Navigating Economic Headwinds: EU Growth Outlook, Inflation Trends, and Business Resilience in 2024

In its recent economic forecasts, the European Commission has adjusted growth expectations for both the EU and the eurozone in 2024, citing the impact of elevated interest rates on economic activity. The commission anticipates a growth of 0.8% in the eurozone and 0.9% in the EU for the year, down from the previous autumn forecast of 1.2% and 1.3%, respectively.

Despite the downgraded growth outlook, the commission highlights a positive development in inflation, forecasting a significant drop to 2.7% in the eurozone from the 5.4% recorded in 2023. This is a more substantial decline than the previously predicted 3.2% rate. Paolo Gentiloni, the EU’s economy commissioner, noted that while the projected rebound in 2024 is more modest than initially expected, it is expected to gain momentum due to slower price increases, rising real wages, and a robust labor market.

Market expectations suggest that the European Central Bank may initiate interest rate cuts, potentially in April, from the current record high of 4%. However, ECB president Christine Lagarde emphasizes the need for confidence in achieving the 2% inflation target before considering rate cuts. Lagarde cautioned against hasty decisions to avoid a resurgence of inflation, underscoring the importance of data and time in the decision-making process.

Looking ahead, the commission anticipates a growth pickup in 2025, projecting a rise to 1.5% in the eurozone and 1.7% in the EU. The growth forecast for 2023 has been revised downward to 0.5% for both regions, following a period of stagnation in the last quarter. Inflation expectations for 2025 remain slightly above target at 2.2%, with a warning of potential upward surprises in inflation due to trade disruptions in the Red Sea.

Philip Lane, the ECB's chief economist, highlights that recent rate increases will soon impact higher mortgage costs, with around 30% of loans to eurozone households expected to be repriced at higher rates over the next year. Lane emphasizes the ongoing transmission of higher borrowing costs into the broader economy, impacting households differently across member states.

Despite 11 EU economies, including Germany, experiencing contraction in growth in 2023, the commission's latest projections foresee positive growth for all 27 member states in 2024. Businesses are grappling with the challenges of adapting to a more rigorous business environment, leading to a 0.6% increase in bankruptcies in the final quarter of last year as pandemic-era financial support was unwound. However, there is a silver lining as business registrations marked their fourth consecutive quarterly increase, rising by 0.1% from the previous period.