EU Commission forecasts gradual recovery of EU economy amid challenges

The European Commission’s Autumn 2024 Economic Forecast outlines a slow but steady economic recovery for the EU, with real GDP growth projected at 0.9% in 2024, accelerating to 1.5% in 2025 and 1.8% in 2026. The euro area is expected to see a similar, albeit slightly slower, trajectory, with growth rates of 0.8%, 1.3%, and 1.6%, respectively. "Despite heightened uncertainty, conditions for a mild acceleration of domestic demand appear in place," stated the European Commission.

Inflation Trends and Economic Pressures

Inflation in the EU is projected to drop significantly from 6.4% in 2023 to 2.6% in 2024, eventually settling at 2.0% by 2026. The euro area will experience a similar decline, from 5.4% to 1.9% over the same period. The Commission noted a robust disinflationary process, despite fluctuations driven by energy prices and global market pressures. "The disinflationary process appears solidly in place," according to the statement, supported by a steady moderation in non-energy goods and food inflation.

Labor Market Resilience and Wage Dynamics

The EU labor market remains resilient, creating 750,000 jobs in early 2024, with total employment since the pandemic surpassing 8 million. The unemployment rate reached a record low of 5.9% in October, though employment growth is projected to slow to 0.5% by 2026. Wage growth, while healthy, is set to decelerate from 4.9% in 2024 to 3% by 2026, yet remain sufficient to restore real wages. "Wage growth will be sufficiently above inflation," the Commission emphasized, boosting household purchasing power.

Investment and Trade Outlook

Despite early 2024's investment contraction—partly due to one-off transactions—an upswing is expected. The Commission forecasts a rebound in 2025, fueled by improved credit conditions, strong corporate balance sheets, and public investment, particularly through the Recovery and Resilience Facility (RRF). Exports are also anticipated to grow as global trade strengthens, with "positive trade dynamics supporting EU export expansion."

Energy and Geopolitical Risks

Oil and gas markets face volatility amid global geopolitical tensions, including OPEC+ production decisions and Middle East conflicts. Although oil prices show a downward trend, gas prices have increased. The forecast underscores the unpredictable nature of energy markets, adding, "Prices of both gas and electricity are expected to decline in 2026." Geopolitical risks, along with climate-related disruptions like the recent floods in Spain, pose additional threats.

Fiscal Adjustments and Debt Concerns

The EU’s general government deficit is forecast to decline to 3.1% of GDP in 2024, aided by fiscal consolidation. However, the debt-to-GDP ratio is expected to rise slightly to 83.4% by 2026, as nominal growth fails to counter persistent deficits. "Discretionary fiscal policy will have a contractionary impulse in 2024," but neutral effects are projected in subsequent years.

Global Economic Context

The global economy, supported by strong U.S. performance, is projected to grow steadily, with India's rapid expansion as a highlight. Conversely, China’s outlook has weakened slightly, impacting global trade. The Commission warned of potential headwinds, including "a further increase in protectionist measures by trading partners," which could harm the EU’s open economy.

Source and Photo: European Commission