PRESS RELEASE - EUROPEAN COMMISSION

DAILY NEWS 

Brussels, 15 November 2024

Autumn 2024 Economic Forecast: A gradual rebound in an adverse environment

After a prolonged period of stagnation, the EU economy is returning to modest growth, while the disinflation process continues. The European Commission's Autumn Forecast projects GDP growth in 2024 at 0.9% in the EU and 0.8% in the euro area. Economic activity is forecast to accelerate to 1.5% in the EU and to 1.3% in the euro area in 2025, and to 1.8% in the EU and 1.6% in the euro area in 2026.

Headline inflation in the euro area is set to more than halve in 2024, from 5.4% in 2023 to 2.4%, before easing more gradually to 2.1% in 2025 and 1.9% in 2026. In the EU, the disinflation process is projected to be even sharper in 2024, with headline inflation falling to 2.6%, from 6.4% in 2023, and to continue easing to 2.4% in 2025 and 2.0% in 2026.

Growth to accelerate as consumption picks up and investment rebounds

After resuming growth in the first quarter of 2024, the EU economy continued to expand throughout the second and third quarters at a steady, albeit subdued, pace.

Employment growth and recovery in real wages continued to support disposable incomes, but household consumption was restrained. A still high cost of living and increased uncertainty following the repeated exposure to extreme shocks, compounded with financial incentives to save in a context of high interest rates, led households to save an increasing share of their income. At the same time, investment disappointed, with a deep and broad-based contraction across most Member States and asset categories in the first half of 2024.

The restraint to consumption appears to be loosening. As the purchasing power of wages gradually recovers and interest rates decline, consumption is set to expand further. Investment is expected to rebound on the back of strong corporate balance sheets, recovering profits, and improving credit conditions. The impulse of the Recovery and Resilience Facility and other EU funds will also drive an increase in public investment over the forecast horizon.

Overall, domestic demand is projected to drive economic growth going forward. In 2025 and 2026, exports and imports are expected to grow at broadly the same pace, implying a neutral contribution to growth by net trade. 

The disinflationary process continues

The disinflationary process that started towards end-2022 continues despite a slight pick-up in inflation in October, largely driven by energy prices.

Price pressures in services remain high, but are projected to moderate as from early 2025, driven by slowing wage growth and an expected pick-up in productivity, and supported by negative base effects. This sets the stage for inflation to fall towards target in late 2025 in the euro area and in 2026 in the EU.

Labour market remains strong, with record-low unemployment

The EU labour market held up well in the first half of 2024 and is expected to remain strong. Employment growth in the EU is set to continue, although at a slower pace, from 0.8% in 2024 (0.9% in the euro area) to 0.5% in 2026 (0.6% in the euro area).

In October, the EU unemployment rate reached a new historical low of 5.9%. In 2024 as a whole it is projected to stand at 6.1% (6.5% in the euro area) and to edge further down thereafter, reaching 5.9% in 2025 and 2026 (6.3% in the euro area).  

Declining deficits on the back of fiscal consolidation

As many Member States work to lower their debt ratios, the EU general government deficit is set to decline in 2024 by around 0.4 pps., to 3.1% of GDP, and to 3.0% in 2025. In 2026, the positive economic momentum is projected to reduce the deficit further to 2.9%. In the euro area, the deficit is forecast to decrease from 3.0% in 2024 to 2.9% in 2025 and 2.8% in 2026.

The aggregate debt-to-GDP ratio of the EU is, however, projected to edge up, from 82.1% in 2023 to 83.4% in 2026. This follows an almost 10 pps. decrease between 2020 and 2023, and reflects the effect of still elevated primary deficits and rising interest expenditure, that are no longer offset by high nominal GDP growth as inflation eases. In the euro area, government debt is forecast to rise from 88.9% of GDP in 2023 to 90% in 2026.

Uncertainty and risks increase

Uncertainty and downside risks to the outlook have increased. Russia's protracted war of aggression against Ukraine and the intensified conflict in the Middle East fuel geopolitical risks and risks to energy security. A further increase in protectionist measures by trading partners could upend global trade, weighing on the EU's highly open economy.

On the domestic front, policy uncertainty and structural challenges in the manufacturing sector could entail further losses of competitiveness and weigh on growth and the labour market. Moreover, delays in the implementation of the RRF or a stronger than expected impact from fiscal consolidation could further dampen the resumption of growth. Finally, the recent floods in Spain illustrate the dramatic consequences that the increasing frequency and scope of natural hazards can have not only for the environment and the people affected, but also for the economy.

Background

This forecast is based on a set of technical assumptions concerning exchange rates, interest rates and commodity prices with a cut-off date of 31 October. For all other incoming data, including assumptions about government policies, this forecast takes into consideration information up until, and including, 25 October. Unless new policies are announced and specified in adequate detail, the projections assume no policy changes.

The European Commission publishes two comprehensive forecasts (spring and autumn) each year, covering a broad range of macroeconomic and fiscal variables for all EU Member States, candidate countries, EFTA countries and other major advanced and emerging market economies.

Full document: Autumn 2024 Economic Forecast

Quote(s)

“With the EU economy steadily recovering, growth should pick up more speed next year with rising consumption, thanks to increased purchasing power and still record-low unemployment, and an expected improvement in investment levels. Still, given today’s high geopolitical uncertainty and many risks, we cannot afford to be complacent. We need to deal with longstanding structural challenges, raise productivity and make sure that the wider EU economy stays globally competitive. It is vital for Member States to carry out all reforms and investments in their Recovery and Resilience Plans and reduce public debt levels in line with the new fiscal rules.” 

Valdis Dombrovskis, Executive Vice-President for an Economy that Works for People

“The European economy is slowly recovering. As inflation continues to ease and private consumption and investment growth pick up, with unemployment at record lows, growth is set to gradually accelerate over the next two years. However, structural challenges and geopolitical uncertainty weigh on our future prospects. Member States will have to walk a narrow path of bringing down debt levels while supporting growth, aided by the new economic governance framework and the continued implementation of NextGenerationEU. Looking ahead, strengthening our competitiveness through investments and structural reforms is crucial to lift potential growth and navigate rising geopolitical risks.” 

Paolo Gentiloni, Commissioner for Economy

Economic forecast for Cyprus

The latest macroeconomic forecast for Cyprus. 

Cyprus’ growth is expected to remain robust in 2025 and 2026. Inflation is projected to decelerate and wage growth to stay high, boosting household purchasing power and consumption. The government budget balance is set to remain in surplus, supported by continued strong growth in revenue and moderate increases in expenditure.

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Growth momentum to continue 

Real GDP growth was resilient in the first half of 2024, expanding by 3.6% y-o-y. This was primarily driven by private consumption, which increased by 4.5%. Investment, excluding the volatile registration of ships and aircraft, grew by 4.8% y-o-y, supported by a positive sentiment in the construction sector. Strong foreign demand for services, particularly in sea transport and tourism, led to a solid export performance. For 2024 as a whole, growth is projected at 3.6%. 

This positive momentum is expected to continue, with economic growth forecast at 2.8% in 2025, and 2.5% in 2026. Investment is set to keep benefitting from the funds of the Recovery and Resilience Facility, and easing financial conditions are expected to provide a further stimulus. Export performance is projected to continue to benefit from growing tourist receipts and a dynamic outlook for services, particularly related to ICT. The ongoing recovery in household purchasing power due to an increase in nominal wages and declining inflation, is expected to boost private consumption. 

HICP inflation is expected to converge to 2.0% over the forecast horizon, reflecting a gradual easing of base effects in particular for food, and declines in domestic energy prices. Services inflation is expected to remain elevated, mainly due to high nominal wage growth and increasing demand especially for tourism. 

The current account deficit remains elevated but is projected to decline, to reach 8.2% of GDP in 2026. This declining trend is set to be supported by strong tourism flows and sustained improvements in the trade balance, despite persistently high net outflows of primary income resulting from the repatriation of profits by foreign-owned corporations. 

Downside risks to the outlook persist. Ongoing tensions in the Middle East could disrupt supply chains and increase production costs. The tourism sector, a key contributor to the external balance, remains vulnerable to those risks. Additionally, energy prices pose a threat due to Cyprus's high oil dependence and limited integration with the European electricity market.

Solid fundamentals to support employment growth 

Employment grew by 2.7% y-o-y in the first half of 2024, reflecting increased hiring in tourism and the public sector. Over the same period, the unemployment rate fell by one pp., reaching 4.9% by the end of the second quarter. This is the lowest level in the last 15 years. Skills mismatches and labour market slack remain limited, partly due to the influx of foreign workers benefiting from the incentives provided under the government’s initiative to attract multinational business to set up their base on Cyprus (headquartering). Employment is projected to grow by 1.9% in 2024, with a slight moderation at 1.2% by 2026. The unemployment rate is, projected to decline further and reach 4.5% in 2026.

Positive fiscal outlook 

The government surplus is expected to remain solid over the forecast horizon. In 2024, the surplus is projected at 3.5% of GDP in 2024, up from 2% in 2023. The budget balance of 2023 includes the temporary negative impact of 1.1% of GDP from the statistical treatment of some retroactive payment to civil servants’ pension fund, which is eliminated in 2024. Further improvements of the 2024 surplus are stemming from revenue growth which is set to outpace the increasing expenditure throughout the year. Improved labour market conditions and higher contribution rates for employers and employees as of January 2024 contribute to increasing budget revenue from social security contributions. Higher receipts from corporate income tax, personal income tax and VAT are also expected to boost tax revenue, which is forecast to increase by around 11% overall. Public wage expenditure is projected to grow by more than 11%, primarily due to inflation indexation and higher social contribution rates for civil servants. Public investment is expected to remain high as RRP projects are maturing and other EU funds of 2021-2027 programming period are gaining speed. Investment financed by national state budget is expected to somewhat decrease. 

The budget surplus is forecast to remain but to be lower at 2.7% of GDP in 2025 and 2026, as tax revenue increases are set to moderate in line with incomes and consumption and collection of tax arrears is assumed to flatten. At the same time, ad hoc increases in public wages adopted at the end of 2024 and measures to support housing are expected to be the main drivers of the growing expenditure in 2025. 

The government debt-to-GDP ratio was at 73.6% in 2023. This figure was revised down by around 4 pps after the benchmark update of nominal GDP for the period 1995-2023. The revision incorporates statistical and methodological changes that had a level-shift impact on the entire forecast profile The debt-to-GDP ratio is expected to continue declining to 66.4% of GDP in 2024 and to 56.7% in 2026, largely due to primary surpluses and continued strong nominal GDP growth. 

Risks to fiscal outlook arise mainly from implementation challenges of some large investment projects, such as the construction of a liquified natural gas terminal, that may burden public budget through called guarantees and other claims. Positive developments may include continued improvements in tax administration and collection of tax arrears

Spring 2024 Economic Forecast: A gradual expansion amid high geopolitical risks

European Economic Forecast. Autumn 2024 - Cyprus

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Athanasios ATHANASIOU

Press Officer / Political Reporter

European Commission

Representation in Cyprus

EU House, 30  Vyronos Avenue, 1096 Nicosia

Tel: +357 22 81 75 76 Mob: +357 99 363753

Twitter: @aathans