The European Union's economy is showing signs of recovery after a period of stagnation, according to the European Commission's Autumn Forecast. The report projects GDP growth of 0.9% in the EU and 0.8% in the euro area for 2024, with expectations of stronger growth in subsequent years. The EU economy is anticipated to reach 1.5% growth in 2025, followed by 1.8% in 2026, while the euro area is forecast to grow at 1.3% and 1.6% respectively.
A significant development in the economic landscape is the rapid decline in inflation rates. The euro area's headline inflation is expected to drop dramatically from 5.4% in 2023 to 2.4% in 2024. The EU is projected to experience an even sharper decrease, with inflation falling from 6.4% in 2023 to 2.6% in 2024. These figures are expected to continue declining, reaching 2.0% in the EU by 2026, aligning closer to central bank targets.
The labor market remains a bright spot in the European economy, with unemployment reaching a historic low of 5.9% in October 2024. Employment growth is projected to continue, albeit at a slower pace, with the EU expecting 0.8% growth in 2024, moderating to 0.5% by 2026. This resilience in employment figures suggests underlying strength in the economy despite various challenges.
Government finances show mixed signals across the region. The EU's general government deficit is projected to improve, decreasing to 3.1% of GDP in 2024 and further to 2.9% by 2026. However, the aggregate debt-to-GDP ratio presents a concerning trend, expected to increase from 82.1% in 2023 to 83.4% by 2026. This rise is attributed to persistent primary deficits and increasing interest expenditure, no longer offset by high nominal GDP growth as inflation moderates.
Domestic demand is emerging as a key driver of economic growth, supported by improving consumer purchasing power and wage recovery. Investment is expected to rebound, bolstered by strong corporate balance sheets and improving credit conditions. The Recovery and Resilience Facility, along with other EU funds, is set to stimulate public investment throughout the forecast period.
The economic outlook faces several significant risks and uncertainties. Geopolitical tensions, including Russia's ongoing war in Ukraine and conflicts in the Middle East, pose potential threats to energy security and economic stability. Additionally, increasing protectionist measures by trading partners could impact the EU's export-oriented economy. Domestic challenges include policy uncertainty, manufacturing sector competitiveness issues, and potential delays in implementing recovery funds.
The forecast also highlights environmental concerns as a growing economic factor, exemplified by recent floods in Spain. These events underscore how natural hazards can significantly impact both environmental and economic conditions, adding another layer of complexity to the EU's economic outlook.
