Employment and Social Developments in Europe (ESDE) 2023

2. Macroeconomic Developments and Forecast

Global economic activity decelerated in 2022 compared to 2021. It stagnated in the first half of 2022, picked up in Q3, and slowed again at the end of the year. ⁽¹⁰⁾ This was primarily the result of disruptions in the supply chain and energy market caused by Russia’s war of aggression against Ukraine, as well as geopolitical tensions between the United States (US) and China affecting international trade. These caused food and energy prices to skyrocket and hindered growth in both advanced and emerging economies. Ongoing COVID-19-related lockdowns in parts of China also exerted a negative influence on the global economy. Consequently, global GDP growth (excluding the EU) was estimated to reach 3.2% in 2022, compared to a 6.1% rise in 2021.

The EU economy expanded in 2022, but growth slowed in the second half of the year due to exceptionally adverse shocks. Real GDP rose by 3.5% in 2022, after growing by 5.4% in 2021. Developments in the euro area were similar, with a rise of 3.5% in 2022. The economic activity in the EU was particularly strong in the first half of 2022 (+0.7% in both Q1 and Q2), slowing in the second half of the year, as the rise in energy prices, impacted by Russia’s invasion of Ukraine, started to affect businesses and households (+0.4% in Q3, -0.1% in Q4). GDP growth in the US, Japan and China was lower than in the EU (+2.1%, +1.0%, and +3.0%, respectively) and higher in the United Kingdom (UK) (+4.1%) where recession was comparatively deeper in 2020 (Chart 1.1).

The rise in EU real GDP can primarily be attributed to household consumption and investment. In 2022, household consumption accounted for more than half of the GDP increase (+2.1 pp), with investment at +1.3 pp. The external sector was almost in balance (-0.1 pp contribution to GDP growth), while public consumption made only a modest contribution (+0.2 pp) (Chart 1.1).

In 2022, real GDP grew in almost all Member States, although with considerable differences between Member States. The increase was above 5.0% in one-third of countries, with notable growth in Ireland (+8.2%), ⁽¹¹⁾ Malta (+7.1%), and Portugal (+6.7%). By contrast, growth declined in Estonia (-1.3%) and was significantly lower than the EU average in Luxembourg (+1.5%), Slovakia (+1.7%), and Germany (+1.8%) (Chart 1.2).

Inflationary pressures that emerged during the economic recovery in 2021 were aggravated by Russia’s invasion of Ukraine. Inflation averaged 9.2% in the EU and 8.4% in the euro area, by far the highest recorded rates since the series began. ⁽¹²⁾ Inflation peaked at 11.5% in the EU in October 2022 (10.6% in the euro area) and decreased slightly by the end of the year, to 10.4% (9.2% in the euro area), due to lower energy inflation, while core inflation remained high. Overall, inflation remained far higher than at the end of 2021 (5.3% and 5.0%, respectively). Year-end inflation was highest in Hungary (25.0%) and the Baltic countries (20.7% in Latvia, 20.0% in Lithuania, 17.5% in Estonia), due to their greater dependence on oil and gas imports from Russia. Spain (5.5%), Luxembourg (6.2%) and France (6.7%) had comparatively lower inflation rates (Chart 1.3).

Real GDP growth is expected to slow in 2023 amid continuing high inflation. That growth is predicted to be 1.0% in the EU and 1.1% in the euro area, followed by growth of 1.7% (EU) and 1.6% (euro area) in 2024. ⁽¹³⁾ During that time, inflation is projected to fall to 6.7% (2023) and 3.1% (2024) in the EU. This outlook reflects the fall of wholesale gas prices below pre-war levels and the availability of gas storage levels above recent seasonal averages, although with core inflation (including processed food and services) remaining high. Domestic demand could be fuelled by the current fall in energy prices but investment growth is projected to decelerate. The external sector should contribute positively to growth, mainly as a consequence of falling import prices, while the recent reopening of China’s economy could boost external demand beyond current projections.

Nevertheless, there are risks to the economic outlook for the EU. High inflation remains a concern, as it could have negative repercussions for real wages and households’ purchasing power. Nominal wage growth is not keeping pace with inflation, with a loss of workers’ purchasing power (see section 4.1.) and increasing risks of poverty, especially for low-wage earners. ^{(14) (15)} Tight labour markets (see section 3.4.) and demands for pay rises could put strong pressure on wages and consumer prices generating perverse inflation-wage dynamics. Monetary policy could react to persistently high inflation by raising interest rates further, increasing financing costs for borrowers and slowing the economy, potentially affecting employment. Future developments in Russia’s war of aggression against Ukraine could prompt new increases in gas prices, although the EU’s continued diversification of supply sources has so far countered these pressures. Fragmentation of global trade represents another risk factor for the global economy, potentially affecting the EU.

In the longer term, demographic trends such as the reversal of population growth, steady increase in the old-age dependency ratio, ⁽¹⁶⁾ and the resulting negative consequences for the economy will bring additional challenges for the EU. After a long period of substantial growth, increases in the EU population slowed considerably over the past decade. More recently, several sudden events such as Brexit, the COVID-19 pandemic, and the Russian war of aggression against Ukraine accelerated or disrupted these longer-term developments. ⁽¹⁷⁾ The pandemic was responsible for 1.2 million additional deaths in 2020-2021, with a steeper decline for men. ⁽¹⁸⁾ In addition to excess mortality, it also caused a temporary decline in births (-14.1% in 24 EU countries during the first wave of COVID-19 compared to the average number of live births in January 2018 and 2019) ⁽¹⁹⁾ and led to a large drop in migration flows (almost 30% in 2020), as a result of lockdown restrictions. ^{(20) (21)} Some of these trends have since reversed, with birth rates recovering by the second half of 2021, to 1.53 live births per woman in the EU in 2021, and the fertility rate increasing in 21 Member States in 2021 compared to 2020. ^{(22) (23)} The UK withdrawal from the EU led to an almost 50% increase in EU citizens leaving the UK, compared to 2015. ^{(24) (25)} Finally, as of March 2023, about 3.9 million people had fled Ukraine and registered for temporary protection in the EU, representing the largest movement of displaced persons in Europe since the Balkan wars in the 1990s. ⁽²⁶⁾ Immigration into the EU from non-EU countries increased by almost 18% in 2021, compared to 2020. ⁽²⁷⁾

Population growth is expected to slow further in the coming years, before starting to decline in the longer term. The EU population is expected to increase slightly by 2030, from the current level of about 447 million people to around 453 million people. ⁽²⁸⁾ By 2100, the population is projected to decrease to about 419 million people, about 28 million people fewer than in 2022.

Consistently low levels of birth rates (1.53 births per woman in 2021) and extended longevity are expected to have a strong impact on the working-age population (15-64-year-olds) and the old-age dependency ratio ⁽²⁹⁾ in the EU. The working-age population is expected to shrink by 1.3% (3.7 million people) by 2030 compared to 2022 (285 million people), and by 9.9% (28.3 million people) by 2050. By 2100, the loss will exceed 20% (about 57 million people). Accordingly, the old-age dependency ratio is expected to increase from around 33% to 38% by 2030, and to 60% by 2100.

Some predominantly rural and less developed EU regions face an accelerated reduction in their working-age population. Combined with difficulties in attracting and/or retaining talent, this may impede these regions’ capacity to build sustainable, competitive, and knowledge-based economies, and puts them at a higher risk of failing to catch up with more advanced regions. ⁽³⁰⁾