Thank you very much, and good morning. Starting, as always, with the key messages from this forecast:
First, the EU economy resumed moderate growth in an increasingly challenging context. After returning to growth in the first quarter of 2024, the EU economy continued to expand in the second and third quarters at a steady, but still subdued, pace. Real GDP growth is expected to reach 0.9% this year before picking up to 1.5% next year and 1.8% in 2026. In the euro area, growth is expected at 0.8% this year, 1.3% in 2025 and 1.6% in 2026.
Second, the service inflation is set to drive the disinflation process ahead. Headline inflation in the EU continued to decline over the last quarters, despite, as you know, an uptick in October. It is expected to average 2.6% in 2024 and ease gradually to reach 2.0% in 2026.
Third, the EU labour market held up well in the first half of 2024 and is expected to remain strong, despite some cooling as the pace of employment growth decelerates.
Fourth, government deficits are set to narrow but debt ratios edge up again, reversing the fast-declining trend observed in the past three years.
And fifth, downside risks and uncertainty have increased. We always say this in our Forecast, but this time it is particularly true, of course.
In the first half of 2024, household consumption grew only modestly, despite gradual improvement in disposable income. A still high cost of living and rising economic uncertainty pushed households to save an increasing share of their income. In the second quarter of this year, the household saving rate stood at 14.8% - above expectations and more than 3 percentage points above the pre-pandemic long-term average, in savings.
At the same time, investment clearly disappointed, with a deep and broad-based contraction across most Member States and asset categories in the first half of 2024.
In the third quarter, consumption is estimated to have gained strength. Investments, on the other hand, further contracted and is set to broadly stagnate in the final quarter of the year.
On the positive side, net external demand contributed again positively to growth.
Over the next two years, the restraint to consumption is set to loosen further, as the purchasing power of wages continues gradually to recover. Investment is expected to pick up on the back of strong corporate balance sheets, recovering profits, improving credit conditions and also the impulse of the Recovery and Resilience Facility.
Energy prices: The European TTF gas prices are expected to be higher than assumed in the previous Forecast in both 2024 and 2025, while wholesale prices of electricity are projected slightly higher in 2024 but lower in 2025.
Meanwhile, oil prices have declined since spring, weighed down by weak demand from China, with futures indicating further declines. Concerns over OPEC+ production cuts and the intensification of the conflict in the Middle East have driven recent volatility in Brent oil prices. Still, their gradual decline over the summer has put annual average futures' oil prices on a downward path over the forecast horizon.
Importantly, prices of both gas and electricity are expected to decline in 2026 from their 2025 levels.
Financial conditions in the EU appear looser than in spring.
In October, the European Central Bank cut its policy rate for the third time since the beginning of its loosening cycle in May. At the cut-off date of this forecast, which was end of October, markets expected the euro area deposit facility rate to decline to below 3% by the end of the year and to around 2% by end 2025, and to stabilise around that level in 2026.
As a result, financing costs for firms and households have moderately decreased over the last few months. Meanwhile, net lending is expanding again, but it remains weak. Credit demand is resuming, particularly for housing loans, and credit standards are easing, though only for mortgages so far. For enterprises, credit standards remain tight, but recent ECB data anticipate a turnaround in credit flows.
The labour market: Our EU economy generated jobs for a further 750 000 workers in the first half of the year. This brings the number of new employed persons since the start of the pandemic to 8 million – which is remarkable. Not frequently mentioned, but remarkable, 8 million since the start of the pandemic. However, the pace of employment growth is set to gradually slow.
Following a contraction in 2023, productivity is set to stagnate this year. It is then expected to post a cyclical rebound in 2025 and gain strength in 2026. And we know how important it is to lift our productivity to improve our competitiveness.
The unemployment rate is projected to edge further down, reaching a historic low of 5.9% in the EU and 6.3% in the euro area in 2026. Let me recall that five years ago, just before the pandemic, the unemployment rate was almost 1 percentage point higher. And ten years ago unemployment was at double digits, around 11% in the Union.
After the peak of 6.1% reached in 2023, wage growth in the EU is still expected at 4.9% in 2024. It is then set to slow down markedly to 3.5% in 2025 and 3% in 2026. This is the wage growth. So, the growth will decrease, but still, it will be sufficiently above inflation to allow, finally, a full recovery of real wages by next year in the EU and the following year in the euro area. So, purchasing power that was lost, will be recovered next year in the euro area, and in 2026 in the EU.
As usual, a few words now on the largest economies.
Activity in Germany is expected to decline by 0.1% in 2024. And this, as you know, is the second year in a row with negative growth (after -0.3% in 2023). High uncertainty has been weighing on consumption and investment. The trade outlook has been weak, reflecting weakness in global demand for industrial goods. Over the coming years, domestic demand is set to pick up, driven by increasing real wages, while competitiveness in the energy intensive industries remains burdened by high energy costs. Real GDP is expected to rebound by 0.7% in 2025 and grow by 1.3% in 2026.
In France growth is set to remain resilient this year, it is forecast to decrease in 2025, as RRF spending partially compensates for fiscal adjustment. Monetary policy easing and private consumption should support growth. GDP is expected to grow by 1.1 % in 2024, 0.8 % in 2025 and 1.4 % in 2026.
In Italy, real GDP is expected to grow by 0.7% this year, as in 2023, exactly the same, with infrastructure investment offsetting the drag on residential construction. RRF-backed investments are planned to pick up in 2025 and 2026, driving economic growth up to 1.0 and 1.2%, respectively.
In Spain, real GDP is projected to expand robustly at 3.0% this year and to moderate thereafter, at 2.3% in 2025 and 2.1% in 2026. Private consumption is expected to be supported by dynamic job creation and real income gains for households. Investment growth is projected to improve, underpinned by the implementation of the recovery plan and the further easing of financing conditions.
After growing by just 0.1% last year, the Polish economy is expected to expand by 3.0% this year and 3.6% in 2025. Private consumption is set to be the main growth driver alongside robust investment, including funded by the EU.
Lastly, looking at the new candidate countries, a few words on Ukraine. Ukraine's economy remains remarkably resilient, despite ongoing attacks against critical infrastructure, in particular energy infrastructure. Supported by restored export capacity, high defence spending and recovering household demand, growth is expected to reach 3.5% this year, before easing to 2.8% in 2025.
Inflation in the third quarter of 2024 fell faster than expected. In the euro area it declined from 2.5% in the second quarter to 2.2% in the third. Energy prices still matter: they pushed euro area inflation down in September, to 1.7%, below the ECB target, and back up to 2.0% in October.
Going forward, headline inflation in the euro area is expected to stabilise at 2.2% until mid-2025, and to gradually fall to 1.8%, which is below the ECB target, by the end of 2026.
This moderation hinges upon the gradual easing of price pressures in services, thanks to slowing wage growth, an expected pick-up in productivity, and supported by negative base effects.
As a result, we expect, bar the annual averages, inflation to fall towards target in late 2025, so in one year from now, in the euro area.
While the process of disinflation will continue in all Member States, its pace differs widely.
Inflation is set to remain higher in central and eastern European countries, a pattern that is not new.
However, as the energy and food price shock wears off, dispersion of inflation rates is expected to decline gradually, reaching again historical averages by 2025.
Now the fiscal dimension: The budget deficit of the EU as a whole is on a mildly declining path. The deficit is forecast to decrease from 3.1% this year, this is the average, to 2.9% in 2026, both in the EU and in the euro area.
This year and next year, deficit reduction is supported by budgetary restraint, partly due to the phasing out of energy support measures and also of sizeable housing tax credits in my country.
The contractionary impact of national fiscal policies on economic activity is expected to be offset in 2025 by the accelerating rollout of EU funds, including the RRF.
Public debt is projected to increase slightly in the EU, from 82.1% in 2023 to 83.4% in 2026. In the euro area, it is set to rise from 88.9% last year to 90% in 2026. This is the debt. This rise reflects the effect of still elevated primary deficits and increasing interest expenditure, which are no longer offset by high nominal GDP growth.
Nevertheless, we should remember that this follows a sizeable decrease of the debt ratio between 2020 and 2023 of almost 10 percentage points.
Rising public investment is improving the quality of expenditure in the EU.
The aggregate public investment ratio is currently at 3.6% and is expected to rise to 3.7% of GDP in 2026. This is a steady increase compared to five years ago, when it stood at 3.2% of GDP, or even ten years ago when public investment was 3% of GDP.
More than half of the projected increase of this amount of public investment is related to investment financed by the RRF and other EU funds, while the rest is due to higher spending by national budgets. So the increase is half from the RRF and half from national budgets.
In 2025, most EU countries are projected to spend more on investment financed by their national budget than they did prior to the pandemic.
While public investment as a share of GDP has been on a growing trend since 2019, the same cannot be said of private investment. In 2026, the end of the forecast, private investment is projected to stand at 17.8%, slightly up from 17.7% of this year, but still below the 2019 level of 18.8%. So, private investments are not yet at the level they had previous to the pandemic.
And so, raising the level of private investments is essential to close our investment gaps and strengthen Europe's competitiveness. And this highlights, of course, the pressing need to make real progress with our Capital Markets Union.
The budgetary outlook: This year, ten EU Member States are expected to have a deficit greater than 3% of GDP.
This number is set to remain stable in 2025, with some variation in country composition. And nine Member States are projected to still show a deficit exceeding 3% in 2026. But as usual, the projections for 2026 are based on unchanged policies.
To conclude with what we call the downside risks and uncertainty; the outlook remains highly uncertain, with risks largely, as we say,tilted to the downside.
Russia's protracted war of aggression against Ukraine, theconflict in the Middle East.
Delays in the implementation of the RRF or a stronger than expected impact from fiscal consolidation could further dampen the resumption of growth. For the moment, our previous forecast is confirmed, as you may remember. More or less this is what we were estimating in spring. But these are the downside risks. At the same time, if inflation were to fall faster than expected, monetary policy could turn out more accommodative.
And the recent extreme weather events in Spain are a tragic reminder that environmental risks are mounting.
Speaking of uncertainty, just a few words on the EU-US relations.
Of course, the trade relationship between the United States and the EU is one of the world's largest and most strategically significant.
In the last decade, trade between the EU and US has more than doubled. In 2023, trade in goods it reached around €850 billion, and in services added €650 billion. So, we are referring to €1.5 trillion.
The EU has a trade surplus for goods vis-à-vis the US worth 1.2% of our GDP, and a deficit for services worth 0.7% of GDP, but this, in services, is almost entirely driven by one Member State, which is Ireland.
The level of integration between our economies is such that EU-US trade relations are a stabilising economic and political force.
Despite trade disputes and regulatory divergences, both regions maintain a shared interest in upholding high standards, fair competition, and stability in global markets.
And in this context, a possible protectionist turn in US trade policy would be extremely harmful for both economies.
And the Commission will work with the incoming US administration to advance a strong transatlantic agenda and ensure that international trade channels remain open, while making them more secure.
To sum up: after the stagnation we had in 2023, the European economy is growing again, towards the famous soft landing. And is set to accelerate over the next two years.
However, growth remains modest, and exposed to important downside risks that I mentioned. This makes it all the more urgent to pursue an ambitious agenda of investments and reforms, to strengthen competitiveness and security within the framework of our new economic governance rules.
The challenges have been well documented in the Draghi and Letta reports. You know the figures, that are coming from our services by the way, €800 billion in additional investment needs for our common priorities. Just as governments are also working to bring down debt levels, so, the famous narrow path.
Where can this mountain of investments come from? On the one hand, from the implementation of the RRF, which has already brought our level of public investment to its highest point in over a decade, as I mentioned. But first of all, it must come from private investment.
And here it will be crucial to create the condition for mobilising private financing, on a much greater scale than we have been able to do so far.
And finally, part of the answer must also be: new common financing instruments, for common European public goods.
