First, following a robust post-pandemic expansion in 2021 and 2022, the EU economy has lost momentum. Real GDP barely grew in the first three quarters of this year. Over the coming quarters though, growth is expected to rebound mildly as consumption recovers with rising real wages, and investment remains supportive.
Second, inflation has declined rapidly since spring, and is projected to continue easing over the forecast horizon.
Third, the strength of the labour market remains the main underlying force behind the outlook.
Fourth, the government deficit ratio in the EU is set to drop below 3% and the debt ratio continues declining.
And fifth, downside risks and uncertainty increase amid heightened geopolitical tensions.
Both the Commission's Economic Sentiment Indicator and the Eurozone Purchasing Managers' Index indicate a gradual loss in growth momentum so far this year.
The PMI suggests that the weakness in industry at the start of the year has spread to services, which entered contractionary territory during the summer. The latest October data from our surveys indicate some stabilisation in sentiment – at a low level.
Among the factors business managers see as limiting production, insufficient demand has further gained prominence, while shortages of material and/or equipment continued to diminish.
The loss of momentum this year has been underpinned by the lack of a solid growth driver, with weakness both on the external side and especially among consumers.
Private consumption has broadly stagnated so far this year as nominal wage growth continued to lag behind inflation. Meanwhile, net trade is set to contribute positively to growth this year as the decline in imports is outpacing that in exports. Investment, both public and private, increased, but only slightly in the first half of the year and so is expected to contribute very little to growth in 2023.
Over the next two years, private consumption is set to be the key growth driver, as wage increases should outpace inflation, lifting households' purchasing power. A robust labour market is also set to contribute. The recovery in private consumption could be even stronger in the absence of the high savings rates expected to persist over the forecast horizon, a reflection of consumers' high uncertainty over their future financial situation and downbeat sentiment keeping precautionary savings high.
Private consumption in the EU is projected to grow by only 0.4% in 2023, before accelerating to 1.3% in 2024 and 1.6% in 2025.
Investment is set to grow steadily in spite of high interest rates, as strong corporate balance sheets provide room for investments. Infrastructure investment is also set to grow, benefitting from public spending and funding from the RRF and REPowerEU. Total investment growth in the EU is expected to slow to 1.2% in 2023 and to pick up to 1.5% in 2024 and 2.3% in 2025.
Overall, we project GDP growth in 2023 at 0.6% in both the EU and the euro area. Ten Member States will however have negative growth this year.
EU GDP growth is forecast to accelerate to 1.3% in 2024, and 1.7% in 2025.
In the euro area, GDP growth is forecast to be slightly lower, at 1.2% in 2024 and 1.6% in 2025.
The external environment is expected to remain challenging for some time, with growth rates below the historical average, which was 3.8% between 2000 and 2019.
After decelerating to 3.3% in 2022, global growth (excluding the EU) is projected to reach 3.5% in 2023. Growth is forecast to inch down to 3.2% in 2024 as the effects of tight monetary policy continue to weigh and the slowdown in China continues. It is expected to pick up again to 3.5% in 2025, as the recovery in advanced economies takes hold.
Global trade growth is expected to rebound in 2024 from the anaemic rate of 2023 and to strengthen further in 2025. Accordingly, EU exports to the rest of the world are projected to pick up over the forecast horizon, though at a moderate pace. However, as imports also recover in line with economic activity, the contribution of net trade to GDP growth is set to be broadly neutral in 2024 and 2025.
While global trade has been particularly weak this year, the EU's current account balance has improved significantly thanks to falling energy prices. Our current account surplus is set to improve to 2.5% in 2023 and stabilise at that rate over the forecast horizon.
However, as global energy prices are assumed to persist at higher than pre-war levels and the EU is set to lose market shares globally, the balance of goods in the EU is expected to remain well below its pre-pandemic level over the forecast horizon. In contrast, the balance of services is assumed to stay above pre-crisis levels.
The reaction of oil and gas prices, both spot and futures, has remained overall muted despite the situation in the Middle-East.
The gas futures price curve remains broadly in line with the assumptions underpinning the Summer Forecast, with gas prices falling gradually towards EUR 45/MWh by the end of 2025. Oil price futures over the forecast horizon have moved slightly higher (around 5%) than assumed in summer.
As such, the disinflationary impulse from energy prices over the forecast horizon is set to be less prominent.
The ECB last hiked its policy interest rates in September, by 25 basis points, and markets expect the Bank to keep them at this level before gradually cutting them by end-2025.
The path of expected policy rates has only marginally increased since summer, but financing costs have increased more visibly and the provision of credit to the private sector, both through banks and markets, has continued to slow. The decline in bank lending is due to both tighter credit supply conditions and lower demand.
Overall, financing conditions remain tight and are set to weigh on growth over the forecast horizon.
Our labour market continued to perform strongly in the first half of 2023, despite the slowdown in growth. Activity and employment rates reached their highest level on record while unemployment remained close to its record low.
However, there are signs of some cooling. Employment expectations as reported in our business surveys remain above their long-term average but have declined throughout most of 2023. Some Member States have seen an uptick in unemployment. This is probably unrelated also to the fact that data on bankruptcy declarations in the EU point to a rising trend over several quarters, though the level of insolvencies remains moderate.
The pace of job creation eased in the first half of the year and is expected to decelerate further. But the EU economy is still set to create jobs over the next two years. Employment growth is forecast at 1.0% this year, before easing to 0.4% in both 2024 and 2025.
Low unemployment rates suggest the labour market is set to remain tight and exert upward pressure on wages. Nominal wage growth is expected to accelerate further this year, before gradually moderating in 2024 and 2025.
Importantly, this forecast sees wage growth exceeding inflation in those years, finally allowing workers to recoup purchasing power.
Growth outcomes across the EU are set to vary across Member States in 2023. In 2024 almost all EU economies are expected to resume or continue growing before experiencing a somewhat stronger expansion in 2025.
A few words now on the largest EU economies.
The German economy is expected to contract by 0.3% in 2023. A loss in purchasing power due to high inflation and tightening financing conditions is weighing on consumption and investment. Foreign trade has evolved less favourably than expected. Going forward, private consumption is set to pick up, driven by real wage increases. Together with recovering foreign demand, this is expected to support a moderate rebound in growth to 0.8% in 2024 and 1.2% in 2025.
Economic activity in France is set to grow moderately in 2023, as inflation remains high and tighter financial conditions weigh on growth. GDP is expected to gain momentum over the forecast horizon, as private consumption accelerates, and inflation progressively decreases. GDP is expected to grow by 1.0% in 2023, 1.2% in 2024 and 1.4% in 2025.
Economic growth in Italy slowed this year, with consumption squeezed by high inflation and investment starting to contract after the post-pandemic expansion. After modest growth of 0.7% this year, a moderate acceleration is expected to 0.9% in 2024 and 1.2% in 2025, also supported by RRF-funded investments.
In Spain, following a strong start to the year, economic activity is set to decelerate in the second half of 2023 and in 2024. Growth is expected to reach 2.4% this year and 1.7% in 2024, before picking up slightly to 2.0% in 2025. Labour market resilience and wage growth supported strong economic activity in 2023. In 2024, growth is expected to be led by a pick-up in investment, largely thanks to RRF-funded investments and private consumption.
The Polish economy remained weak in the first half of 2023, pointing to a modest 0.4% expansion in 2023. Growth was depressed by falling private consumption and a drag from inventories while net exports and investments supported activity. In 2024 and 2025, growth is projected to accelerate to 2.7% and 3.2%, respectively. Private consumption is set to be the main growth driver as real wages increase and inflation fades. Investment and net exports are set to support growth.
Let me take this opportunity also to say a word on Ukraine, which we are covering in our forecast for the first time this autumn, along with the other two countries that were granted EU candidate status last year, Moldova and Bosnia-Herzegovina. In Ukraine, after collapsing by 29% in 2022 following the Russian invasion, the economy has shown remarkable resilience in 2023, with growth projected to reach 4.8%. This can be attributed to exceptional harvests and of course, government stimulus underpinned by the unwavering support of international partners, as well as to the authorities' commitment to ensure macrofinancial stability.
Inflation has fallen sharply, reflecting a broad-based deceleration in consumer prices. Energy prices have kept declining, and all other components saw inflationary pressures moderate, pushing headline inflation in the euro area to 2.9% in October. This is almost eight percentage points down from the peak of 10.6% which was reached in October last year. This 2.9% is the lowest since mid-2021.
Inflation is set to continue declining in 2024 and 2025, though at a more moderate pace. This reflects continued easing of inflationary pressures in food, manufactured goods and services. However, given the recent rise in energy commodity prices, and the assumed expiry of energy measures, consumer energy prices will no longer push inflation lower in a decisive way.
Headline inflation in the euro area is projected to fall from 5.6% in 2023 to 3.2% in 2024 and 2.2% in 2025. In the EU, the figures are 6.5% in 2023, 3.5% in 2024 and 2.4% in 2025. The pace of decline in 2024 is somewhat slower than projected in the summer, reflecting higher, on average, energy commodity prices.
While inflation moderation is underway and projected to continue in all Member States in 2024 and 2025, the pace of this reduction differs widely across the EU.
Inflation is expected to remain significantly higher in central and eastern European, mostly non-euro area Member States.
Now that the imported commodity-price shock has largely subsided, inflation differentials largely reflect domestic drivers. These include differences in wage growth and developments in profits and markups across Member States.
After reaching the historically high level of 6.7% of GDP in 2020 the aggregate EU deficit fell to 3.3% in 2022 and is set to decline slightly to 3.2% in 2023 despite the less favourable economic environment. The complete phase-out of pandemic related temporary measures as well as a lower net budgetary impact of energy-related measures have contributed to this fall, despite the very different growth figures.
In 2024 and 2025, restraint in discretionary fiscal support is expected to lead to further deficit reductions to 2.8% and 2.7% of GDP, respectively. The estimated net costs of energy-related measures are declining rapidly and are expected to be completely phased out in 2025. These savings are outweighing the increased impact of higher interest expenditure for governments.
Overall, these developments imply a contractionary fiscal impulse in 2023-2025, so that fiscal policies are not expected to fuel additional inflationary pressures.
The EU debt-to-GDP ratio fell significantly to 85% in 2022, from the record high of 92% in 2020. It is projected to decline further to 83% of GDP in 2023 and then broadly stabilise just below 83%. In the euro area, where debt peaked at 99% of GDP in 2020, the ratio is estimated to drop to 90% in 2023 before also stabilising around that level.
In 2023, several Member States are still projected to see a deterioration in their general government balance. While lower energy prices are helping to contain the cost of existing support measures, many governments introduced new measures or extended existing ones.
In 2024, the deficit reduction is set to be more broad-based across countries, driven by the significant further phasing out of energy support measures.
The number of countries with a deficit exceeding 3% of GDP is set to increase from 10 in 2022 to 12 in 2023, before falling again to eight in 2024 and increasing again to 13 in 2025 based on unchanged policies.
Uncertainty and downside risks to the economic outlook have increased in recent months. They are primarily related to the evolution of Russia's protracted war of aggression against Ukraine and the new and tragic conflict in the Middle East.
Energy markets appear most vulnerable, as renewed disruptions to energy supplies could potentially have a significant impact on energy prices, global output and the overall price level. Economic developments in the EU's major trading partners, China in particular, also pose risks.
Mounting risks associated to climate change also weigh on the outlook. Natural hazards like heatwaves, fires, droughts and floods, which have been raging across the continent with increasing frequency and scope, illustrate the dramatic consequences that climate change can have for the environment, the people affected but also the economy.
On the domestic side, the transmission of monetary tightening may weigh on economic activity for longer and to a larger degree than projected in this forecast.
Barring the risks to energy price developments highlighted above, risks to the inflation outlook appear broadly balanced.
To sum up, we are approaching the end of a challenging year for the EU economy, in which growth has slowed down more than expected. Strong price pressures and the monetary tightening needed to contain them, as well as weak global demand, have taken their toll on households and businesses.
Looking ahead to 2024, we expect a modest uptick in growth as inflation eases further and the labour market remains resilient. Thanks in part to the RRF, investment is set to keep increasing. Public debt and deficits are expected to pursue their decline, albeit more gradually.
And heightened geopolitical tensions have further increased the uncertainty and risks clouding the outlook.
Now I am looking forward to your questions.
