Executive summary
This Winter interim Forecast lowers the growth outlook for this year and sets inflation on a lower downward path than projected last autumn. Economic activity in 2023 is now estimated to have expanded by only 0.5% in both the EU and the euro area. The growth outlook for 2024 is revised down to 0.9% in the EU and 0.8% in the euro area. In 2025, economic activity is still expected to expand by 1.7% in the EU and 1.5% in the euro area. EU HICP inflation is forecast to fall from 6.3% in 2023 to 3.0% in 2024 and 2.5% in 2025. In the euro area, it is projected to decelerate from 5.4% in 2023 to 2.7% in 2024 and to 2.2% in 2025.
Last year’s modest growth largely owes itself to the momentum of the post-pandemic economic rebound in the previous two years. Already towards the end of 2022, the economic expansion came to an abrupt end and activity has since been broadly stagnating, against the background of falling household purchasing power, collapsing external demand, forceful monetary tightening and the partial withdrawal of fiscal support in 2023. The EU economy thus entered 2024 on a weaker footing than previously expected. After narrowly avoiding a technical recession in the second half of last year, prospects for the first quarter of 2024 remain subdued.
Still, there have been positive developments since the 2023 Autumn Forecast, particularly when it comes to inflation. The sharp fall in energy prices was followed by a broad-based and faster-than-expected moderation of price pressures. As energy supply keeps outstripping demand, spot and future prices for oil and especially gas are now significantly lower than assumed in the Autumn Forecast. Retail energy prices are therefore set to fall further, helping EU recover some of the competitiveness lost during the energy crisis. Despite mild upward pressure from higher shipping costs in the wake of Red Sea trade disruptions, underlying inflation continues on a steady downward path. Credit conditions are still tight, but markets now expect the loosening cycle to start earlier. Remarkably, the EU labour market continues to perform strongly.
All in all, the conditions for a gradual acceleration of economic activity this year appear to be still in place. As inflation decelerates, real wage growth and resilient employment should support a rebound in consumption. Despite falling profit margins, investment is set to benefit from a gradual easing of credit conditions and further deployment of the Recovery and Resilience Facility (RRF). The pace of growth is set to stabilise broadly in line with potential, as of the second half of this year.
Protracted geopolitical tensions and the broadening of the Middle East conflict to the Red Sea tilt the balance of risks towards more adverse outcomes. Additional trade disruptions could bring renewed stress to supply chains, hampering production and adding price pressures. Domestically, a faster recovery of consumption, higher-than-expected wage growth and a lower-than-anticipated fall in profit margins could hold back the disinflation process. On the downside, a more persistent transmission of the still tight monetary conditions could further delay the rebound in economic activity, pushing inflation lower. Climate risks and the increasing frequency of extreme weather events continue to pose threats.
The European economy has left behind it an extremely challenging year, in which a confluence of factors severely tested our resilience. The rebound expected in 2024 is set to be more modest than projected three months ago, but to gradually pick up pace on the back of slower price rises, growing real wages and a remarkably strong labour market. Investment is expected to hold up, buoyed by easing credit conditions and the flow of RRF funding. In 2025, growth is set to firm and inflation to decline to close to the ECB’s 2% target. Geopolitical tensions, an ever more unstable climate and a number of crucial elections around the world this year are all factors increasing the uncertainty around this outlook.
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