“Check against delivery”
Let me begin with the five key messages from this forecast:
First, after a difficult 2023, economic activity rebounded in the first quarter of this year. Economic momentum is expected to gather pace over the coming quarters, leading to an annual growth rate for the EU of 1% this year and 1.6% in 2025.
Second, private consumption is set to drive the economic rebound, thanks to continued strength of the labour market and rising real wages, which should allow for a recovery in lost purchasing power.
Third, inflation has declined further since the start of the year and is set to continue easing, reaching the ECB’s target in the course of 2025.
Fourth, the general government deficit ratio in the EU is set to resume falling in 2024, while the debt ratio increases slightly in 2025.
And fifth, downside risks and uncertainty remain elevated, and they are mostly connected to the wars on our borders and in the Middle East.
In 2023, private consumption was particularly weak, growing by only 0.4%. Despite robust employment and wage growth, labour incomes barely outpaced inflation. Moreover, households saved a larger share of their disposable income – the EU saving rate, at 13.5% in 2023, remained well above pre-COVID readings.
Investment also contributed very little to growth, with weakness particularly noticeable towards the end of the year, especially in residential construction.
External demand did not provide much support either, weighed down by a sharp slowdown in global merchandise trade.
Last but not least, the slowdown in the pace of accumulation of inventories detracted almost 1 pp. from domestic demand.
Over the next two years, the picture for the European economy is set to improve.
Private consumption is set to be the main growth driver. It is projected to rebound to 1.3% growth this year and 1.7% in 2025. Continued employment growth and rising real wages should sustain disposable income. The expansion of private consumption is set however to be partially held back by a further uptick in the saving rate.
Despite broad stagnation in output, the EU economy created more than two million jobs in 2023. Labour supply was mainly lifted by immigration and the rising participation of women and older workers.
Activity and employment rates reached new highs while unemployment stood at its record low of 6.0%. Positively, unemployment continued falling in Member States recording the highest rates, resulting in a continued decline of dispersion across countries.
Worth noting is the fact that in 2023-Q3 employment rates in the EU reached record highs not only for native workers (71.2%), but also for workers from third countries (65.1%).
Going forward, employment growth is expected to be more subdued. After 1.2% growth last year, EU employment is projected to grow by 0.6% this year and 0.4% in 2025. The first quarter saw employment growth of 0.2% in the EU, according to Eurostat’s release just out. This still means that the EU economy should generate another 2.5 million jobs by the end of next year. Meanwhile unemployment should hover around its current record low.
Nominal compensation per employee expanded by 5.8% in 2023 in the EU, with a gradual deceleration in the second half of the year. It is projected to decelerate further but to remain above inflation.
As a result, workers are set to continue recouping lost purchasing power. By 2025, average real wages are projected to have fully recovered their 2021 levels, though this is not the case for all Member States.
Expectations for rate cuts across the world have been scaled back recently. Also in the euro area, markets now expect a more gradual pace of monetary easing than in winter.
The euro area short-term nominal interest rates is now expected to decrease from 4% to 3.2% by the end of the year and to 2.6% by the end of 2025 – with markets, as you know, expecting the first cut occurring in June.
This slight change in market views is mainly due to more persistent underlying inflationary pressures.
Bank lending has so far failed to rebound, due to some further tightening of credit standards, but especially lower corporate demand for loans. However, the expected easing of monetary conditions coupled with an economic rebound and lower indebtedness after years of deleveraging, should gradually revive credit flows.
Moreover, metrics of credit risk indicate improved investor sentiment for EU assets. Sovereign spreads narrowed further while European equities continued to increase.
Still, financial conditions in the EU remain relatively tight and are still weighing on growth – particularly on investment.
Overall investment is projected to remain very weak this year. It is projected to accelerate to 2% in 2025 with large differences across components.
Equipment investment is set to expand only marginally this year. The prolonged weakness in the manufacturing sector has left many plants operating below normal capacity, weighing on demand for equipment investments.
Non-residential construction investment is expected to remain resilient, largely reflecting government infrastructure spending with RRF support. And indeed, public investment in the EU is projected to keep increasing, from 3.5% of GDP last year to 3.6% in 2024 and 3.7% of GDP in 2025.
By contrast, housing investment is projected to continue contracting, as house prices continue to fall and still tight credit conditions dampen demand.
Global growth is projected to edge up from 3.1% in 2023 to 3.2% in 2024 and 3.3% in 2025. This is a marginal upward revision compared to the Winter Forecast.
The growth outlook for the US looks better than previously expected, mainly due to a strong end-of-2023 performance.
In China, a strong rebound in economic activity during the first quarter lifts its near-term outlook. However, the country’s structural impediments combined with its current growth model are expected to result in a slowdown, also posing challenges for the global and the EU economy.
Global trade growth is expected to rebound this year from the slump of 2023 and to strengthen further in 2025. Accordingly, EU exports of goods and services are expected to expand by about 1.5% this year and 3.3% in 2025. Imports are also set to rebound, implying a neutral or only marginally positive contribution to EU growth of net external demand in the two forecast years.
Almost all EU economies are expected to see positive growth – albeit moderate to say the least, in some cases – in 2024, and to experience a stronger pickup in activity in 2025.
A few words now on the largest EU economies.
In Germany, following a recession in 2023, economic activity is expected to stagnate in 2024. Domestic demand is set to pick up slowly this year and next, as real wage growth resumes. GDP is forecast to grow by a subdued 0.1% in 2024, led by both private and government consumption, before picking up to 1.0% next year, led by consumption and a recovery in investments.
In France, growth is projected at 0.7% in 2024. Private consumption will be the main driver, as real wages bounce back, while investment is set to contract. In 2025, the economy is projected to keep gaining momentum on the back of a recovery in investment and lower inflation, with GDP expected to grow by 1.3%.
In Italy, growth is forecast at 0.9% in 2024. Economic activity remains supported by investments, while net exports contribute positively to growth. GDP is expected to expand next year by 1.1%, thanks to a recovery in consumption, following the strong contraction at the end of last year.
In Spain, economic activity is expected to grow by 2.1% in 2024 and 1.9% in 2025 driven by domestic demand and supported by a strong labour market. The implementation of the RRP is set to underpin investment growth over the forecast horizon.
In Poland, growth is forecast to rebound to 2.8% in 2024. Private consumption is expected to be the main driver, supported by rapidly rising wages, additional government social support boosting disposable income, improved consumer sentiment, and receding inflationary pressures. In 2025, real GDP is projected to increase by 3.4%.
Lastly, looking at the new candidate countries, Ukraine, continues to grapple with the impact of Russia’s war of aggression. In 2024, real GDP growth is projected at 2.9%. Based on our technical assumption that conditions for a gradual increase in early reconstruction efforts will be in place from early 2025, in this scenario, growth is forecast to pick up in 2025 and reach 5.9%.
Escalating hostilities in the Middle East have caused price volatility in the oil market since the start of the year. Stronger-than-expected growth in both China and the US in early-2024 pushed up oil prices. Since the end of April though, mostly after the cut-off date of this forecast, tensions on the oil market eased and prices declined. Still, oil prices are somewhat higher than in Winter.
The gas futures price curve is only marginally higher than assumed in Winter and way below the level that prevailed last Autumn. The futures curves point to a slight uptick in TTF gas prices, averaging EUR 31/MWh and EUR 35/MWh in 2024 and 2025, respectively.
As such, energy prices are not expected to be the strong disinflationary force that they were in the recent past.
Inflation in the first quarter of 2024 declined faster than we expected. It averaged 2.6% in the first quarter in the euro area, and is estimated to have reached a two-year low of 2.4% in April.
Going forward, we expect inflation to continue moderating, falling to 2% by the end of 2025.
Headline inflation in EU is expected to fall from 6.4% in 2023 to 2.7% in 2024 and 2.2% in 2025. This represents a downward revision of 0.3pp. in both years.
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. This is 0.2 and 0.1 pps. below the winter forecast, respectively
While inflation moderation is projected to continue in all Member States, its pace differs widely across the EU.
Inflation is set to remain higher in central and eastern European countries, a pattern that has characterised our inflation maps since the beginning of the energy crisis.
Fortunately, as energy and food prices normalise, and average headline inflation in the EU moderates, so do intra-EU divergences. The dispersion of inflation rates within the EU is projected to decline in 2025 to historical levels.
After a sizeable reduction in 2022, the EU government deficit increased marginally last year, from 3.4% to 3.5% of GDP, as economic conditions deteriorated, and interest expenditure increased.
The almost complete phase-out of energy-related measures, lower subsidies for private investment, as well as the gradual improvement in economic activity are expected to lead to renewed deficit reductions on aggregate in the EU, to 3.0% and 2.9% of GDP in 2024 and 2025, respectively.
Overall, these developments imply a contractionary fiscal impulse in 2024 and a broadly neutral stance in 2025.
The EU debt-to-GDP ratio fell to 83% in 2023, from the record high of 92% in 2020. It is projected to remain stable in 2024 before edging up slightly to 83.4% in 2025 amid higher debt servicing costs and lower nominal GDP growth.
Budgetary developments are set to vary considerably. This reflects, among other things, different speeds at which energy support measures are being phased out.
In 2024, most Member States are still projected to see a deterioration in their general government balance while, based on unchanged policies, deficit reduction is set to be more broad-based across countries in 2025.
As in 2023, eleven Member States are projected to record a general government deficit at or above 3% of GDP in 2024. This number is forecast to drop to nine in 2025.
By the end of 2025, in most Member States debt-to-GDP ratios are projected to be lower than in 2020, but to remain above 60% of GDP in 12 countries.
Uncertainty and downside risks to the economic outlook stemming from the EU external environment have increased.
Global policy uncertainty is also high, in view of the unprecedented share of the global population going to the polls this year.
In this context, global trade and energy markets appear particularly vulnerable to uncertainty and potential policy reversal. Furthermore, a re-pricing of interest rates in the US would result in a tightening of global financial conditions.
On the domestic side, the fiscal and monetary policy stance could turn more restrictive than currently projected, with negative consequences for growth.
The last mile of the disinflationary process may be more challenging in the EU as well, which could lead monetary authorities to ease monetary conditions at a slower pace than currently expected by markets.
Finally, risks associated with climate change and the degradation of natural capital also increasingly weigh on the outlook.
Domestic demand could surprise on the upside. A decline in the saving propensity could spur consumption growth, while residential construction investment could recover faster.
Lastly, let me draw your attention to a special topic in the Spring Forecast which celebrates the 20th anniversary of the 2004 enlargement by taking stock of income convergence of the 10 then-acceding Member States.
Since the beginning of the accession process, the catch-up in real incomes by the acceding Member States has been impressive. It has also been resilient to the major crises that hit the EU in the past 20 years.
Expressed in purchasing power parities, GDP per capita of the 10 “new” Member States increased from 45% of the EU14 [the “old” EU Members excluding the UK] in 1997, when the accession process formally started, to 51% in 2004 at the time of accession, and then moved dramatically higher over the past two decades, reaching 79% in 2023.
Despite unfavourable demographic trends, total factor productivity and capital deepening should keep driving this convergence. Based on our 10-year ahead projections, these 10 Member States should further narrow the income gap with the “old” Member States over the next decade. In 2033 their average income levels should rise to 92% of that of the EU14. And this is I think also very good news for the countries I met yesterday – the finance ministers and central bank governors of the Western Balkan countries, Georgia, Moldova and Ukraine – which are all working towards joining the EU.
To sum up, 2023 was a challenging year for the EU economy. But now we believe we have turned a corner. We expect an uptick in growth this year and further acceleration in 2025. Meanwhile inflation is set to fall further and reach the ECB target next year.
Consumption is set to lead growth, while investment is expected to lag behind. In this context, NextGenerationEU is key to buffering weak private sector demand. And all of this in a context of high geopolitical risks and elevated uncertainty.
Now I am looking forward to your questions.
