2024 Euro Forecast: Economic Growth and Inflation Outlook
The European economy, after a period of stagnation, began to show signs of recovery in the first quarter of this year. The momentum, while modest, has continued through the second and third quarters, bolstered by easing inflationary pressures. Despite persistent global uncertainties, conditions are emerging that could support a gentle acceleration in domestic demand within the Eurozone.
However, the latest economic projections suggest a tempered outlook for 2024. Real GDP growth in the euro area is forecasted to reach 0.8% in 2024. Looking further ahead, the forecast anticipates a gradual strengthening of the economy, with growth expected to rise to 1.3% in 2025 and 1.6% in 2026. This progression is predicated on increased consumer spending and a recovery in investment following a contraction expected in 2024.
Inflation within the euro area is undergoing a significant disinflationary trend. Having started to recede from the end of 2022, headline inflation is projected to more than halve in 2024, falling from 5.4% in 2023 to 2.4%. The decline is expected to moderate in subsequent years, reaching 2.1% in 2025 and 1.9% in 2026.
Household finances have seen some improvement, with disposable income growing in the first half of the year, driven by increased employment and a recovery in real wages. By mid-year, the purchasing power of wages had recovered almost half of the losses incurred due to high inflation. Nevertheless, a cautious approach to spending appears to be prevalent among households.
Fueled by memories of high inflation, purchasing power still below previous peaks, and the attractiveness of higher returns on savings due to elevated interest rates, households have opted to save a larger portion of their income.
The household saving rate in the second quarter of 2024 reached 14.8%, exceeding expectations and surpassing the pre-pandemic long-term average by more than 3 percentage points. Simultaneously, investment figures have been disappointing, contracting by over 2.5% in the first half of the year, partly due to fluctuations in intellectual property product transactions, but also reflecting a broader weakness across asset categories. Elevated uncertainty is considered a significant factor dampening both consumption and, particularly, investment.
Recent volatility in Brent crude oil prices, influenced by OPEC+ production decisions and escalating geopolitical tensions in the Middle East, adds complexity to the economic landscape. Despite these fluctuations, the overall trend for average futures oil prices is downward, influenced by expectations of weaker global demand, especially from China, and increased output from OPEC+ and the US. Compared to earlier projections, futures oil prices are anticipated to be lower in both 2024 and 2025. Conversely, gas prices have risen since previous forecasts and are expected to be higher in both 2024 and 2025. Wholesale electricity prices are also projected to be slightly higher in 2024, although lower in 2025.
Encouragingly, forecasts indicate a reduction in both gas and electricity prices in 2026 compared to 2025 levels.
Consumer inflation dynamics have shifted. After the initial sharp decline due to energy price deflation, inflation remained relatively stable in the early months of the year before resuming its downward trajectory in August. This renewed decline is attributed to continued downward pressure from energy prices and moderating inflation in non-energy goods. Euro area inflation fell to 1.7% in September, before increasing to 2% in October, driven by a rise in oil prices and base effects pushing energy inflation upwards again. Despite anticipated volatility due to base effects and the expiration of energy support measures, the disinflationary process appears to be firmly in place. Energy inflation is expected to have a minimal impact on headline inflation, even with a slight increase in 2026. Price pressures for non-energy goods are expected to continue to ease, with inflation for food and non-energy industrial goods stabilizing around historical averages by the end of the forecast period. However, strong inflationary pressures within the services sector are projected to persist until early 2025, moderating thereafter due to slower wage growth, anticipated productivity gains, and negative base effects.
The European Central Bank has been adjusting its monetary policy, with a third policy rate cut implemented in October, continuing a loosening cycle initiated in May. Market expectations at the forecast cut-off date indicated the euro area deposit facility rate falling below 3% by the end of the year. Further reductions are anticipated by the end of 2025, with the policy rate expected to reach around 2% and stabilize at that level for the remainder of the forecast horizon. Long-term interest rates (10-year) have decreased less significantly than short-term rates and are expected to remain slightly above 2% over the forecast period, reflecting reduced inflation expectations. Signs of revival are emerging in bank lending data for the euro area, with net lending expanding again, albeit remaining weak in nominal terms. Demand for housing loans is recovering, and credit standards are easing. For businesses, while credit standards have not yet eased, the rate of tightening has ceased, potentially indicating a future turnaround in credit flows.
The EU labor market has demonstrated resilience in the first half of 2024, generating 750,000 new jobs. Since the onset of the pandemic (Q4 2019), the total number of employed individuals has increased by a substantial 8 million, largely benefiting women, older workers, and foreign-born jobseekers. However, employment growth has decelerated, and the job intensity of growth appears to be normalizing. While still tight by historical standards, the EU labor market is showing signs of loosening, with vacancy rates approaching pre-pandemic levels and business managers reporting reduced labor shortages, particularly in industry. Despite this, labor demand growth continues to outpace supply.
The EU unemployment rate reached a new historical low of 5.9% in October. Employment growth is projected to slow from 0.8% in 2024 to 0.5% in 2026. Following a contraction in 2023, productivity is expected to stagnate in 2024, followed by a cyclical rebound in 2025 and further gains in 2026, although overall productivity growth is projected to remain subdued.
This subdued productivity growth may reflect persistent weaknesses in innovation and business dynamism. The unemployment rate is projected to decline slightly further, reaching 5.9% in the EU and 6.3% in the euro area by 2026. Wage growth in the EU, after peaking in 2023 at 6.1%, is still expected to be robust in 2024 at 4.9%. It is then forecast to slow significantly to 3.5% and 3% in 2025 and 2026, respectively. Nevertheless, wage growth is expected to outpace inflation sufficiently to allow for a full recovery of real wages by next year in the EU and the following year in the euro area.
As inflation continues to moderate, household real disposable income is projected to grow further in both 2025 and 2026. Supported by strong balance sheets, reduced incentives to save, and improving credit conditions, households are expected to gradually decrease their saving rate to 14% by 2026. Consequently, consumption growth is projected to accelerate throughout the forecast period.
Corporate balance sheets are strong, profits are recovering, credit conditions are improving, and the Recovery and Resilience Facility (RRF) is providing impetus, setting the stage for a significant rebound in investment. Following a contraction this year, investment is projected to expand in 2025 and accelerate further in 2026. Residential construction is expected to remain constrained in 2025 due to subdued household investment.
However, public sector investment in infrastructure, partly funded by the RRF, is projected to provide a boost. As the housing sector recovers in 2026, construction investment is expected to grow by 3.3%. Equipment investment is also forecast to rebound in 2025 and continue to expand in the following year. Approximately half of the RRF-grant related expenditure is earmarked to support businesses in addressing capacity adjustment needs, including investments in energy-saving and low-emission production technologies.
Despite these positive factors, persistent uncertainty and structural shifts are expected to weigh on certain manufacturing sectors, particularly energy-intensive and automotive industries.
Global economic activity has shown resilience in the first half of the year, largely driven by growth in the US. Excluding the EU, global growth is projected to remain around 3.5% throughout the forecast period, broadly consistent with previous projections, although with some geographical shifts. The US economy is expected to grow more strongly in 2024 (at 2.7%) before moderating to just above 2% in 2025 and 2026. Growth prospects for the UK and Japan have also improved slightly. In contrast, the outlook for China is slightly weaker than previously anticipated, with projected growth slowing to 4.4% in 2026 despite recent stimulus measures. India is expected to remain the fastest-growing major economy, even with a gradual slowdown in real GDP growth. Global merchandise trade is expected to rebound in the second half of 2024 as demand for goods recovers and the manufacturing sector regains momentum. Global services trade is projected to continue expanding strongly, driven by tourism and digital services. Overall, global trade excluding the EU is projected to grow by 3.2% in 2024, accelerating to 3.5% in 2025 before moderating to 3.2% in 2026.
This positive global trade dynamic is expected to support EU export growth. After a broadly flat year for goods exports in 2024, merchandise exports are projected to accelerate in 2025 and 2026. Service exports have performed strongly this year, contributing to an overall export growth of 1.4% in 2024. In 2025 and 2026, service exports are projected to grow at a similar pace to goods exports as the post-pandemic recovery in global travel spending gradually diminishes. After stagnating this year, imports of goods and services are expected to rebound visibly in 2025 and 2026. Consequently, net exports, which contributed to real GDP growth in 2024, are not projected to contribute to growth in 2025 and 2026. The surplus in the current account balance with the rest of the world is expected to decline from 3.6% in 2024 to 3.3% in 2026.
The EU general government deficit is projected to decrease in 2024 to 3.1% of GDP, driven by revenue increases and fiscal consolidation measures. A marginal decrease to 3.0% is forecast for 2025, with further budgetary restraint offset by revenue shortfalls. In 2026, the deficit is expected to decline further to 2.9% due to positive economic momentum.
In the euro area, the deficit is projected to gradually decrease from 3.0% of GDP in 2024 to 2.8% in 2026. Discretionary fiscal policy is estimated to have a slightly contractionary effect on the EU economy in 2024 and a broadly neutral effect in 2025 and 2026, despite EU fund contributions. The contractionary fiscal stance in 2024 is largely due to a temporary decrease in EU-financed expenditure and the phasing out of housing tax credits in Italy. In 2025, a contractionary impulse from primary net current expenditure is broadly offset by increased public investment, reflecting the utilization of the RRF and other EU funds. The aggregate debt-to-GDP ratio for the EU is projected to increase slightly from 82.1% in 2023 to 83.4% in 2026, reflecting the impact of persistent deficits and rising interest rates. In the euro area, government debt is forecast to increase from 88.9% of GDP in 2023 to 90% in 2026.
The economic outlook for the EU remains highly uncertain, with risks predominantly skewed to the downside. The ongoing war in Ukraine and the intensified conflict in the Middle East contribute to geopolitical risks and vulnerabilities in European energy security. Increased protectionist measures by trading partners could negatively impact global trade and the EU’s open economy. Low productivity growth may constrain firms’ ability to sustain wage growth, potentially leading to job reductions or price increases for consumers. Delays in RRF implementation or a more restrictive fiscal stance in 2026 could further dampen economic activity. Finally, the increasing frequency and severity of natural hazards pose significant risks to both populations and the economy, as highlighted by recent events.