Taking stock of Europe's economic outlook for 2023 and beyond

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Europe's economic outlook for the next year and beyond is mixed. After two years of sky-high inflation, consumer price pressures in Europe are expected to ease on the back of falling energy prices and as monetary policy works its way through the economy.

What is the forecast for inflation beyond 2023?

On the positive side, eurozone inflation is continuing its downward trend. In October 2023, it stood at 2.9%, compared to a high of 10.6% a year ago - marking its lowest level since July 2021.

Over this past year, this inflationary decline was driven primarily by the sharp fall in energy prices. This has since become increasingly broad-based across all main consumption categories beyond energy and food.

Monetary tightening within the European economy is expected to continue driving down inflation - but at a more moderate pace - reflecting the slower but more broad-based easing of inflationary pressures in food, manufactured goods and services.

Overall, headline inflation in the eurozone is projected to fall from 5.6% in 2023 to 3.2% in 2024 and 2.2% in 2025. 

In the EU, headline inflation is set to decrease from 6.5% in 2023 to 3.5% in 2024 and 2.4% in 2025.

Will economic growth pick up again?

Following robust economic growth throughout most of 2022, real GDP contracted towards the end of last year and barely grew in the first three quarters of 2023.

High - though falling - inflation, tightening monetary policy and weak external demand stunted growth across the European Union this year.

The European Commission's Autumn Forecast projects GDP growth to be down to 0.6% for 2023 in both the EU and the euro area - 0.2 percentage points below the Commission's summer forecast.

However, economic activity is expected to accelerate in the coming year as consumption recovers on the back of a robust labour market, wage growth and an easing of inflation.

Furthermore, investment is projected to increase further, supported by overall solid corporate balance sheets and by the Recovery and Resilience Facility. 

As such, EU GDP growth is forecast to rise to 1.3% in 2024. In the euro area, GDP growth is projected to be slightly lower, at 1.2%.

Looking further forward to 2025, growth is expected to strengthen to 1.7% for the EU and 1.6% for the euro area, with inflationary pressures and monetary tightening subsiding.

EU employment rates reach their highest on record

The EU labour market performed strongly in the first half of 2023, despite the slowdown in economic growth. 

In the second quarter, activity and employment rates in the EU reached their highest level on record. In September, the unemployment rate remained at 6% of the labour force - close to its record low.

Looking ahead, the employment forecasts are reassuring. Employment growth in the EU is projected at 1% in 2023, before easing to 0.4% in both 2024 and 2025. 

The EU unemployment rate is expected to remain broadly stable at 6% in 2023 and in 2024, and to edge down slightly to 5.9% in 2025. 

And there's good news for workers, as real wages are expected to turn positive as of next year on the back of continued wage growth and declining inflation.

What are the projections for the EU general government deficit?

The EU general government deficit is set to decline slightly in 2023, to 3.2% of GDP. 

This is due to a combination of factors, including the phasing-out of temporary pandemic-related measures, a reduction in subsidies to private investment and the sizeable reduction in energy-related measures next year and their phase-out in 2025.

Continued restraint in discretionary fiscal support is expected to further reduce the EU public deficit to 2.8% of GDP in 2024 and to 2.7% in 2025. 

The EU debt-to-GDP ratio is expected to continue to decline in 2023, to 83%. In 2024 and 2025, the debt ratio is forecast to stabilise above the 2019 level of around 79%.

Will conflicts and climate change weigh on Europe's economy?

Russia's continued war of aggression in Ukraine and the conflict in the Middle East mean Europe's economic outlook is fraught with uncertainty and risk.

So far, the impact of the Israel-Hamas war on European energy markets has been contained, but the risk of disruptions to energy supplies and the subsequent impact on energy prices remains significant.

Economic developments in the EU's major trading partners, especially China, could also be cause for concern.

Finally, extreme weather events in Europe like heatwaves, fires, droughts and floods illustrate the dramatic consequences that climate change can have not only for the environment and the people affected but also for the economy.