(CN) — The European Commission released its spring 2024 economic forecast Wednesday, predicting a mixed bag of "gradual expansion amid high geopolitical risks."
"After a prolonged period of stagnation, the EU economy is on track for a gradual recovery," EU economic commissioner Paolo Gentiloni said in a prepared statement. "Better than expected growth at the start of the year and the ongoing relaxation in inflation set the scene for this return to growth."
Gentiloni added that private consumption among EU residents — fueled by increases to real wages and employment levels — is expected to be the main driver of this slow growth. The commission measured the EU's overall economic growth rate in the first quarter of 2024 at 0.3%, exceeding earlier expectations. The commission expects overall GDP growth in the EU to reach 1% by the end of the year, reaching 1.6% by the end of 2025. Southern EU countries' economies are expected to expand faster than northern ones.
Inflation will persist through 2025, the commission reported, though at a slowing rate.
"In the EU, [inflation] is now expected to decrease from 6.4% in 2023 to 2.7% in 2024 and 2.2% in 2025. In the euro area, it is forecast to fall from 5.4% in 2023 to 2.5% in 2024 and 2.1% in 2025. This is a downward revision compared to winter for both the EU and the euro area – especially for this year," the commission stated.
Despite continued inflation, the commission said it was an improvement over the economic reality of 2023, when income for most workers barely outpaced inflation. This meant most EU residents spent less of their disposable income on consumption, further stalling the economy.
"Food and non-energy industrial goods have now become the primary disinflation drivers and are expected to continue detracting from inflation over the forecast horizon, reflecting receding pipeline pressures," the commission said. "Service prices, in contrast, have so far contributed very little to the disinflation process, reflecting still elevated wage pressures."
Unemployment remains low, though wage growth is expected to slow through 2024 and into 2025. Workers' average real wages in some — not all — EU member states are expected to recover their 2021 levels by the end of 2025, with the EU as a whole adding 2.5 million jobs over the same time period.
"Continued wage and employment growth will sustain growth in disposable income in 2024. A further uptick in the saving rate to 14.4% however limits the expansion of private consumption to 1.3% - still well below trend growth. In 2025, real disposable income is set to accelerate further, while the decline in interest rates reduces incentives to save," the commission said.
Gentiloni cited "two ongoing wars in our neighborhood and mounting geopolitical tensions" as risks to this modestly positive outlook, alluding to the Russia-Ukraine war and Israel's siege of Gaza. How those wars progress could drastically alter Wednesday's prediction, the commission said, particularly if the siege of Gaza broadens into a wider regional war involving Iran.
The forecast also assumes that the number of people fleeing the war in Ukraine and seeking temporary protection status in the EU will remain steady through 2024. About 4.3 million such refugees had entered the EU by the end of 2023. The commission projected that figure would decrease to 4.1 million by the end of 2025 as people returned to Ukraine, moved outside the EU or attained permanent resident status in their host countries.
The commission remains confident in its forecast despite its underlying assumptions on how these two wars will unfold.
"Despite the challenging external environment, the narrative supporting an outlook of gradual economic expansion remains largely valid. The EU labour market performed strongly in 2023 on the back of favourable demand and supply conditions," the commission said. "Notwithstanding signs of weakening, continued job and wage growth coupled with the ongoing decline in inflation are set to support the consumption-driven rebound that was already expected in the previous forecast rounds."
Follow @djbyrnes1
Subscribe to Closing Arguments
Sign up for new weekly newsletter Closing Arguments to get the latest about ongoing trials, major litigation and hot cases and rulings in courthouses around the U.S. and the world.
