show signs of revival. Net lending is expanding again, but remains weak in nominal terms. Demand for housing loans is resuming and credit standards are easing. For enterprises, credit standards have not yet started loosening, but in the last quarter they stopped tightening – heralding a turnaround in credit flows.

The EU labour market held up well in the first half of 2024.  The economy still generated jobs for 750 000 workers. This brings the number of new employed persons since the start of the pandemic (2019-Q4) to a sizeable 8 million, largely benefiting women, older workers and foreign-born jobseekers. However, the pace of employment growth decelerated, and the job intensity of growth appears to be gradually normalising. Though still tight by historical standards, the EU labour market started loosening, with the vacancy rate nearing its pre-pandemic level and business managers’ labour shortages further abating, especially in industry. Labour demand growth, however, continued to outpace supply: 

in October, the EU unemployment rate reached a new historical low of 5.9%. Employment growth is set to slow down from 0.8% in 2024 to 0.5% in 2026. Following a contraction in 2023, productivity is set to stagnate in 2024. It is then expected to post a cyclical rebound in 2025 and to gain even more strength in 2026. Still, productivity growth is set to remain subdued. 

This likely reflects continuing weak innovation capacity and business dynamism. Composition effects have so far not played a major role (see Special Issue 2). The unemployment rate is projected to edge further down, reaching 5.9% in the EU and 6.3% in the euro area in 2026. After the peak reached in 2023 (6.1%), wage growth in the EU is still expected at a healthy pace in 2024 (4.9%). It is then set to slow down markedly to 3.5% and 3% in 2025 and 2026 respectively. Still, wage growth will be sufficiently above inflation to allow full recoup of real wages by next year in the EU and the following year in the euro area.

As inflation continues to ease, household real disposable income is set to grow further in both 2025 and 2026. With strong balance sheets, abating incentives to save and improving credit conditions, households are projected to gradually lower their saving rate, to 14% in 2026. Consumption growth is therefore projected to accelerate throughout the forecast horizon.

Strong corporate balance sheets, recovering profits, improving credit conditions and the impulse of the Recovery and Resilience Facility set the stage for a robust rebound of investment. After contracting this year, investment is projected to expand in 2025 and further accelerate in 2026. In 2025, residential construction is still set to be held back by subdued household investment. 

The general government sector, however, is projected to boost investment in infrastructure, also with the support of the RRF. As the housing sector finally recovers in 2026, construction investment is set to expand by 3.3%. Equipment investment is also forecast to rebound in 2025 and continue expanding the following year. Roughly half of the projected RRF-grant related expenditure is set to support corporates in addressing capacity adjustment needs, including for the transition to energy saving and low-emission production. 

Still, elevated uncertainty and structural shifts are expected to weigh on segments of manufacturing, especially on the energy-intensive and automotive industries. 

Global economic activity held up well in the first half of the year, largely thanks to a pick-up in activity in the US. Excluding the EU, global growth is projected to hover around 3.5% over the forecast horizon. This is broadly in line with projections back in spring, though with some changes in geographical composition. Namely, growth in the US is seen a bit stronger in 2024 (at 2.7%) before moderating to just above 2% in 2025 and 2026. Growth prospects in the UK and Japan brightened a bit as well. The outlook for China, in contrast, is slightly weaker than previously expected. The Chinese economy is projected to grow by 4.9% this year and, notwithstanding the recent stimulus package, to continue slowing down to 4.4% in 2026. India is expected to remain the fastest growing major economy over the forecast horizon (see Special Issue 1), even if real GDP growth is projected to gradually slow down.  As demand for goods is expected to recover and the manufacturing sector to regain momentum, global merchandise trade is set to continue rebounding in the second half of 2024. Global services trade is expected to keep expanding at a solid pace, driven by tourism and digital services. All in all, global trade excluding the EU is projected to expand by 3.2% in 2024, and to accelerate to 3.5% in 2025, before edging down to 3.2% in 2026. This suggests that the intensifying headwinds against the expansion of global trade, including the increasing number of trade restrictions, have not (yet) significantly affected global trade (see Box I.2.1). 

This positive trade dynamics is set to support an expansion of EU exports. Following a broadly flat yearly growth of exports of goods in 2024, in 2025 and 2026, merchandise exports are projected to pick up speed. Data for the first half of the year show that export of services are in for a strong performance this year, lifting the expected growth of aggregate exports to 1.4% in 2024. In 2025 and 2026, exports of services are projected to grow at roughly the same pace as goods, as the catch-up dynamics of global travel expenditure gradually tapers off. After broadly stagnating this year, imports of goods and services in 2025 and 2026 are expected to rebound visibly. As a result, after supporting real GDP growth in 2024, net exports are projected to no longer contribute to growth in 2025 and 2026. The surplus in the balance of current transactions with the rest of the world is set to move down from 3.6% from 2024 to 3.4% in 2025 and 3.3% in 2026, as the improvement in terms of trade comes to a halt.

The EU general government deficit is expected to decline in 2024 by around 0.4 pps. to 3.1% of GDP, driven by revenue windfalls and fiscal consolidation efforts. In 2025, the deficit is forecast to decrease marginally, to 3.0%, as further budgetary restraint is offset by revenue shortfalls. In 2026, the positive economic momentum is set to reduce the deficit further to 2.9%. 

In the euro area, the deficit is projected to gradually decrease from 3.0% of GDP in 2024 to 2.8% in 2026. Notwithstanding the contribution of EU funds, discretionary fiscal policy is estimated to have a slightly contractionary impulse on the EU economy in 2024, and a broadly neutral effect in 2025 and 2026. The contractionary fiscal stance in 2024 is largely due to a temporary dip in EU-financed expenditure and the phase-out of housing tax credits in Italy. In 2025, a contractionary impulse of primary net current expenditure is broadly offset by higher public investment, also reflecting the uptake of the RRF and other EU funds. These projections do not include measures needed to achieve the adjustment paths set out in Member States’ Medium-Term Fiscal-Structural Plans (MTFSPs) as they will be specified only in late 2025. The aggregate debt-to-GDP ratio of the EU is projected to increase slightly, from 82.1% in 2023 to 83.4% in 2026. This follows an almost 10 pps. decrease between 2020 and 2023 and reflects the effect of still elevated deficits that are no longer offset by high nominal growth, while the impact of higher interest rates becomes more visible. In the euro area, government debt is forecast to rise from 88.9% of GDP in 2023 to 90% in 2026.

The EU’s economic outlook remains highly uncertain, with risks largely tilted to the downside. Russia’s protracted war of aggression against Ukraine and the intensified conflict in the Middle East fuel geopolitical risks and continued vulnerability of European energy security. A further increase in protectionist measures by trading partners could weigh on global trade, with negative impact on the EU's highly open economy. Low productivity growth may make it increasingly difficult for firms to sustain wage growth, leading them to either reduce labour or pass rising costs to consumers. Moreover, delays in the implementation of the RRF or a more restrictive fiscal stance in 2026 as the MTFSPs are implemented could further dampen economic activity. Finally, the recent floods in Spain illustrate once again the dramatic consequences that the increasing frequency and scope of natural hazards can have not only for the people affected and their habitat, but also for the economy.

Press release of 15 November 2024

EC press conference by Commissioner Paolo GENTILONI on the Autumn 2024 Economic Forecast