European Commission cuts EU growth forecast and expects inflation to fall further

European flags outside the European Commission
European flags outside the European Commission Copyright Canva
By Piero Cingari
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The EU's economy entered 2024 with subdued momentum. The European Commission downgraded its growth forecast to 0.9% for the EU and 0.8% for the euro area. Yet while inflation rates are expected to decline more than previously predicted, challenges remain.

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Following a narrow escape from recession in late 2023, the European Union’s economy has entered 2024 with less vigour than anticipated, as confirmed by the European Commission in its latest Winter Economic Forecast.

The new projections highlight a downgraded growth outlook for the year, now expected at a modest 0.9% in the EU, a decrease from the previously expected 1.3%, with the euro area's forecast similarly adjusted to 0.8% from an earlier 1.2%.

Resurgence on the horizon

The Commission highlights that a gradual resurgence is on the horizon for the latter half of 2024, bolstered by diminishing inflationary pressures, an expected increase in real wages, and a robust labour market stimulating consumer spending.

A pick-up is expected in 2025, with a predicted growth of 1.7% in the EU, unchanged from the autumn forecast, and 1.5% in the euro area, down from the previous 1.6%.

Inflation is predicted to ease more swiftly than previously foreseen. The Harmonised Index of Consumer Prices (HICP) inflation in the EU is set to decline faster from a steep 6.3% in 2023 to 3.0% in 2024, further dropping to 2.5% in 2025.

The euro area mirrors this trend, with inflation rates forecasted to slow from 5.4% in 2023 to 2.7% in 2024 and 2.2% in 2025. The 2024 inflation forecast for the euro area has been revised down from 3.2%, while 2025 was left unchanged.

Investment is predicted to get a boost from improving credit conditions and the ongoing rollout of the Recovery and Resilience Facility. Trade, which underperformed last year, is also expected to return to normal levels with foreign partners.

Looming economic risks

Despite some encouraging signs, the European Commission remains vigilant of looming economic risks, including the phasing out of energy support schemes, sustained geopolitical frictions, and potential escalations in Middle Eastern conflicts affecting Red Sea trade routes.

Falling inflation fosters expectations of monetary policy easing

The start of 2024 has seen some market segments reporting lower interest rates, signalling a potential inflexion in bank lending volumes in the coming months, after a sluggish year.

Markets are already pricing in a possible monetary policy shift by the European Central Bank (ECB), with anticipations of a rate cut as early as the second quarter of 2024 and cumulative cuts nearing 200 basis points over the forecast horizon.

Yet, the Commission warns of high interest rate volatility, suggesting that markets are still grappling with uncertainty until the ECB commits to a defined path towards monetary easing.

Europe’s economic powerhouse faces challenges

Germany's economic sentiment indicators remain disconcerting, with January figures hitting lows not seen since the COVID-19 crisis, suggesting weak economic activity for the first half of 2024.

After a 0.3% contraction in output in 2023, the German economy is only expected to see a modest increase of 0.3% in 2024, a downward revision from the 0.8% previously forecasted in autumn. The projection for 2025 remains constant at a growth of 1.2%.

Labour shortages represent a bottleneck to economic activity, while a trade-driven recovery is also unlikely amid stagnating export and import dynamics. On a more optimistic note, market financing conditions have eased recently, with expectations of continued relief facilitated by more accessible bank lending.

Divergent paths across member states

In 2024, all EU economies are anticipated to grow, although disparities are notable. A number of smaller economies are expected to see their GDPs increase in the range of 2-3% in 2024, in contrast to the larger economies, which are likely to face more challenges.

The growth outlook for France has been revised downward from an initial prediction of 1.2% for 2024 to 0.9%, with the forecast for 2025 also being slightly lowered to 1.3%. The forecast for Italy in 2024 has been decreased to 0.7%, while the projection for 2025 remains unchanged. The economic projections for Spain for both 2024 and 2025 have remained the same.

Malta leads the euro area growth rankings with a robust 4.6% in 2024 and 4.3% in 2025, followed by Cyprus and Croatia. Outside the eurozone, Romania is poised to lead with an expected growth of 2.9% in 2024, while Hungary is projected to experience the most substantial growth in 2025 at 3.6%.

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