Following a period of stagnation, the European Union economy showed signs of life in the first quarter of this year. Consistent with spring projections, this moderate expansion continued through the second and third quarters, bolstered by easing inflationary pressures. Despite a backdrop of heightened global uncertainty, conditions seem favorable for a gentle acceleration in domestic demand within the Eurozone.
However, the latest Autumn Forecast paints a slightly adjusted picture for real GDP growth in 2024 Euro area. Projections now indicate a growth rate of 0.8% for the euro area and 0.9% for the broader EU. While the euro area forecast remains consistent with spring expectations, the EU figure has been slightly revised downwards by 0.1 percentage points. Looking ahead, the forecast anticipates a more robust recovery, with EU growth expected to climb to 1.5% in 2025 and 1.8% in 2026, fueled by increased consumer spending and a rebound in investment after a contraction in 2024 euro. The euro area is projected to follow a similar growth trajectory, reaching 1.3% in 2025 and 1.6% in 2026.
The disinflationary trend that began in late 2022 continued its course through the summer months. Despite a minor uptick in October, largely attributed to energy price fluctuations, headline inflation in the euro area is projected to more than halve in 2024 euro, dropping from 5.4% in 2023 to 2.4%. This easing of inflation is expected to continue, albeit at a slower pace, reaching 2.1% in 2025 and 1.9% in 2026. The EU is expected to experience an even sharper disinflation in 2024 euro, with headline inflation falling to 2.6% from 6.4% in 2023, and further decreasing to 2.4% in 2025 and 2.0% in 2026.
Household disposable income saw healthy growth in the first half of the year, supported by expanding employment and the ongoing recovery of real wages. By mid-year, wage purchasing power had recovered nearly half of the losses incurred due to high inflation.
However, a notable trend emerged: households appeared hesitant to spend their increased income. With the memory of high inflation still prominent, purchasing power remaining below its mid-2022 peak, and attractive returns available from higher interest rates, households opted to save a larger portion of their income.
In the second quarter of 2024 euro, the household saving rate reached 14.8%, exceeding expectations and surpassing the pre-pandemic long-term average by over 3 percentage points. Simultaneously, investment performance was disappointing, contracting by more than 2.5% in the first half of the year. While some of this contraction was due to one-off transactions in intellectual property products, the underlying decline remained substantial and widespread across various asset categories. Elevated economic uncertainty is believed to have dampened both consumption and, particularly, investment in the 2024 euro economy. On a positive note, a rebound in global goods trade and continued growth in services trade modestly boosted exports of goods and services by 0.5% in the first half of the year. Import growth lagged significantly behind, resulting in a positive contribution from net external demand to overall growth. While consumption is estimated to have strengthened in the third quarter, investment is believed to have contracted further.
Recent volatility in Brent oil prices, driven by concerns over OPEC+ production cuts and the escalating conflict in the Middle East, presents a risk. Nevertheless, the gradual decline in oil prices over the summer has placed annual average futures’ oil prices on a downward trajectory throughout the forecast period. This is driven by expectations of weaker global oil demand, especially from China, and increased production from both OPEC+ and the US. Compared to spring assumptions, futures oil prices at the forecast cut-off date were 7% and 10% lower for 2024 euro and 2025, respectively. Conversely, gas prices have risen since spring and are now projected to be higher than anticipated in the Spring Forecast for both 2024 euro and 2025. Wholesale electricity prices are also projected to be slightly higher in 2024 euro but lower in 2025.
Crucially, both gas and electricity prices are expected to decrease in 2026 from their 2025 levels, offering potential relief in the medium term.
After the strong deflationary effect of energy inflation subsided, consumer inflation largely plateaued in the early months of the year. However, it resumed its downward trend in August, influenced by renewed downward pressure from energy and continued moderation in non-energy goods inflation. Euro area inflation fell to 1.7% in September before rebounding to 2% in October due to a rise in oil prices and strong base effects pushing energy inflation upwards again. Despite anticipated volatility due to base effects and the expiration of energy-related support measures, the disinflationary process appears firmly established. Energy inflation is projected to contribute only negligibly to headline inflation, even with a slight increase in 2026. Price pressures in non-energy goods are expected to moderate further, with inflation in food and non-energy industrial goods stabilizing around historical averages by the end of the forecast horizon for the 2024 euro economy. Importantly, strong inflationary pressures in services are expected to persist until early 2025, moderating thereafter as wage growth slows and productivity is projected to pick up, further supported by negative base effects.
In October, the European Central Bank (ECB) implemented its third policy rate cut since the beginning of its loosening cycle in May. As of the forecast cut-off date, markets anticipated the euro area deposit facility rate to fall below 3% by the end of 2024 euro. By the end of 2025, the policy rate is expected to decrease further to around 2%, approximately 60 basis points lower than spring expectations, and stabilize around that level for the remainder of the forecast period. Most central banks in non-euro area Member States are also expected to ease their monetary policy stance, with more pronounced cuts anticipated in Poland and particularly Romania. Long-term rates in the euro area (10-year) have decreased in recent months, but to a lesser extent than short-term rates. They are now projected to remain slightly above 2% throughout the forecast horizon, with the downward adjustment since spring largely reflecting lower inflation expectations for the 2024 euro economy and beyond. Meanwhile, bank lending data for the euro area indicate signs of recovery. Net lending is expanding again, although it remains weak in nominal terms. Demand for housing loans is picking up, and credit standards are easing. For businesses, credit standards have not yet begun to ease, but the tightening observed in previous quarters has ceased, potentially signaling a turnaround in credit flows.
The EU labor market demonstrated resilience in the first half of 2024 euro. The economy continued to generate jobs, adding 750,000 workers. This brings the total number of newly employed individuals since the start of the pandemic (2019-Q4) to a substantial 8 million, largely benefiting women, older workers, and foreign-born jobseekers. However, the pace of employment growth has slowed, and the job intensity of growth appears to be gradually normalizing. Although still tight by historical standards, the EU labor market has begun to loosen, with the vacancy rate approaching pre-pandemic levels and business managers reporting fewer labor shortages, particularly in industry. Nevertheless, labor demand growth continues to outpace supply:
In October, the EU unemployment rate reached a new historical low of 5.9%. Employment growth is projected to slow from 0.8% in 2024 euro to 0.5% in 2026. Following a contraction in 2023, productivity is expected to stagnate in 2024 euro. A cyclical rebound is anticipated in 2025, strengthening further in 2026. Despite this, productivity growth is projected to remain subdued, potentially reflecting ongoing weaknesses in innovation capacity and business dynamism. Composition effects have not played a significant role thus far. The unemployment rate is projected to edge down further, reaching 5.9% in the EU and 6.3% in the euro area in 2026. After peaking in 2023 (6.1%), wage growth in the EU is still expected to be robust in 2024 euro (4.9%). However, it is then projected to slow markedly to 3.5% and 3% in 2025 and 2026, respectively. Despite this slowdown, wage growth will remain sufficiently above inflation to allow for full recovery of real wages by next year in the EU and the following year in the euro area.
As inflation continues to ease, household real disposable income is projected to grow further in both 2025 and 2026. With strong balance sheets, reduced incentives to save, and improving credit conditions, households are expected to gradually lower their saving rate to 14% by 2026. Consequently, consumption growth is projected to accelerate throughout the forecast horizon for the 2024 euro economy and beyond.
Strong corporate balance sheets, recovering profits, improving credit conditions, and the impetus from the Recovery and Resilience Facility (RRF) are setting the stage for a robust rebound in investment. Following a contraction this year, investment is projected to expand in 2025 and accelerate further in 2026. In 2025, residential construction is still expected to be constrained by subdued household investment.
However, the general government sector is projected to boost infrastructure investment, partly supported by the RRF. As the housing sector finally recovers in 2026, construction investment is projected to expand by 3.3%. Equipment investment is also forecast to rebound in 2025 and continue to grow in the following year. Roughly half of the projected RRF-grant related expenditure is intended to support businesses in addressing capacity adjustment needs, including the transition to energy-saving and low-emission production methods, crucial for the future of the 2024 euro economy.
Despite these positive drivers, elevated uncertainty and structural shifts are expected to weigh on certain segments of manufacturing, particularly energy-intensive and automotive industries.
Global economic activity has remained resilient in the first half of the year, primarily due to a pickup in activity in the US. Excluding the EU, global growth is projected to hover around 3.5% throughout the forecast horizon. This is broadly consistent with spring projections, although with some shifts in geographical composition. Specifically, US growth is projected to be slightly stronger in 2024 euro (at 2.7%) before moderating to just above 2% in 2025 and 2026. Growth prospects in the UK and Japan have also improved somewhat. In contrast, the outlook for China is slightly weaker than previously anticipated. The Chinese economy is projected to grow by 4.9% this year and, despite recent stimulus measures, continue to slow down to 4.4% in 2026. India is expected to remain the fastest-growing major economy throughout the forecast period, even with a gradual slowdown in real GDP growth. As demand for goods is expected to recover and the manufacturing sector regains momentum, global merchandise trade is projected to continue its rebound in the second half of 2024 euro. Global services trade is expected to maintain solid growth, driven by tourism and digital services. Overall, global trade excluding the EU is projected to expand by 3.2% in 2024 euro, accelerating to 3.5% in 2025 before slightly declining to 3.2% in 2026. This suggests that increasing headwinds against global trade expansion, including the growing number of trade restrictions, have not yet significantly impacted global trade flows.
This positive trade dynamic is expected to support EU export growth. Following broadly flat annual growth in goods exports in 2024 euro, merchandise exports are projected to accelerate in 2025 and 2026. Data from the first half of the year indicate strong performance in services exports this year, boosting expected aggregate export growth to 1.4% in 2024 euro. In 2025 and 2026, services exports are projected to grow at roughly the same pace as goods as the catch-up dynamics of global travel expenditure gradually diminish. After broadly stagnating this year, imports of goods and services are expected to rebound visibly in 2025 and 2026. As a result, after supporting real GDP growth in 2024 euro, net exports are projected to no longer contribute to growth in 2025 and 2026. The surplus in the balance of current transactions with the rest of the world is projected to decrease from 3.6% in 2024 euro to 3.4% in 2025 and 3.3% in 2026 as the improvement in terms of trade comes to a halt.
The EU general government deficit is expected to decrease in 2024 euro by approximately 0.4 percentage points to 3.1% of GDP, driven by revenue windfalls and fiscal consolidation efforts. In 2025, the deficit is forecast to decrease marginally to 3.0% as further budgetary restraint is offset by revenue shortfalls. In 2026, positive economic momentum is expected to reduce the deficit further to 2.9%.
In the euro area, the deficit is projected to gradually decline from 3.0% of GDP in 2024 euro to 2.8% in 2026. Despite the contribution of EU funds, discretionary fiscal policy is estimated to have a slightly contractionary effect on the EU economy in 2024 euro and a broadly neutral effect in 2025 and 2026. The contractionary fiscal stance in 2024 euro is largely due to a temporary dip in EU-financed expenditure and the phase-out of housing tax credits in Italy. In 2025, a contractionary impulse from primary net current expenditure is broadly offset by increased public investment, also reflecting the uptake of the RRF and other EU funds. These projections do not incorporate measures necessary to achieve the adjustment paths outlined in Member States’ Medium-Term Fiscal-Structural Plans (MTFSPs) as these will only be specified in late 2025. The aggregate debt-to-GDP ratio of the EU is projected to increase slightly from 82.1% in 2023 to 83.4% in 2026. This follows an almost 10 percentage point decrease between 2020 and 2023 and reflects the impact of still elevated deficits that are no longer offset by high nominal growth, while the effects of higher interest rates become more apparent in the 2024 euro economy. In the euro area, government debt is forecast to rise from 88.9% of GDP in 2023 to 90% in 2026.
The EU’s economic outlook remains highly uncertain, with risks predominantly skewed to the downside for the 2024 euro economy and beyond. Russia’s ongoing war of aggression against Ukraine and the intensified conflict in the Middle East exacerbate geopolitical risks and the continued vulnerability of European energy security. A further increase in protectionist measures by trading partners could negatively impact global trade, with adverse consequences for the EU’s highly open economy. Low productivity growth may increasingly challenge firms’ ability to sustain wage growth, potentially leading to labor reductions or the passing of rising costs onto consumers. Furthermore, delays in the implementation of the RRF or a more restrictive fiscal stance in 2026 as MTFSPs are implemented could further dampen economic activity. Finally, recent floods in Spain serve as a stark reminder of the dramatic consequences that the increasing frequency and intensity of natural hazards can have, not only for affected populations and their environments but also for the broader economy.
