Autumn 2023 Economic Forecast: A modest recovery ahead after a challenging year

The European economy has lost momentum this year against the background of a high cost of living, weak external demand and monetary tightening. While economic activity is expected to gradually recover going forward, the European Commission's Autumn Forecast revises EU GDP growth down compared to its summer projections. Inflation is estimated to have dropped to a two-year low in the euro area in October and is set to continue declining over the forecast horizon.

Growth has lost momentum, but a rebound is still expected

Following a robust expansion throughout most of 2022, real GDP contracted towards year-end and barely grew in the first three quarters of 2023. Still high, though declining, inflation, and tightening monetary policy took a heavier toll than previously expected, alongside weak external demand. The latest business indicators and survey data for October point to subdued economic activity also in the fourth quarter of this year, amid increased uncertainty. Overall, the Autumn Forecast projects GDP growth in 2023 at 0.6% in both the EU and the euro area, 0.2 percentage points below the Commission's summer forecast.

Economic activity is expected to gradually pick up as consumption recovers on the back of a steadily robust labour market, sustained wage growth and continued easing of inflation. Despite tighter monetary policy, investment is projected to continue increasing, supported by overall solid corporate balance sheets and by the Recovery and Resilience Facility. In 2024, EU GDP growth is forecast to improve to 1.3%. This is still a downward revision of 0.1 pps. from the summer. In the euro area, GDP growth is projected to be slightly lower, at 1.2%.

In 2025, with inflation and the drag from monetary tightening subsiding, growth is expected to strengthen to 1.7% for the EU and 1.6% for the euro area.

Inflation to continue easing after falling to two-year low

Inflation remains on a downward trend. It is estimated to have declined to 2.9% in the euro area in October, from its 10.6% peak a year ago. This marks its lowest level since July 2021.

While the moderation in the past year was mainly driven by the sharp fall in energy prices, it has now become increasingly broad-based across all main consumption categories, beyond energy and food.

As monetary tightening works its way through the economy, inflation is set to continue declining, though at a more moderate pace, reflecting a slower, but more broad-based, easing of inflationary pressures in food, manufactured goods and services. Headline inflation in the euro area is projected to fall from 5.6% in 2023 to 3.2% in 2024 and 2.2% in 2025. In the EU, headline inflation is set to decrease from 6.5% in 2023 to 3.5% in 2024 and 2.4% in 2025.

Labour market to remain resilient

The EU labour market continued to perform strongly in the first half of 2023, despite the slowdown in economic growth. In the second quarter, activity and employment rates in the EU reached their highest level on record, and in September the unemployment rate remained at 6% of the labour force, close to its record low.

Although latest information from surveys points to some cooling and some Member States have seen an uptick in unemployment, the labour market is set to remain resilient over the forecast horizon. Employment growth in the EU is projected at 1.0% this year, before easing to 0.4% in both 2024 and 2025. The unemployment rate in the EU is expected to remain broadly stable at 6.0% in 2023 and in 2024, and to edge down to 5.9% in 2025. Real wages are expected to turn positive as of next year on the back of continued nominal wage growth and declining inflation.

Public deficits decrease as fiscal support is phased out

The phase-out of pandemic-related temporary measures, a reduction in subsidies to private investment and a lower net budgetary impact of energy-related measures are expected to offset the pressure on the fiscal balances from a less favourable economic environment and higher interest expenditure. Consequently, the EU general government deficit is projected to decline slightly in 2023, to 3.2% of GDP. Continued restraint in discretionary fiscal support is expected to further reduce the EU public deficit to 2.8% of GDP in 2024 and to 2.7% in 2025. The main driver of this decline is set to be the sizeable reduction in energy-related measures next year and their phase out in 2025.

The EU debt-to-GDP ratio is projected to continue to decline in 2023, to 83%. This is supported by high inflation, while higher interest rates on new debt issuances raise interest expenditure only gradually given the long average maturity of public debts in the EU. In 2024 and 2025, the debt ratio is forecast to broadly stabilise above the 2019 level of around 79%.

Risks and uncertainty increase amid geopolitical tensions

Uncertainty and downside risks to the economic outlook have increased in recent months amid Russia's protracted war of aggression against Ukraine and the conflict in the Middle East. So far, the latter's impact on energy markets has been contained, but there is a risk of disruptions to energy supplies that could potentially have a significant impact on energy prices, global output and the overall price level. Economic developments in the EU's major trading partners, especially China, could also pose risks.

On the domestic side, the transmission of monetary tightening may weigh on economic activity for longer and to a larger degree than projected in this forecast, as the adjustment of firms, households and government finances to the high interest rate environment could prove more challenging. Finally, extreme weather events like heatwaves, fires, droughts and floods, which have been raging across the continent and beyond with increasing frequency and scope, illustrate the dramatic consequences that climate change can have not only for the environment and the people affected, but also for the economy.

New candidate countries covered for the first time

This Autumn Economic Forecast for the first time covers Bosnia and Herzegovina, Moldova and Ukraine, to which the European Council granted EU candidate status last year. In Ukraine, the economy has shown remarkable resilience in 2023. Growth is forecast to reach 4.8% in 2023, 3.7% in 2024 and 6.1% in 2025, after collapsing by 29% in 2022 following Russia's full-scale invasion.

This rebound can be attributed to exceptional harvests and government stimulus underpinned by the unwavering support of international partners, as well as to the authorities' commitment to ensure macrofinancial stability.

Background

This forecast is based on a set of technical assumptions concerning exchange rates, interest rates and commodity prices with a cut-off date of 25 October. For all other incoming data, including assumptions about government policies, this forecast takes into consideration information up until, and including, 31 October. Unless new policies are announced and specified in adequate detail, the projections assume no policy changes.

The European Commission publishes two comprehensive forecasts (spring and autumn) and two interim forecasts (winter and summer) each year. The two comprehensive forecasts cover a broad range of economic indicators for all EU Member States, candidate countries, EFTA countries and other major advanced and emerging market economies. The interim forecasts cover annual and quarterly GDP and inflation for the current and following year for all Member States, as well as EU and euro area aggregates.

The European Commission's Winter 2024 Economic Forecast will update the GDP and inflation projections in this publication and is expected to be presented in February 2024.

Autumn 2023 Economic Forecast: A modest recovery ahead after a challenging year

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