Economic trends in Europe: Current analytics

20, Jun - BLOG

Economic trends in Europe in 2022 and 2023 have been mixed, reflecting both the post-pandemic recovery and the impact of geopolitical instability. In 2022, the euro area showed economic recovery from the COVID-19-induced downturn thanks to strong growth in the first half of the year. The economic recovery was accompanied by stronger consumer demand and employment growth. However, growth slowed in the second half of 2022 due to the energy crisis caused by the war in Ukraine and sanctions against Russia.

This led to a significant rise in energy prices and increased inflationary pressures. Germany, the largest economy in the eurozone, faced serious problems in the energy sector, which slowed its economic growth and affected all economic trends in Europe.

Earlier this year, the EU economy emerged from a long period of stagnation. The 0.3% growth rate recorded in the first quarter of 2024, although lower than expected, exceeded forecasts. Activity in the euro area grew at a similar pace, marking the end of the moderate recession experienced in the second half of last year.

In addition, EU inflation continued to fall in the first quarter, although some of the noise coming from the far right and left across Europe may make analysis somewhat difficult. Admittedly, the forecasts of these political forces are not coming true. There is no denying that inflation is falling even faster than expected. Basically, in the context of economic trends in Europe, it is worth noting that there is a tendency for the economy to prove more resilient than expected.

In 2023, economic activity as a whole remained stagnant. Private consumption grew by just 0.4%. Despite solid growth in employment and wages, labor income barely kept pace with inflation. In addition, households were saving a larger portion of their disposable income than in 2022.

High interest rates kept the opportunity cost of consumption high, uncertainty remained high, eroding the real value of wealth due to inflation and falling real estate prices, contributing to a cautious approach to spending. Investment grew by 1.5% in 2023, but this growth was mainly driven by a significant carryover from 2022.

These are all important trends, but the main trend is where the EU economy as a whole is heading in the medium term. Despite the geopolitical turmoil of recent years and the risks of war escalation in both Europe and the Middle East, namely the risk of higher oil prices, the EU economy is showing resilience. According to current forecasts, the EU economy is expected to grow by 1.6% in 2025.

In 2023, the economic situation in the euro area remains fragile. Despite efforts to diversify energy sources and reduce dependence on Russian supplies, high energy prices continue to put pressure on the economy.

France and Italy saw moderate growth, but these countries also struggled with inflation and rising input costs. In Spain and Portugal, despite improvements in the tourism sector, the recovery has been uneven due to high unemployment and structural economic problems.

Northern eurozone countries, such as the Netherlands and Finland, showed more resilient economic performance due to a strong export orientation and high levels of digitalization.

However, they too did not escape the impact of global economic shocks and rising energy prices. Overall, 2023 was characterized by the euro area countries' attempts to adapt to the new economic reality, strengthen energy independence and cope with inflation, which led to heterogeneous results in the region, so we cannot speak of an unambiguously bad or good European economic trend.

Current situation in the EU

Europe's economic recovery, spurred by domestic demand, is heading in the right direction. The latest eurozone GDP data show that growth has slightly exceeded expectations, with all major economies performing slightly better than forecast a few months ago.

Europe's economic recovery is being driven by improving consumer and business sentiment. Personal incomes are supported by strong labor markets, which are contributing to the recovery in incomes. Deflation continues in many countries, paving the way for lower interest rates.

As of April 2024, overall inflation in the euro area remained stable at 2.4%, with core inflation also slowing. Despite this positive news, inflation remains elevated in a number of European countries, necessitating a cautious and measured approach to monetary easing.

We forecast that the European Central Bank (ECB) will start cutting the discount rate from June, reducing it by 25 basis points each quarter until it reaches a neutral level of 2.5% in September 2025, and this should further improve European economic trends.

This seems appropriate in our baseline scenario. In Central, Eastern and Southeastern Europe, we also expect rates to fall. However, full disinflation will take longer to occur, so monetary policy should remain tight for a longer period.