Real GDP growth is projected to remain low in 2023, at 1.6%, before recovering to 2.4% in 2024. The below-average growth in 2023 is mainly due to lower private consumption and weaker investment amid tighter financing conditions and geopolitical uncertainty. After a record high in 2022, headline inflation is set to decelerate in 2023 and 2024, supported by the implementation of measures to mitigate the impact of high energy prices. These measures are also expected to weigh on the general government balance in 2023 and 2024. Public deficit is projected to increase the general government debt-to-GDP ratio, although it is set to remain at a low level.
| Indicators | 2022 | 2023 | 2024 |
|---|---|---|---|
| GDP growth (%, yoy) | 1,5 | 1,6 | 2,4 |
| Inflation (%, yoy) | 8,2 | 3,2 | 2,6 |
| Unemployment (%) | 4,6 | 4,8 | 5,0 |
| General government balance (% of GDP) | 0,2 | -1,7 | -1,5 |
| Gross public debt (% of GDP) | 24,6 | 25,9 | 27,0 |
| Current account balance (% of GDP) | 5,7 | 7,2 | 7,4 |
Growth set to recover pre-pandemic levels in 2024
Real GDP contracted by 3.8% q-o-q in 2022-Q4 on the back of a decrease in private consumption, exports and investment, in particular in the construction sector. The weakening of activity was mainly observed in the financial sector, with a sharp drop in value added (-10.8% q-o-q) mainly caused by the volatility and decline in market valuation of financial assets. In 2022, GDP growth was 1.5% y-o-y, driven by private and public consumption.
Private consumption growth is projected to rebound, supported by the use of excess savings and by the introduction of additional government support measures. Domestic demand is also underpinned by the growth in government consumption due to higher compensation of employees and intermediate consumption. Nevertheless, investment is expected to remain weak as rising interest rates weigh on the borrowing capacity and on the demand for mortgages. Furthermore, a positive contribution from net exports, due to a recovery of export and import growth, is set to result in a GDP growth of 1.6% in 2023, below the pre-pandemic trend. In 2024, with an expected GDP growth rate of 2.4%, the economy is set to return to its pre-pandemic growth trend, mainly supported by a recovery in investment and a further positive contribution from net exports.
Labour market set to remain resilient
Following the slowdown in economic activity in 2023, the labour market is forecast to weaken slightly, but remain resilient. Employment growth is set to decline from 3.5% in 2022 to 2.4% in 2023 and to 2.3% in 2024. Unemployment dropped to 4.6% in 2022 and is expected to increase only moderately to 4.8% in 2023 and 5.0% in 2024. This can be explained by the still high job vacancy rate and by the improvement in employment prospects in some sectors such as construction.
Fiscal support to lower headline inflation, while core inflation edges up
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, expected to moderate over the forecast horizon, amid assumed lower energy prices supported by the Solidaritéitspak. HICP inflation is, thus, set to drop to 3.2% in 2023 and 2.6% in 2024. In turn, core inflation is forecast to rise from 4.4% in 2022 to 5.1% in 2023, reflecting higher wages and non-industrial goods prices. In 2024, core inflation is projected to decline to 3.2% following a decline in all its components.
Support measures drive the decline in the general government balance
In 2022, government finances registered a small surplus of 0.2% of GDP mainly driven by high revenue growth from a strong labour market and high inflation-related tax income. In 2023, the government balance is projected to turn into a deficit of 1.7% as a result of moderate GDP growth and of the increase in expenditure due to the Solidaritéitspak. The net budgetary cost of the energy support measures is projected in the Commission 2023 spring forecast at 1.1% of GDP in 2023, compared with 0.5% in 2022.
In addition, the automatic wage indexation raises expenditure on compensation of employees and social transfers. Revenue growth is expected to decline in 2023, from the high growth rates observed in 2022, mainly due to lower GDP growth and inflation, the 1 pp. VAT reductionand a slowdown in activity in the housing and fund management sector. Nevertheless, revenue continues to benefit from the strong labour market via higher personal income tax and social contributions.
In 2024, the deficit is projected at 1.5% of GDP as a result of a lower growth rate in expenditure, even though the Solidaritéitspak has been extended until the end of 2024. The Commission currently assumes the net cost of energy support measures at 0.5% of GDP in 2024. Revenue is also expected to grow at a slower pace, on the back of the projected decline in inflation, and therefore less wage indexations, and of the reversal of the 1 pp. VAT reduction. Public investment is planned to remain above 4% of GDP until 2024, geared towards the green and digital transition, public infrastructure, and housing. The general government deficit is set to push the debt-to-GDP ratio from 24.6% in 2022 to 27.0% in 2024.