EU Economic Performance Overview: 2023-2024
The EU economy avoided a full-blown recession in 2023, but the GDP growth was significantly lower than the previous year, only reaching +0.5%. This represents a sharp decline from 2022, when growth was at +3.6%. The factors contributing to this slowdown are multiple: high inflation, tightening monetary policy by the European Central Bank, persistent geopolitical tensions, especially related to the Ukraine conflict, and high energy and commodity prices. These factors negatively impacted business investments, creating challenges for the industrial sector while sparing the services sector, which continued to perform robustly.
As the EU continues into 2024, the GDP growth forecast has remained relatively unchanged at +0.9%, indicating limited economic recovery in the near term. However, this forecast is subject to uncertainty, as several downside risks, including inflation, energy price volatility, and geopolitical instability, remain unresolved. Looking ahead to 2025, the EU economy is expected to see a slight uptick in growth at +1.2%, with a stronger recovery in 2026 (+1.5%).
Key Economic Drivers and Challenges for the EU Economy:
Inflation and Monetary Tightening:
Inflation in the EU hit 11.5% in October 2022, marking the highest rate since 1985, largely driven by surging energy prices and supply chain disruptions caused by the war in Ukraine. The European Central Bank responded by increasing its policy rate from 0% to 4.5% by September 2023, leading to higher borrowing costs and squeezing household and government budgets. While inflation has decreased from its peak, core inflation, the measure of price growth excluding volatile food and energy prices, remains stubbornly high.
As of December 2024, HICP inflation, Harmonised Index of Consumer Prices, is 2.7%. The ECB expects inflation to moderate over the next couple of years, with forecasts predicting 2.4% in 2024, 2% in 2025, and 1.8% in 2026. However, there are ongoing concerns about underlying inflationary pressures, particularly in essential goods and services.
Energy Prices and Geopolitical Risks:
Energy prices continue to pose significant risks to the EU’s economic outlook. As of January 2025, the cost of gas has risen sharply, reaching €48 per MW/h, just below the €50 per MW/h mark seen in December 2024. This increase is attributed to several factors, including a colder-than-expected winter, reduced renewable energy output from wind and solar power, and the ongoing transition from Russian pipeline gas to Liquefied Natural Gas supplied by countries like the United States.
The ongoing Ukraine conflict continues to disrupt energy markets, with uncertain supply chains and trade routes affecting prices. Furthermore, the Middle East also remains a source of volatility, as tensions in the region threaten to further destabilize energy markets. Geopolitical uncertainty will likely continue to influence energy prices and economic performance in the near future.
Manufacturing Sector Weakness:
The manufacturing sector has struggled, especially in Germany, where industrial production remains weak. In 2023, Germany’s manufacturing sector contracted, leading to a mild recession (-0.3%). This trend is expected to continue in 2024 (-0.1%) as supply chain disruptions, high energy prices, and rising production costs persist. The automotive industry and heavy industry have been especially hard hit, with reduced demand for German products due to both domestic and global economic headwinds.
In contrast, services have been the primary driver of EU growth, with sectors such as finance, technology, and tourism showing strong performance, especially in southern EU countries like Spain and Portugal. The services sector accounts for a larger share of GDP in countries like France and Italy, which have seen moderate growth in 2023.
EU’s Major Economies: Performance and Forecasts
Germany:
As the largest economy in the EU, Germany has faced significant struggles in 2023, with a GDP contraction of -0.3% due to the weakness in its industrial base. The German economy is expected to see minimal recovery in 2024 (+0.4%), followed by a stronger rebound in 2025 (+0.4%) and 2026 (+1.2%). Much of this growth will hinge on a recovery in manufacturing and export demand, particularly in sectors like automotive, machinery, and chemicals.
France and Italy:
France and Italy posted better-than-average GDP growth in 2023 at +1.1% and +0.7%, respectively. Both countries are expected to see steady growth in 2024, with France achieving +1.1% and Italy growing by +0.5%. These countries are expected to continue their growth momentum through 2026, with France reaching +1.6% and Italy slightly lagging at +0.9%.
Both economies are expected to be more reliant on the services sector, but manufacturing weaknesses could continue to dampen growth prospects. However, a robust recovery in the tourism sector in countries like France and Italy may offset some of the broader manufacturing downturns.
Spain:
Spain saw outstanding growth in 2023 (+2.7%), outpacing the EU average. The Spanish economy has benefited from a rebound in tourism, public sector investments, and a strong services sector. Spain’s GDP growth is expected to continue at +3% in 2024, followed by +2.3% in 2025, and +1.7% in 2026. Spain's industrial production has also been among the most resilient, surpassing pre-pandemic levels in certain sectors.
Energy Prices, Supply Chain, and Inflation Risks
Energy Prices:
Energy remains one of the most uncertain elements of the EU economic outlook. Prices for natural gas and electricity have fluctuated sharply throughout 2024, with gas reaching levels above €50 per MW/h in December. The factors influencing these increases include global demand, shifts in energy supply chains, and uncertainty about future geopolitical risks, particularly the ongoing war in Ukraine and tensions in the Middle East.
The EU has made significant strides in diversifying its energy suppliers, especially by increasing imports of LNG from the United States and other producers. However, energy prices remain volatile, and the potential for further price hikes remains a risk, particularly if global economic growth recovers more strongly than expected.
Inflation and Economic Growth:
Inflation in the EU has fallen significantly from its peak in October 2022, but core inflation remains a significant challenge. Energy inflation has eased considerably (from 41% in June 2022 to 0.7% in December 2024), but inflation in core goods and services continues to exert pressure. The ECB remains vigilant, with the monetary policy set to balance inflationary pressures against potential economic stagnation. Interest rates have been raised to curb inflation, but borrowing costs remain high, limiting the capacity of governments to support economic recovery through fiscal stimulus.
The Manufacturing Sector's Struggles and Future Outlook:
The manufacturing sector in the EU has remained in a state of contraction since 2023, with some countries, particularly Germany and Italy, struggling with the high cost of production and energy. Industrial production is forecast to fall by -2% in 2024 before seeing marginal growth of +0.8% in 2025 and +2.5% in 2026.
The EU steel market, which is closely tied to global industrial production, continues to face downward pressure due to the combination of high input costs, global competition, and trade tensions. Germany's steel
