Economic activity in 2023 is now estimated to have expanded by only 0.5% in both the EU and the euro area.
Last year’s modest growth largely owes itself to the momentum of the post-pandemic economic rebound in the previous two years.
The rebound expected in 2024 is set to be more modest than projected three months ago, but to gradually pick up pace on the back of slower price rises, growing real wages and a remarkably strong labor market.
The growth outlook for 2024 is revised down to 0.9% in the EU and 0.8% in the euro area.
After narrowly avoiding a technical recession in the second half of last year, the economic outlook for the first quarter of 2024 remained subdued.
In 2025, growth is set to firm and inflation to decline to close to the ECB’s 2% target.
In 2025, economic activity is still expected to expand by 1.7% in the EU and 1.5% in the euro area.
EU HICP inflation is forecast to fall from 6.3% in 2023 to 3.0% in 2024 and 2.5% in 2025.
In the euro area, HICP inflation is projected to decelerate from 5.4% in 2023 to 2.7% in 2024 and to 2.2% in 2025.
As energy supply keeps outstripping demand, spot and future prices for oil and especially gas are now significantly lower than assumed in the Autumn Forecast.
Retail energy prices are therefore set to fall further, helping the EU recover some of the competitiveness lost during the energy crisis.
Despite mild upward pressure from higher shipping costs, underlying inflation continues on a steady downward path.
Credit conditions are still tight, but markets now expect the loosening cycle to start earlier.
The EU labor market continues to perform strongly.
As inflation decelerates, real wage growth and resilient employment should support a rebound in consumption.
Investment is expected to hold up, buoyed by easing credit conditions and the flow of RRF funding.
Protracted geopolitical tensions and the broadening of the Middle East conflict to the Red Sea tilt the balance of risks towards more adverse outcomes.
Domestically, a faster recovery of consumption, higher-than-expected wage growth and a lower-than-anticipated fall in profit margins could hold back the disinflation process.