Growth in the EU is slow to recover, but inflation is easing faster, the Commission stressed in its winter interim economic forecast released today.

After sluggish growth in 2023, the EU economy entered 2024 on a weaker footing than expected. The Commission revises growth in both the EU and the euro area slightly downwards: to 0.5% in 2023, from 0.6% forecast in the autumn forecast, and to 0.9% (from 1.3%) in the EU and 0.8% (from 1.2%) in the euro area in 2024. In 2025, economic activity is expected to expand by 1.7% in the EU and 1.5% in the euro area.

On the other hand, inflation, according to the Commission’s forecasts, is expected to decelerate faster than predicted in the autumn. In the EU, Harmonized Index of Consumer Prices (HICP) inflation is forecast to decline from 6.3% in 2023 to 3% in 2024 and 2.5% in 2025. In the euro area, it is expected to slow from 5.4% in 2023 to 2.7% in 2024 and to 2.2% in 2025.

Growth in the EU is expected to pick up in 2024 after a weak start to the year.

The Commission notes that in 2023 growth was held back by the erosion of household purchasing power, strong monetary tightening, the partial withdrawal of fiscal support and the decline in external demand. After narrowly avoiding a technical recession in the second half of last year, the outlook for the EU economy in the first quarter of 2024 remains weak. However, economic activity is expected to accelerate gradually this year. As inflation continues to ease, real wage growth and a resilient labor market should support a recovery in consumption. Investments are set to benefit from the gradual easing of credit conditions and the continued implementation of the Recovery and Resilience Facility (RRF). In addition, trade with foreign partners is expected to normalize, after a weak performance last year.

The growth rate is expected to stabilize from the second half of 2024 to the end of 2025.

The fall in inflation in 2023 was faster than expected, mainly due to falling energy prices. As activity lagged, the easing of price pressures in the second half of last year spread to other goods and services.

Lower-than-expected inflation results in recent months, lower energy commodity prices and weaker economic momentum have put inflation on a steeper downward path than expected in autumn forecasts. In the short term, however, the end of energy support measures in member states and higher shipping costs following trade disruptions in the Red Sea are expected to put some upward pressure on prices, without derailing the deflationary process. By the end of the forecast horizon, euro area inflation is expected to rise just above the ECB’s target, with EU inflation higher.

Finally, the Commission highlights the increased uncertainty surrounding its economic forecasts amid geopolitical tensions and the risk of further escalation of the conflict in the Middle East. “The rise in shipping costs in the wake of trade disruptions in the Red Sea is expected to have only a marginal impact on inflation,” the Commission estimates, while stressing that “further disruptions could lead to new supply bottlenecks that could stifle production and drive up prices.”

Domestically, the risks to key growth and inflation forecasts are linked to whether consumption, wage growth and profit margins underperform or exceed expectations, and how high interest rates remain, for how long. Climate risks and the increasing frequency of extreme weather events also continue to pose threats, according to the Commission.