Economic activity is set to slow down in 2024 (1.1% annual growth), before gradually increasing to 1.2% in 2025 and 1.5% in 2026, supported by improving domestic and external demand. The withdrawal of energy support measures is driving inflation up to 4.4% in 2024 but easing inflationary pressures over the forecast horizon are set to bring inflation down to 2.9% in 2025 and 1.9% in 2026. In the absence of additional measures, the government deficit is projected to increase over the forecast horizon due to rising expenditure, mainly related to ageing costs and interest payments. The government debt is also expected to continue its increasing path
| Indicators | 2024 | 2025 | 2026 |
|---|---|---|---|
| GDP growth (%, yoy) | 1,1 | 1,2 | 1,5 |
| Inflation (%, yoy) | 4,4 | 2,9 | 1,9 |
| Unemployment (%) | 5,6 | 5,7 | 5,6 |
| General government balance (% of GDP) | -4,6 | -4,9 | -5,3 |
| Gross public debt (% of GDP) | 103,4 | 105,1 | 107,2 |
| Current account balance (% of GDP) | 0,4 | 0,3 | 0,3 |
Economic activity to grow moderately
Growth during the first half of 2024 was subdued mainly due to weak domestic demand. Private consumption increased only moderately, due to weakening purchasing power and employment growth. While business investment grew significantly, driven by exceptional transactions, household investment remained constrained. Domestic demand is projected to remain sluggish in the second half of the year. Exports and imports are both set to decrease this year, although the slower decrease of exports results in a positive contribution of net exports to growth.
Private consumption is projected to rise moderately over the forecast horizon, in line with the modest growth of disposable income. While decreasing, the saving rate is expected to remain high in 2025-26, as indicated by weak consumer confidence indicators. The declining number of building permits points to a further decrease in residential construction in 2025 but improving financing conditions are expected to eventually lead to a slight rebound in 2026. Business investment is set to continue to increase although at a more moderate pace, notably supported by projected lower financing costs and better outlook for the external demand. Overall, investment is projected to grow by 1.8% in 2025, and by 1.9% in 2026, also underpinned by the deployment of the RRP. Exports are set to increase in 2025, driven by the expected improvement of the external environment and of cost competitiveness, mainly deriving from lower wage growth. However, rising imports boosted by private consumption are projected to offset export growth, resulting in a negative contribution of net exports to GDP growth. In 2026, net exports are set to have a zero contribution to growth.
All in all, the GDP growth is forecast at 1.1% in 2024, 1.2% in 2025, and 1.5% in 2026.
Labour market set to remain stable
Employment growth slowed down in the first half of 2024, mainly driven by a decrease in the industrial and retail sectors. It is expected to remain sluggish in the second half of the year, reaching just 0.3% for the year as a whole. Employment is set to increase steadily over the forecast horizon. At the same time, the increase of the retirement age is expected to bolster labour market participation. The unemployment rate is expected to remain broadly stable at around 5.6%. The wage growth, driven by automatic wage indexation, is projected to slow down over the forecast horizon, notably due to projected deceleration of inflation.
Inflation to rebound, before easing gradually
Headline inflation is projected to rise to 4.4% in 2024, mainly reflecting the withdrawal of government measures aimed at mitigating the impact of high energy prices. In addition, the Economic activity is set to slow down in 2024 (1.1% annual growth), before gradually increasing to 1.2% in 2025 and 1.5% in 2026, supported by improving domestic and external demand. The withdrawal of energy support measures is driving inflation up to 4.4% in 2024 but easing inflationary pressures over the forecast horizon are set to bring inflation down to 2.9% in 2025 and 1.9% in 2026.
Government deficit impacted by increasing ageing costs and interest expenditure
In 2024, the government budget deficit is projected to increase to 4.6% of GDP. The savings generated by the phasing-out of the measures to mitigate the impact of high energy prices and to support firm’s competitiveness (0.4% of GDP) are expected to be fully offset by a structural rise in expenditure and a slowdown in revenues from indirect taxes. The increase in total expenditure is driven by ageing related costs for pensions and health care, interest expenditure on public debt, and buoyant government investment.
In 2025, the deficit is forecast to increase further to 4.9% of GDP considering that no new major measures have been planned at this stage. Expenditure on ageing-related and other social benefits are set to continue their upward trend. In addition, interest expenditure is projected to increase further, as a result of the higher government debt level and a higher refinancing rate on maturing debt, even though interest rates are expected to fall. These increases are only partly offset by the expected moderation in government investment following the election year. In 2026, the expenditure trend is set to continue and to outpace revenue growth, resulting in a further increase of the deficit to 5.3%. In 2025 and 2026, there is a fiscal risk related to a pending transaction that may result in higher government expenditure.
In 2024, general government debt is projected to increase only moderately, to 103.4% of GDP, mainly due to a debt reducing stock flow adjustment that stems from the lower outstanding balance of short-term state notes. In 2025 and 2026, the debt is projected to increase faster to 107.2% of GDP, driven by the general government deficit.