Written by Alessandro D’Alfonso, Martin Höflmayr and Giulio Sabbati.
After showing unexpectedly strong economic resilience in the face of the pandemic and the energy price shock triggered by Russia’s war in Ukraine, Europe is bracing for an uncertain soft landing. The latest economic forecast points towards weakening growth. Real GDP growth is expected to be 0.6 % in both the EU and the euro area in 2023, having been revised downwards for the second time this year. This is partly explained by a heavier toll from monetary policy tightening than expected, alongside weak external demand. Inflation has been declining over the past 12 months, to 2.4 % in November in the euro area from its 10.6 % peak a year ago. Nevertheless, annual inflation is expected to be 5.6 % in the euro area, and 6.5 % in the EU, still significantly above the 2 % target. Much of the inflation-dampening effect induced by monetary policy is yet to materialise, as estimates suggest the tightening will have its maximum impact in 2024.
Despite the gloomy economic backdrop, labour markets have proven particularly resilient, with unemployment rates at historic low levels, underscoring a record tight labour market. Higher interest rates are expected to show effects on public debt levels gradually. Debt-to-GDP ratios in the EU have dropped significantly from a historic high at close to 92 % at the beginning of 2021, to 83 % of GDP in 2023, remaining above the pre-pandemic debt levels of around 79 %, while the EU fiscal stance is projected to turn contractionary in 2023.
Downside risks to the economic outlook have increased, with continuing conflicts transmitting uncertainty, particularly visible in energy markets. A recent court decision in Germany that ruled a €60 billion off-budget fund unconstitutional, will compel Germany to re-structure its fiscal policy, with potential spill-over effects in other EU countries.
In that context, this publication, the fourth in a series updated twice a year, aims to track the state of the EU economy and trends in the recovery. It also provides a snapshot of the deployment of the Next Generation EU (NGEU) recovery instrument, which is about to enter the second half of its lifecycle. Its main tool for investment and reform, the Recovery and Resilience Facility (RRF) is being reinforced, with new REPowerEU chapters focused on energy. In 2024, the RRF is projected to be a key driver of public investment in the EU.
Read this infographic on ‘Monitoring the EU’s economic outlook: Seeking to avoid a hard landing‘ in the Think Tank pages of the European Parliament.
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