European economy holds up, but is hostage to ‘external factors’

Brussels – Optimism mixed with concern. The European economy is holding up, but the real question is for how long. The European Commission’s spring economic forecast contains mixed elements. On the one hand, better-than-expected growth in early 2024 and continued reduction in inflation set the stage for a gradual expansion of economic activity over the forecast horizon. On the other, however, the uncertainty and downside risks to the economic outlook have further increased in recent months. The result is conservative estimates that could be revised in the coming months.

The Eurozone economy is projected to grow 0.8 percent in 2024, as in the previous February forecast. But compared to the previous report, the outlook reduces by 0.1 percentage point expectations for 2025: Gross domestic product (GDP) is seen at 1.4 percent instead of 1.5 percent, weighed down by a slowdown in the major euro area economies, starting with Germany, seen as virtually flat this year (0.1 percent). Growth is also subdued in France (0.7 percent), with Estonia even contracting (-0.5 percent).

Good news comes on the consumer price index front. “Inflation is forecast to continue declining and reach target slightly earlier in 2025 than projected in the Winter Interim Forecast,” the EU executive stresses. The numbers indicate, for the eurozone, a deceleration from 5.4 percent in 2023 to 2.5 percent in 2024 and 2.1 percent in 2025. Compared to the  February estimates​, the Commission cuts inflation by 0.2 percentage points for this year and 0.1 percentage points for next year.

External factors weigh, especially the evolution of the conflict between Russia and Ukraine and the one in the Middle East. But more generally, “broader geopolitical tensions continue to pose risks,” it warns. Not to mention that “the persistence of inflation in the US may lead to further delays in rate cuts in the US and beyond, resulting in somewhat tighter global financial conditions.”

Economy Commissioner Paolo Gentiloni tries to summarize and take stock of a document made up of lights and shadows. “The EU economy perked up markedly in the first quarter, indicating that we have turned a corner after a very challenging 2023,” he said. Given this, he explains, “We expect a gradual acceleration in growth over the course of this year and next.” However, he adds, “Our forecast remains subject to high uncertainty and – with two wars continuing to rage not far from home – downside risks have increased.”

 Hence the call for reform and prudence. “Public debt is set to increase slightly next year, pointing to a need for fiscal consolidation while protecting investment, Gentiloni said. Indications that are especially valid for Italy and its endless debt. Valdis Dombrovskis, Commissioner for an Economy that Works for People, called for “more prudent fiscal policies to bring down high debt ratios.”