In the Euro area, growth slowed sharply in 2023, to an estimated 0.4 percent, as high energy prices—largely related to Russia’s invasion of Ukraine—weighed on household spending and firms’ activity, particularly in manufacturing. Estimated growth in 2023 is in line with last June’s projections, with unexpected resilience in the first half of the year offset by weaker-than-expected activity in the second half. The downturn in late 2023 reflected broadening weakness in the economy, which extended to the services sector. This was partially attributed to the ongoing decline in exports amid deteriorating export price competitiveness and tepid external demand.
Growth in 2024 is forecast to firm to a still-anemic 0.7 percent. Easing price pressures should boost real wages and lift disposable incomes, but the lagged effects of past monetary tightening are expected to keep a lid on domestic demand, especially business investment, partly by reducing credit growth. The forecast for growth in 2024 has been downgraded since June 2023 by 0.6 percentage point, largely owing to weaker-than-expected momentum at the start of the year and more adverse credit supply conditions than previously assumed.
Growth is projected to pick up to 1.6 percent in 2025, supported by a recovery in investment growth, especially as the European Union’s NextGenerationEU (NGEU) funds lift public investment and help offset modest consolidation of national fiscal balances. Increased absorption of NGEU funds is predicated on reform milestones being met under Recovery and Resilience plans. NGEU-related investments and reforms are expected to accelerate the green and digital transitions and address longstanding structural issues, thereby supporting long-term growth.
Last Updated: Jan 31, 2024
