“We need to deal with longstanding structural challenges, raise productivity and make sure that the wider EU economy stays globally competitive,” said Valdis Dombrovskis, executive vice president at European Commission, said in a press statement on Friday 15 November 2024. Photo: Shutterstock

“We need to deal with longstanding structural challenges, raise productivity and make sure that the wider EU economy stays globally competitive,” said Valdis Dombrovskis, executive vice president at European Commission, said in a press statement on Friday 15 November 2024. Photo: Shutterstock

The European Commission forecasts that economic activity in the euro area will grow 1.3% in 2025, with headline inflation easing from 2.4% in 2024 to 2.1% in 2025, and further declining to 1.9% in 2026.

In its semiannual economic forecast, on Friday 15 November 2024, the European Commission presented a cautious outlook for the EU economy, forecasting a modest recovery from a prolonged period of stagnation. Despite ongoing challenges, including geopolitical instability and high inflationary pressures, the commission expects economic activity to gradually pick up in the coming years.

For 2024, the European Union’s GDP is projected to grow by 0.9%, while the euro area is expected to see a slightly smaller increase of 0.8%. This marks a modest rebound following recent stagnation, stated the commission. Growth is anticipated to accelerate in 2025, with GDP forecast to rise by 1.5% in the EU and 1.3% in the euro area. By 2026, the EU’s GDP growth is expected to reach 1.8%, with the euro area growing slightly more slowly at 1.6%.

Luxembourg GDP is expected to frow 2.3% and 2.2% in 2025 and 2026 respectively, compared to 1.2% in 2024.

Inflation

Headline inflation in the euro area is expected to ease significantly in 2025, falling from 5.4% in 2023 and 2.4% in 2024 to 2.1% in 2025, and further declining to 1.9% in 2026. In the broader EU, inflation is projected to follow a similar trend, dropping from 6.4% in 2023 to 2.6% in 2024, before easing to 2.4% in 2025 and 2.0% in 2026.

This continued disinflationary trend reflects a sustained reduction in price pressures, despite some volatility in energy prices. Inflationary pressures in services, which have remained elevated, are anticipated to moderate from early 2025, supported by slowing wage growth and an expected recovery in productivity.

Consumption and investment

Domestic demand is expected to be the primary driver of growth in the coming years, with household consumption and investment picking up pace. After a slow start in 2024, consumption is set to expand as wages recover their purchasing power and interest rates gradually decline. Despite these positive factors, consumption had been restrained in 2024 due to high living costs, persistent uncertainty, and the incentive for households to save in response to high interest rates.

Investment is projected to rebound in the medium term. Strong corporate balance sheets, recovering profits, and improved credit conditions are expected to support a recovery in business investment. Furthermore, EU-wide funds, including the recovery and resilience facility (RRF), are set to boost public investment, which will provide additional support for economic activity.

Exports and imports are projected to grow at a similar pace over the forecast period, meaning net trade will likely contribute little to overall growth in 2025 and 2026.

Labour market

The EU labour market has shown remarkable resilience, with unemployment reaching a historic low of 5.9% in October 2024. For the full year, the unemployment rate is expected to be 6.1% in the EU and 6.5% in the euro area. This is expected to edge down further in the following years, with unemployment projected to remain at 5.9% in both the EU and the euro area in 2025 and 2026.

Employment growth in the EU is forecast to be 0.8% in 2024, with the euro area seeing slightly higher growth of 0.9%. However, employment growth is expected to slow down as the forecast period progresses, with EU employment growth projected to fall to 0.5% by 2026 (0.6% in the euro area).

Fiscal consolidation

The EU’s general government deficit is expected to narrow in the coming years, reflecting ongoing fiscal consolidation efforts by member states. In 2024, the deficit is projected to decrease by around 0.4 percentage points to 3.1% of GDP, with further reductions expected in 2025 (3.0%) and 2026 (2.9%). The euro area’s deficit is forecast to follow a similar trajectory, with the deficit set to decrease from 3.0% in 2024 to 2.8% by 2026.

However, the EU’s debt-to-GDP ratio is projected to rise, increasing from 82.1% in 2023 to 83.4% in 2026. This follows a significant decline of nearly 10 percentage points between 2020 and 2023, but the effect of rising interest expenditure and primary deficits will push the debt ratio higher in the years ahead. In the euro area, the debt-to-GDP ratio is expected to increase from 88.9% in 2023 to 90% by 2026.

Geopolitical risks and economic uncertainty

Despite a generally positive economic outlook, significant uncertainties remain, with several risks to the forecast. Geopolitical instability, particularly Russia’s ongoing war against Ukraine and the escalating conflict in the Middle East, continue to pose significant threats to energy security and global trade. In addition, any further rise in protectionist measures by trading partners could disrupt the EU’s highly open economy.

On the domestic front, there are concerns over policy uncertainty and structural challenges in the manufacturing sector. These factors could undermine the EU’s competitiveness, weighing on both growth and the labour market. Delays in the implementation of the RRF or stronger-than-expected fiscal consolidation measures could also dampen growth prospects. Furthermore, the increasing frequency of extreme weather events, as evidenced by recent floods in Spain, could have significant economic consequences, further exacerbating challenges to growth and stability.

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