Employment and Social Developments in Europe (ESDE) 2024

2. Macroeconomic developments and forecast

Global economic activity expanded throughout all quarters in 2023, primarily driven by robust growth in China, the United States, and India. At the same time, economic activity slowed in other advanced economies, such as the United Kingdom and Canada. The decrease in international goods trade reflected the weakness of global manufacturing. Conversely, services continued to recover, particularly travel and tourism. The fall in demand for manufactured goods post-COVID-19 pandemic, the frail state of the manufacturing sector, high inventory levels in advanced economies, and trade restrictions all negatively impacted trade.⁽¹²⁾

In the EU, real GDP growth decelerated in 2023 and stands below the levels of other major economies. Real GDP rose by just 0.4% in 2023, after growing by 3.4% in 2022 and 6.1% in 2021. Developments in the euro area were similar, with a growth rate of 0.4% in 2023. Economic activity in the EU was somewhat stronger in the first half of 2023 (+1.1% in Q1 and +0.5% in Q2), slowing in the second half of the year (+0.2% in Q3 and +0.4% in Q4).⁽¹³⁾ Annual GDP growth in the US, Japan and China was higher than in the EU (+2.6%, +1.9%, and +5.2%, respectively) and lower in the UK (+0.1%) (Chart 1.1).

The expansion of EU real GDP in 2023 was primarily driven by an increase in net trade. In the context of weak foreign demand hindering exports and a sluggish domestic demand and manufacturing activity hindering imports, the decrease in import volumes was higher than the decline in exports, contributing +0.7 pp of real GDP growth. Net trade impact on growth was more favourable than anticipated in the Autumn 2023 Economic Forecast. ⁽¹⁴⁾ Private and public consumption contributed only modestly to GDP growth (+0.3 pp and +0.2 pp respectively) and the contribution of gross fixed capital formation (+0.3 pp) was outweighed by the negative impact of the change in inventories (-1.1 pp) (Chart 1.1).

In 2023, real GDP expanded in 16 Member States. The increase was 2.0% or more in eight countries, with particularly high growth in Malta, at 5.7%. ⁽¹⁵⁾ By contrast, real GDP declined in 11 countries, notably in Estonia ( 3.0%) and Ireland (-5.5%) (Chart 1.2). Among the five biggest EU economies, real GDP declined in Germany ( 0.2%) and expanded in the Netherlands (+0.1%), France (+0.9%), Italy (+0.9%) and Spain (+2.5%).

Inflation in both the EU and the euro area slowed significantly in 2023. By December, annual inflation in the EU had dropped to 3.4% (2.9% in the euro area), marking a significant reduction from December 2022 levels (10.4% in the EU and 9.2% in the euro area), and from the peak in October 2022 (11.5% in the EU and 10.6% in the euro area) (Chart 1.3). In February 2024, inflation had further decelerated, to 2.8% in the EU (2.6% in the euro area), remaining stable until July 2024. The main drivers were the decline in energy prices and an easing of inflationary pressures from food, industrial goods, and services. Gas and electricity inflation rates experienced a decline in the latter half of 2022 and early 2023, followed by a drop in prices due to improved supplies and infrastructure, higher inventory levels, and subdued demand. While food price inflation started to slow in April 2023, inflation in services only started to subside during the 2023 summer. Elevated – albeit declining – inflation and tightening monetary policy affected economic performance in 2023, with important consequences for households (see Section 4.1.).

Inflation is projected to remain stable for the rest of 2024 and to decline further in 2025.Annual inflation in the EU is forecasted to average at 2.7% in 2024 and then to decline to 2.2% in 2025. Food and non-energy industrial goods are the primary drivers behind this slowdown. ⁽¹⁶⁾. Yet, the expiration of policy measures introduced to address the energy crisis may continue to put pressure on the prices of consumer energy. Wage pressures remain elevated, with service prices having contributed little to disinflation.

Almost all Member States’ economies are projected to grow in 2024, with an average growth at the EU-level of 1.0% (0.8% in the euro area). After recovering somewhat at the beginning of 2024 (+0.6% in Q1 and +0.8% in Q2, compared to same quarter of the previous year), GDP growth is expected to reach 1.6% in 2025 (1.4% in the euro area). The EU entered 2024 with a weaker economic outlook than initially expected. Nevertheless, the conditions remain in place for a gradual improvement in economic activity. Continued wage and employment growth are expected to sustain growth in households’ disposable income in 2024 and to continue in 2025 (albeit slightly slower), which would also boost consumption. The contribution of investment to real GDP growth is expected to increase more gradually and the contribution of EU's net external demand is predicted to become neutral. ⁽¹⁷⁾ Overall, domestic risks related to growth and inflation are broadly balanced in the EU.

Heightened geopolitical tensions and global policy uncertainty expose the EU economic outlook to several risks. Russia's ongoing war of aggression against Ukraine and the Middle East conflict could add to upward pressure on prices and stress on supply chains, jeopardising production and trade. Energy commodities are also vulnerable to these downward risks. Persistence of inflation in the US may delay its interest rate cuts, resulting in tighter global financial conditions. In addition, uncertainties linked to China and US economic activity developments could weigh on the EU economy. Finally, climate change risks continue to be of primary concern, with severe potential costs for natural capital, infrastructure and economic activity. ⁽¹⁸⁾ Financing the digital infrastructure may also prove a challenge.