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However, member states’ budgetary positions remain burdened by the legacy of the pandemic and the energy crisis and the aggregate EU government debt ratio is projected to increase slightly next year, pointing to a need for fiscal consolidation. The reformed EU economic governance framework will allow steering the consolidation process, with a focus on strengthening member states’ debt sustainability, while promoting growth-enhancing reforms and investment.
2023 was a challenging year for the EU economy. Even though energy gas prices began declining in the second half of 2022, their gradual and persistent pass-through pushed up core inflation, in turn prompting a forceful tightening by monetary authorities (Lane 2024). The disinflationary efforts of EU central banks were accompanied by a gradual withdrawal of fiscal measures taken to buffer the energy inflation shock. Private investment activity progressively came to a halt, dragged by a severe downsizing of the rate-sensitive-residential construction. Consumption expanded only moderately as households saved a larger share of their disposable income to reduce their debt level, rebuild wealth buffers or benefit from higher returns on financial assets. External demand also faltered, as global goods trade slumped. Meanwhile, HICP inflation has continued declining. From a peak of 10.6% in October 2022, inflation in the euro area is estimated to have reached 2.4% in April 2024. Inflation in the EU followed a similar path, though remaining slightly higher. The rapid fall in retail energy prices throughout 2023 was the main driver of the inflation decline, but underlying inflationary pressures started easing too in the second half of 2023, amidst the weak growth momentum.
The 0.3% rebound in real GDP growth in the first quarter of the year has set the EU economy on the previously expected modest expansion path. The expansion has been broad-based across countries. Looking forward, the macroeconomic fundamentals are conducive to growth. Labour markets entered the year on a strong footing on the back of favourable demand and supply conditions. Notwithstanding signs of weakening, employment is set to keep expanding, while wage growth coupled with the ongoing decline in inflation are set to support a recovery of real wages – which by 2025 are expected to regain their 2021 level, on aggregate in the EU. High financing costs are set to continue dragging corporate investment and especially residential construction. However, markets expect a gradual easing of monetary policy starting soon in the euro area, while outside the euro area, central banks in some central and eastern European countries as well as Sweden have already started to ease monetary conditions.
According to the European Commission Spring 2024 Forecast (European Commission 2024a), continued wage and employment growth will sustain growth in disposable income in 2024....
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