The EU Commission downgrades economic forecasts with uncertainties in the background

The last set of economic forecasts released by the European Commission highlighted a slight downgrade in GDP growth for 2024 and 2025.

The EU economy is expected to reach 0.9% this year before picking up to 1.5% next year and 1.8% in 2026. In the euro area, real GDP growth is expected at 0.8% this year, 1.3% in 2025, and 1.6% in 2026. The last figures marginally diverge from what the Commission expected in the winter and spring packages, where EU growth was respectively estimated at 0.9% and lately at 0.8%.

The European Commission noted that inflation in the third quarter of 2024 fell faster than expected. The euro area declined from 2.5% in the second quarter to 2.2% in the third. It will likely stabilize at 2,2% until mid-2025 and fall below the 2% ECB medium-term policy target. Geopolitical uncertainty is the leading player in all reports issued by the European Commission’s economic forecasts. The strong headwinds experienced after the robust recovery that followed the pandemic-related economic slump have given way to a lack of clear perspectives on a future possible rebound.

“The outlook remains highly uncertain, with risks largely tilted to the downside,” European Commission Paolo Gentiloni told the press while rattling off the main trends observed in the latest quarter. Russia’s war of aggression against Ukraine and the intensified conflict in the Middle East “remain key geopolitical risks,” he further stressed.

The EU Commission also fears delays in implementing the RRF and a stronger-than-expected impact from fiscal consolidation. These factors stand out as potentially dampening the resumption of growth.
The main issue arising from the new economic forecasts package was the lukewarm growth in household consumption. Gentiloni pointed out that “a still high cost of living and rising economic uncertainty pushed households to save an increasing share of their income.” The household saving rate stands at 14.8%, above expectations and more than 3 percentage points above its pre-pandemic long-term average.

The EU economy is facing “big uncertainties on the how and when the propensity to consumption will regain strength, although some countries have recorded an increase in real wages.” On the other hand, investment further contracted and is set to broadly stagnate in the year’s final quarter.

Clouding perspective on relations with the new United States federal administration is no less. Changes in US trade policy could have repercussions, especially in Germany and Italy, which have higher surpluses.

The European Commission sees Germany’s GDP in recession at -0.1% in 2024 and falling after -0.3% in 2023. Italy is expected to grow at 0.7% in 2024, 1% in 2025, and 1.2% in 2026.

France will touch 1.1% in 2024, 0.8% in 2025 and 1.4% in 2026. For Spain, the estimate is 3% in 2024, 2.3% in 2025, and 2.1% in 2026.