Real GDP growth is projected to fall by 0.6% in 2023, before recovering to 1.4% in 2024 and 2.0% in 2025. The below-average growth in 2023 is mainly due to weak investment linked to tighter financing conditions and to lower net exports, while their rebound explains the improvement in 2024. After reaching a record high in 2022, headline inflation is set to decelerate over the forecast horizon, supported by measures to mitigate the impact of high energy prices. The projected government deficits are expected to drive up the government debt-to-GDP.
| Indicators | 2023 | 2024 | 2025 |
|---|---|---|---|
| GDP growth (%, yoy) | -0,6 | 1,4 | 2,0 |
| Inflation (%, yoy) | 3,2 | 3,0 | 1,8 |
| Unemployment (%) | 5,5 | 5,9 | 6,0 |
| General government balance (% of GDP) | -1,9 | -2,1 | -1,0 |
| Gross public debt (% of GDP) | 26,8 | 28,7 | 29,3 |
| Current account balance (% of GDP) | -1,2 | -2,0 | -3,0 |
Growth expected to remain below pre-pandemic levels up to 2025
After a small rebound in 2023-Q1, real GDP contracted by 0.1% q-o-q in 2023-Q2( ) on the back of a decrease in investment and exports. The weakening of activity in recent quarters was mainly observed in the financial, trade and construction sectors. Domestic demand is underpinned by the growth in private and government consumption, also supported by the introduction of additional government support measures and three wage indexations in 2023. Nevertheless, private consumption growth is projected to decline slightly due to the slowdown in the labour market, which is expected to lead to precautionary savings. Therefore, savings rates are still well above historical levels. At the same time, investment is expected to remain weak due to the uncertain economic outlook in combination with the impact of higher interest rates weighing on bank lending and loan demand, especially for mortgages. A negative contribution from net exports, due to negative export growth, is set to result in a GDP growth of -0.6% in 2023, well below the pre-pandemic trend. In 2024 and 2025, with an expected GDP growth rate of 1.4% and 2.0% respectively, the economy is forecast to recover, mainly driven by domestic demand, supported by private consumption and investment while government consumption levels off, along with a more neutral contribution from net exports.
Labour market set to slow down
Mirroring the decline in economic activity in 2023, the labour market is expected to weaken. Employment growth is projected to slow down from 3.4% in 2022 to 1.7% in 2023 and 1.2% in 2024, before starting to recover to 1.5% in 2025. Unemployment dropped to 4.6% in 2022, but is expected to increase to 5.5% in 2023, 5.9% in 2024 and 6.0% in 2025.
Fiscal measures to lower headline inflation
Headline inflation increased to a record high of 8.2% in 2022, mainly driven by energy and food price increases. Energy price inflation is, however, set to moderate over the forecast horizon, amid expected lower energy prices supported by energy measures (Solidaritéitspak 3.0). HICP inflation is, thus, set to drop to 3.2% in 2023, 3.0% in 2024 and further down to 1.8% in 2025. Although wage growth is strong in 2023, the fact that several public services became free will contribute to a less pronounced increase in services prices. Headline inflation excluding energy and food prices is expected to decrease from 4.2% in 2022 to 3.9% in 2023 and this trend is expected to continue in 2024 and 2025, when it would decline to 2.7% and 2.3% respectively.
Economic slowdown and cost of fiscal support measures weigh on public finances
In 2023, the government deficit is projected to widen to 1.9% of GDP (from 0.3% in 2022) amid weak economic growth and an increasing impact of measures to mitigate the impact of high energy prices and to support household purchasing power and the income of corporations. Energy-related measures have an estimated impact of 0.9% of GDP, with the other measures attaining 0.6% of GDP. Expenditure is also rising due to three successive automatic wage indexations pushing-up compensation of employees and social transfers. Revenue growth is expected to moderate in 2023, from the high growth rate in 2022, due to the slowdown in economic activity, including in housing and the fund management sector. The temporary 1 pp. VAT rate reduction in 2023 also contributes to this moderation. Nevertheless, revenue continues to benefit from the strong labour market via higher personal income tax and social contributions.
In 2024, the government deficit is projected to increase to 2.1% of GDP mainly as a result of lower growth in revenues on the back of the economic slowdown and revenue measures to support household and corporations. The revenue measures relate to the wage compensation of the third index tranche for corporates that was triggered in September 2023 and that is implemented via a reduction in social security contributions in 2024. In addition, revenues are reduced by the upward adjustment of the personal income tax brackets. Revenues are supported in 2024 by the reversal of the 1 pp. VAT rate reduction in 2023. The net budgetary cost of measures to mitigate the impact of high energy prices (0.4% of GDP) and of the other measures (0.9% of GDP) remains at a high level in 2024. Expenditure growth is projected to slow down due to lower subsidies and a single wage indexation expected for 2024, which moderates the growth of compensation of employees and social transfers. In 2025, the government deficit is forecast to decline to 1.0% of GDP. This is mainly driven by the lower impact of the other measures (0.5% of GDP) and the energy-related measures (0.3% of GDP, gas and electricity price measures are assumed to remain in place until end 2025), and lower growth in compensation of employees. Revenue is projected to recover from the low growth rate in 2024 driven by higher income and wealth taxes.
The general government deficits are projected to drive the debt-to-GDP ratio upwards, from 24.7% in 2022 to 29.3% in 2025.