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EU economy set for gradual expansion, high risks remain

16 May 2024, 18:18 CET
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EU economy set for gradual expansion, high risks remain

Paolo Gentiloni - Photo © European Union 2024

(BRUSSELS) - Following broad economic stagnation in 2023, better-than-expected growth at the start of 2024 and reductions in inflation set the scene for a gradual expansion of activity, the EU Commission said Wednesday in its Spring Economic Forecast.

"The EU economy perked up markedly in the first quarter, indicating that we have turned a corner after a very challenging 2023," said Economy Commissioner Paolo Gentiloni. However, he warned that the forecast "remains subject to high uncertainty and - with two wars continuing to rage not far from home - downside risks have increased."

The Commission's Spring Forecast projects GDP growth in 2024 at 1.0% in the EU and 0.8% in the euro area. In 2025, GDP is forecast to accelerate to 1.6% in the EU and to 1.4% in the euro area. EU HICP inflation is expected to fall from 6.4% in 2023 to 2.7% in 2024 and 2.2% in 2025. In the euro area, it is projected to decelerate from 5.4% in 2023 to 2.5% in 2024 and to 2.1% in 2025.

Growth of economic activity this year and next is expected to be largely driven by a steady expansion of private consumption, as continued real wage and employment growth sustain an increase in real disposable incomes.

In contrast, investment growth appears to be softening, expected to pick up only gradually. While credit conditions are set to improve over the forecast horizon, markets now expect a slightly more gradual path of interest rate cuts compared to winter.

HICP inflation has continued declining sharply from the 10.6% (year-on-year) peak recorded in October 2022 in the euro area. In April this year, it is estimated to have reached a two-year low of 2.4%.

Starting from a lower-than-expected turnout in the first months of this year, inflation is forecast to continue declining and reach target slightly earlier in 2025 than projected in the Winter interim Forecast. Disinflation is set to be mainly driven by non-energy goods and food, while energy inflation edges up and services inflation declines only gradually, alongside moderation in wage pressures. Inflation in the EU as a whole is expected to follow a similar path, though remaining slightly higher.

After a sizeable reduction in 2021 and 2022, the fall in the EU government deficit came to a halt in 2023 as economic activity weakened. The decline is projected to resume in 2024 (3.0%) and 2025 (2.9%) notably on the back of the phase-out of energy-support measures.

Amid higher debt servicing costs and lower nominal GDP growth, the debt-to-GDP ratio in the EU is set to stabilise this year at 82.9%, before edging up by around 0.4 pps. in 2025.

Uncertainty and downside risks to the economic outlook have further increased in recent months, mainly stemming from the evolution of Russia's protracted war of aggression against Ukraine and the conflict in the Middle East. Broader geopolitical tensions also continue to pose risks. Moreover, the persistence of inflation in the US may lead to further delays in rate cuts in the US and beyond, resulting in somewhat tighter global financial conditions.

Spring 2024 Economic Forecast: Full document

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