European Semester: spring forecast shows gradual expansion amid high geopolitical risks

Views: 18

The European Semester has played a crucial role in supporting strong and coordinated economic policy responses over the past five years, as the EU was confronted by a series of extraordinary challenges. The EU has demonstrated a high degree of economic and social resilience in the face of major shocks, such as post-pandemic complexities, military conflict in Eastern Europe, related energy price surges, inflation hikes and numerous modern challenges.  

The EU economy staged a comeback at the start of the year, following a prolonged period of stagnation. Though the growth rate of 0.3% estimated for the first quarter of 2024 is still below estimated potential, it exceeded expectations, acknowledged the EU statistics.
At the same time, activity in the euro area expanded, marking the end of the mild recession experienced in the second half of 2023; meanwhile, inflation across the EU cooled further in the first quarter.
More on Semester in:

The spring-2024 economic forecast projects GDP growth in 2024 at one percent in the EU-27 and 0.8% in the euro area-20, on the back of a strong labor market and dynamic private consumption. In 2025, growth is forecast to accelerate further to 1.6% in the EU and to 1.4% in the euro area; however, inflation is expected to fall from 6.4% in 2023 to 2.2% in 2025.
Despite largely stagnant output, the EU economy created more than two million jobs in 2023, thanks to broad-based employment growth across the EU. According to the EU labor force survey, the employment rate of people aged 20-64 in the EU hit the new record high of 75.5% in the last quarter of 2023.
Reference to:

Main figures in the forecast
The EU-wide economic activity broadly stagnated in 2023: private consumption only grew by 0.4%; despite robust employment and wage growth, labor incomes barely outpaced inflation. Moreover, households put aside a larger share of their disposable incomes than in 2022, as high interest rates kept the opportunity cost of consumption elevated, while high uncertainty, the erosion of the real value of wealth by inflation and the fall in real estate prices sustained precautionary savings.
Investment grew by 1.5% in 2023, but largely driven by a sizeable carry-over from 2022; by the end of 2023, weakness in investment was widespread among the EU-27 with a visible downsizing of the interest-rate-sensitive construction sector. External demand did not provide much support either, weighed down by a sharp slowdown in global merchandise trade.
Still, with domestic demand stagnating, imports contracted more than exports, lifting the contribution of net external demand to real GDP growth to a sizable 0.7 percentage-points, pp. Besides, the negative drag of an unusually strong inventory cycle detracted almost 1 pp. from domestic demand, which explains most of the over-estimation of real GDP growth in 2023 in previous forecasts.
Meanwhile, the overall inflation continued declining: from a peak of over 10 percent in October 2022, inflation in the euro area reached 2.4-2.6 percent in April 2024. 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, noted the spring forecast.

Labor market
Regardless of some “cooling evidences” in demand, the labor market remains tight: in March 2024, the EU unemployment rate was at its record low of 6 percent with other labor market’s features remaining at near record-low levels. Besides, the unemployment rate continued falling in the member states at recording rates, resulting in continued decline of dispersion in the EU-27; hence, the strong labor market performance reflects favorable developments in both labor demand and labor supply, also due to migration.
In the perspective, the impulse of these positive drivers is set to abate, and employment growth is expected to be more subdued. Over the forecast horizon, however, the EU economy is still expected to generate another 2.5 million jobs, while the unemployment rate should hover around the current record-low rates.
Nominal compensation per employee expanded by about 6 percent in 2023 in the EU-27, with a gradual deceleration in the second half; it is projected to decelerate further throughout the forecast horizon, alleviating underlying inflationary pressures.
Importantly, growth in real wages – which started towards the end of 2023 – is set to continue throughout the forecast horizon; by 2025, average real wages are set to fully recover their 2021 levels, though not in all EU states.

Disinflation factors
Food and non-energy industrial goods have already become the primary disinflation drivers, which are expected to continue detracting from inflation over the forecast horizon, reflecting receding pipeline pressures. Service prices, in contrast, have so far contributed very little to the disinflation process, reflecting still elevated wage pressures.
However, relatively weak economic momentum and decelerating wage growth should allow services inflation to ease over the forecast horizon. Basically, core inflation (excluding energy and food) is expected to decline over the forecast horizon at broadly the same pace as headline inflation, remaining just slightly above. After narrowing significantly since mid-2023, dispersion of inflation within the EU is set to decline further by 2025, reflecting country-specific drivers of core inflation, including the expected wage growth, developments in productivity and unit profits. These dynamics are largely mirrored by the GDP deflator – a measure of the evolution of domestic price pressures; the deflator is set to slowdown from 6% in 2023 to 3.3% in 2024 and 2.2% in 2025, as still high but abating wage growth is offset by a return to productivity growth and a reduction in profit margins.
As in 2023, eleven EU states are projected to record a general government deficit exceeding 3% of GDP in 2024, dropping to nine in 2025. The EU fiscal stance turned neutral in 2023, after significant expansion during 2020-22; it is expected to contract in 2024 and then turn broadly neutral in 2025.

Mitigating risks
Risks originating from outside the EU have increased in recent months amid two ongoing wars (in the Middle East and Ukraine) and mounting geopolitical tensions: global trade and energy markets appear particularly vulnerable. Moreover, persistence of inflation in the US may further delay rate cuts in the US, but also beyond, resulting in somewhat tighter global financial conditions.
On the internal market, the EU Central Banks may also postpone rate cuts until the decline in services inflation firms. In addition, the need to reduce budget deficits and put debt ratios back on a declining path may require some EU states to pursue a more restrictive fiscal stance than currently projected for 2025, weighing on economic growth.
At the same time, a decline in saving propensity could spur consumption growth, while residential construction investment could recover faster. Risks associated to climate change and the degradation of natural capital increasingly weigh on the outlook; the EU is particularly affected, as Europe is the continent experiencing the fastest increase in temperature.

Targeted recommendations to the member states
The 2024 country reports analyse economic, employment and social developments in each EU state and take stock of the implementation of recovery and resilience plans (RRPs) and Cohesion Policy programs. The reports also identify key challenges, with a particular focus on competitiveness, and priority reforms and investments. Based on this analysis, the Commission proposes country-specific recommendations (CSRs) to provide guidance to the states on how to tackle those key challenges that are only partially or not addressed in the states’ RRPs.
The country-specific recommendations are divided into:
= A recommendation on fiscal policy, including fiscal-structural reforms, where relevant;
= A recommendation to continue or accelerate implementation of the national recovery and resilience plans and Cohesion Policy programs; and
= Further recommendations, where relevant, on outstanding and/or newly emerging structural challenges, with a focus on improving competitiveness.

Effective delivery of NextGenerationEU and Cohesion Policy: crucial drivers of a competitive EU economy. As illustrated in this year’s country reports, NextGenerationEU and other EU funding programs have supported the EU’s recovery towards a greener, more digital, fairer and more resilient future through job creation, improved competitiveness, macroeconomic stability and territorial and social cohesion.
The Commission has already disbursed over €240 billion to the EU member states in RRF grants and loans for the successful implementation of key reforms and investments. Also, over €252 billion has been disbursed under the Cohesion Policy funds since the beginning of the 2019 pandemic.
Most EU states continue to make good progress in the delivery of their RRPs and Cohesion Policy programs; however, some states need to urgently address emerging delays and structural challenges, to ensure the timely implementation of investments and reforms included in their RRP.
Present spring semester cycle also provides guidance to the EU member states in view of the forthcoming mid-term review of Cohesion Policy programs.

Strengthening fiscal sustainability
Recent pandemic, the surge in energy prices, as well as other global challenges required adequate policy response and substantial increase in public debt in several EU member states in recent years; fiscal policies were supposed to put public debt on a downward path or to keep it at prudent levels, while preserving investment.
The new economic governance framework signifies 2024 as a year of transition for fiscal policy coordination in the EU. The fiscal policy guidance and decisions under the new framework contained in the spring-24 package aim to strengthen the states’ debt sustainability and promote EU-wide sustainable and inclusive growth. Under the new rules, the states will prepare medium-term plans setting out their expenditure paths and their priority reforms and investments.
The spring-24 package’s recommendations provide a strong underpinning for the reform and investment commitments the member states must set out in these plans.
The CSRs provide that the EU states should pursue prudent fiscal policies by ensuring that the growth in net expenditure in 2025 and beyond is consistent with the fiscal adjustment requirements under the new governance framework.
This means, specifically, that the states with public debt above 60% of GDP or a deficit above 3% of GDP should ensure that the growth in net expenditure is limited to a rate that puts the government debt-to-GDP ratio on a plausible downward path over the medium term, while bringing the general government deficit to below 3% of GDP and maintaining it below this reference value over the medium term.
Source and citation from:

Forecast figures for some Baltic States (information sources):
= Forecast for Denmark:
= Forecast for Latvia:
= Forecast for Poland:
= Forecast for Estonia:
= Forecast for Lithuania:
= Forecast for Finland:
= Forecast for Sweden:
= Forecast for Germany:

Additional info on the EU macroeconomic surveillance in:


Leave a Reply

Your email address will not be published. Required fields are marked *

nine + five =