EU economy and recovery_SN_Fig 2

Economic activity is projected to pick up again slowly, after broadly stagnating in 2023, according to the latest European Commission forecast. Reflecting cautious optimism, it projects GDP growth in 2024 at 1 % for the EU and 0.8 % for the euro area. Compared to the previous forecast, this marks a slight improvement for the EU, while the euro area forecast remains unchanged. Importantly, the southern EU continues to experience faster economic growth than northern and western ember States, supporting a partial return to economic convergence within the EU. Indeed, evidence suggests that intra-EU goods trade in particular served as a ‘convergence engine’, as poorer and less populous EU regions became, on average, increasingly important sites for export-oriented manufacturers. In the future, services trade is expected to be the centripetal force for convergence.
Despite robust employment and wage growth, labour incomes barely outpaced inflation in 2023. This has led to sluggish private consumption, which rose by a mere 0.4 % last year and is weighing on growth. While this will likely change in the course of 2024, consumption is expected to be well below its pre-pandemic trend, as households continue to save a larger share of their disposable income. Investment is expected to gradually expand as interest rates are expected to decline. In 2023, investment grew by 1.5 %, driven mainly by a carry-over from 2022, but weakened towards the year’s end, especially in the interest-rate-sensitive construction sector. External demand in 2023 also lagged due to a sharp slowdown in global merchandise trade, although a contraction in imports boosted net external demand’s contribution to real GDP growth by 0.7 percentage points. Bank lending remains sluggish, hindered by lower corporate demand for loans and tighter credit standards. In 2024, the recovery is likely to be driven primarily by real income gains translating into higher consumption, with credit-dependent fixed investment picking up later as interest rates continue to drop.