For Luxembourg, the European Commission is now betting on a 0.8% fall in GDP in 2023. This is a larger drop than forecast in the autumn, “mainly due to a contraction in financial services and the construction sector”. “Private consumption, buoyed by falling inflation and government support measures, as well as public consumption, have stimulated domestic demand”, the commission on 15 February 2024. However, growth should regain momentum in 2024 (1.3%) and 2025 (+2.1%). These figures are unchanged from the autumn projections.
On the inflation front, the HICP (harmonised index of consumer prices) has fallen to 2.9% in 2023, boosted by a decline in energy and food prices. Despite the indexations scheduled for 2024 and 2025, inflation is expected continue to fall, to 2.6% in 2024 and 2.3% in 2025.
Weaker-than-expected recovery in Europe
“After recording moderate growth last year, the EU economy is growing at a slower rate than expected at the start of 2024”, noted the European Commission. It revised its growth forecasts downwards: +0.5% for both zones in 2023, compared with +0.6% according to the autumn forecasts, and 0.9% in the EU and 0.8% in the eurozone in 2024, compared with 1.3% and 1.2% respectively. For 2025, on the other hand, the commission kept its growth forecasts unchanged at 1.7% for the EU and 1.5% for the eurozone.
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“However, the forecasts still assume a gradual acceleration in economic activity after the first quarter of 2024. With inflation continuing to slow, real wage growth and the resilience of the labour market should encourage a rebound in consumption. Despite the narrowing of profit margins, investment should be boosted by a gradual easing of credit conditions and by the continued implementation of the Recovery and Resilience Facility”, said the commission, for whom “the pace of growth should stabilise from the second half of 2024 until the end of 2025”.
Drop in inflation
On the inflation front, the downturn appears to be faster than expected in Europe. From 6.3% in 2023, the HICP is set to fall to 3% in 2024 and 2.5% in 2025. In the eurozone, HICP inflation is forecast to fall from 5.4% in 2023 to 2.7% in 2024 and 2.2% in 2025.
“Weaker-than-expected inflation rates in recent months, a fall in energy commodity prices and a slowdown in economic momentum have led to a steeper downward path than anticipated in the autumn forecasts”, explained the commission, which points to the possible inflationary effects of the abolition of energy support measures in all member states and the increase in maritime transport costs following the disruption of trade flows in the Red Sea.
Originally published in French by and translated for Delano