The gross domestic product of the European Union is expected to increase by 0.6 percent this year, and the same economic growth is expected to be recorded in the Euro area. This follows from current forecasts introduced by the European Commission and the European Central Bank.

The year 2024 is supposed to be a little more successful in this regard, but even then, there is no very valid reason to celebrate. The economy of the European Union is expected to grow by only 1.3 percent next year, as is currently estimated by the European Commission. What is behind the very slow recovery? Three key factors play a major role.

The first is the effect of the restrictive monetary policy, which the European Central Bank started implementing last July. The reason was the rapid increase in inflation, which reached the highest level in the last 40 years and was also the highest in the history of the Euro area itself. However, disinflation cannot be carried out without having a negative impact on economic performance. The economic slowdown is therefore a secondary but inevitable effect of monetary restriction aimed at reducing unprecedentedly high inflation.

The second factor can be considered the efforts of individual governments of the member countries of the European Union to reduce the deficit of public budgets. Public finances came under considerable pressure during the covid crisis, which was followed by the energy crisis. And although governments tried to finance extraordinary expenses with extraordinary budget revenues, the public budget deficit in the European Union will exceed three percent of GDP this year, but it is expected to decrease more significantly in the coming years.

This goes hand in hand with persistent uncertainty, especially on the part of households. Their real incomes fell in many EU countries during the energy crisis, which, together with concerns about future developments, led to a reduction in consumer spending.

The third major factor negatively affecting the economic recovery of the EU is weak foreign demand. Although it helped the EU economy to a certain extent this year, it will slow down a bit next year, mainly due to the weakening economic growth in China. Certain risks continue to be posed by the development of the war conflict in Ukraine and the Middle East.

For the following years, the current economic predictions are only slightly more optimistic. A further drop in inflation, down to the target of two percent, can be considered positive, while GDP growth in the European Union is expected to accelerate. It seems that the EU economy will stabilize in the next few years, creating the conditions for faster economic growth. Unless there is some negative surprise that we have no idea about today.

Economic forecast for EU 2023 – 2025 (real GDP growth in %)

*Note: ECB forecast for euro area, not EU

Peter Svoreň, APME FX

Sources:

European Commission Autumn 2023 Economic Forecast

International Monetary Fund: Regional Economic Outlook – Europe, November 2023

European Central Bank, Macroeconomic projection, December 2023