“European economy turned a corner”. EU Commission unveiled new forecasts

The European economy will be able to put its economic stagnation behind it in 2023, but growth prospects are suffering from the failure of the world economy to take off and geopolitical tensions. The European Commission’s new estimates largely confirm what was predicted in Brussels in the last forecast report in February. In 2024, GDP in the euro area will grow by 0.8% and by 1% on average in the European Union.

The European executive slightly revised downward the growth rates for 2025 and now indicates a GDP increase of 1.4 % in the Eurozone and 1.6 % in the European Union. In the last growth forecast report in February, GDP in the Eurozone was given to grow by 1.5% and in the EU by 1.7% in 2025. With economic expansion in the southern rim of the EU still outpacing growth in northern and western Europe, economic convergence within the EU is set to progress further.

Almost all Member States are expected to return to growth in 2024. Germany is expected to recover from the recession spanned over 2023 and stage a comeback to positive figures reaching a subdued growth reaching 0.1% in 2024. France’s growth is projected at 0,7% in the same year, while Italy is on its way to reaching 0,9% in GDP growth.

The European Commission is confident in the rebound of private consumption to back economic growth and enhance investments. Inflation has been further downward revised compared to the expectations in February, reaching 2.5% in 2024 and 2.1% in 2025 in the Euro area. By 2025 the EU economy is therefore expected to match the 2% target in inflation. This trend paves the way for a gradual pace of policy rate cuts, with first ease next June.

The European Commission looks confidently at the cycle of monetary policy easing that some non-EU central banks have embarked on, mentioning the case of the Swedish central bank. Optimism is boosted by the positive outlook of Euribor’s three-month futures. This index refers to the rates used by a selection of European banks to lend money to each other’s. According to it euro area short-term nominal interest rates are likely to decrease from 4% to 3.2% by the end of the year and to 2.6% by the end of 2025. This could probably trigger a rebound in bank lending and spur corporate demand for loans. Investment levels are however projected to accelerate to 2% in 2025 with large differences across components.

Growth in employment and nominal wage barely outpaced inflation in 2023 and external demand did not provide much support either, the report reads. Nominal compensation per employee is projected to decelerate from the 5.8% recorded in 2023 but to remain above inflation. The slowdown in food prices and non-energy goods is expected nevertheless to erode saving propensity which is experiencing an uptick rate to 14.4%. Real wages are expected to have fully recovered their 2021 levels in 2025.

Despite positive internal driving factors, the EU is set to face “risks originating from outside the EU caused by two ongoing wars in its neighbourhood and mounting geopolitical tensions”, the report says. The vulnerability of global trade and energy markets and the persistence of inflation in the US may further delay rate cuts by the Federal Reserve and also beyond, “resulting in somewhat tighter global financial conditions”, as the text further reads. On the domestic front, EU Central Banks may also postpone rate cuts until the decline in services inflation firms.

The outlook on public expenditure is far from raising good hopes. EU governments are called to reduce budget deficits and put debt ratios back on a declining path. This need is likely to force them to pursue a more restrictive fiscal stance than currently projected for 2025, weighing on economic growth, as the European Commission suggests. After experiencing a halt in 2023 given a weakened economic activity, the decline in the deficit/GDP ratio average in the EU is projected to resume in 2024 and 2025 notably on the back of the phase-out of energy-support measures.

“We believe we have turned a corner after the challenges faced in 2023 in the European economy”, Commissioner for Economy Paolo Gentiloni told journalists in a press conference.  “NextGenerationEU is key to buffering weak private sector demand”, he stressed in a bid to cheer EU governments to devote their efforts to the implementation of the plan.