Following economic stagnation in 2023, real GDP growth is projected to pick up to 0.8% in 2024, 1.6% in 2025 and 1.5% in 2026. Inflation has come down substantially while wages are expected to increase by well over 6% in 2024. The resulting improvement in real wages is expected to support private consumption going forward. Investment growth was negative in the second half of 2023 but is set to recover gradually because of easing of financial conditions and positive public investment growth. The government deficit is forecast to increase to 1.9% in 2025 due to tax cuts and the impact of a court ruling on unduly paid taxes. The deficit in 2026 is set to widen further due to expenditure related to a reform of military pensions.
| Indicators | 2024 | 2025 | 2026 |
|---|---|---|---|
| GDP growth (%, yoy) | 0,8 | 1,6 | 1,5 |
| Inflation (%, yoy) | 3,2 | 2,4 | 1,9 |
| Unemployment (%) | 3,7 | 3,8 | 3,9 |
| General government balance (% of GDP) | -0,2 | -1,9 | -2,4 |
| Gross public debt (% of GDP) | 43,3 | 44,3 | 46,6 |
| Current account balance (% of GDP) | 11,1 | 11,1 | 11,0 |
A return to modest growth following a few volatile quarters
Real GDP growth was volatile in the first half of 2024, with the first quarter surprising on the downside (-0.3% q-o-q) and the second quarter on the upside (+1.0% q-o-q). The main driver of this volatility was the contribution from net trade, which fluctuated between strongly negative in the first quarter to strongly positive in the second. Following a contraction in the first half of the year, private consumption in the remainder of 2024 is expected to benefit from strong real wage growth, with contractual wage growth well above 6% and the labour market remaining tight. Business confidence indicators show a modest recovery from the low levels reached at the end of 2023, but industrial production remains weak. Investment activity decreased for three quarters in a row in 2023, with construction being particularly affected by tighter financial conditions and labour shortages. Investment growth is set to pick up modestly in 2024 as financial conditions improve and public investment expands. Overall, GDP growth in 2024 is projected at 0.8%.
In 2025 and 2026, private consumption is expected to pick up further as solid wage growth, falling inflation and tax cuts support households’ real disposable incomes. In addition, the outlook for business investment and trade is set to improve on the back of easing financial conditions and an improved external environment. Real GDP is forecast at 1.6% in 2025 and 1.5% in 2026.
The labour market remains strong
The labour market remains strong, with a very low unemployment rate (3.6%) and vacancies outnumbering the unemployed. Nevertheless, employment growth has been slowing down in recent months. Going forward, growth in the labour force is expected to exceed the weak employment growth, this is set to result in a marginal pick up in unemployment from 3.7% in 2024 to 3.8% in 2025 and 3.9% in 2026. Driven by a tight labour market, and given that wages have not yet fully caught up to the price increases of the past years, nominal wage growth is projected to reach 6.4% in 2024. Wage growth is expected to remain elevated but to slowly ease to 4.7% in 2025 and 3.6% in 2026.
Inflation coming down slowly
HICP inflation in the first half of 2024 hovered around 3%, down from an average of 4.2% in 2023. However, services inflation remains high and, together with high processed food inflation, pushed the headline rate up somewhat in the third quarter (3.4%). Strong nominal wage growth and the adjustment of rents to higher price levels drove the increase in services inflation while an increase in excise duties on tobacco led to a surge in processed food price inflation. Going forward, services inflation is projected to peak in the fourth quarter of 2024 before starting to come down gradually in 2025 and 2026. Annual HICP inflation is forecast at 3.2% in 2024, 2.4% in 2025 and 1.9% in 2026.
A lower-than-expected 2024 government deficit set to worsen
In 2024, the budget deficit is expected to be significantly smaller (0.2%) than projected in the Spring Forecast (2.0%) due to higher-than-expected revenue from taxes on income and wealth in the first two quarters of the year. Additionally, expenditure from budgetary funds earmarked for defence, infrastructure and climate are lower than initially planned by the government.
In 2025, the budget deficit is set to increase to 1.9%. In part, this is due to a court ruling requiring the government to return unduly paid taxes on asset returns to taxpayers. This is expected to have an impact on the deficit of almost 0.5 pps. In addition, the government has announced that it will lower the income tax rate in the two lower tax brackets. At the same time, expenditure is set to grow as public investments are expected to increase more strongly than in 2024.
The government balance in 2026 is set to be temporarily affected by a reform of the military pension system that requires a transfer of approximately 0.7% of GDP from the government to a private pension fund. Increases of the VAT rates for cultural activities, accommodation and motor fuels are expected to contribute to a moderate increase in revenue in 2026, although not sufficient to compensate for the increase in spending. The deficit is forecast to reach 2.4%.
Public debt is set to fall to 43.3 of GDP in 2024. However, higher deficits thereafter are expected to increase the debt ratio to 44.3% in 2025 and 45.6% in 2026, still below the euro area average.