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No Cheers Over the Hesitant Economic Recovery of the EU

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Apme Fx | No Cheers Over the Hesitant Economic Recovery of the EU

The economic performance of the European Union will practically stagnate this year. For next year, key institutions expect a slight acceleration of GDP growth, with inflation currently falling to a level close to three percent. Several factors are behind the slow economic recovery. Among the most significant are weak foreign demand, the effects of monetary restriction and the dampening of fiscal support that the economies of the twenty-seven countries received during the covid and energy crisis.

The gross domestic product of the European Union is expected to increase by 0.6 percent this year, and the same economic growth is expected to be recorded in the Euro area. This follows from current forecasts introduced by the European Commission and the European Central Bank.

The year 2024 is supposed to be a little more successful in this regard, but even then, there is no very valid reason to celebrate. The economy of the European Union is expected to grow by only 1.3 percent next year, as is currently estimated by the European Commission. What is behind the very slow recovery? Three key factors play a major role.

The first is the effect of the restrictive monetary policy, which the European Central Bank started implementing last July. The reason was the rapid increase in inflation, which reached the highest level in the last 40 years and was also the highest in the history of the Euro area itself. However, disinflation cannot be carried out without having a negative impact on economic performance. The economic slowdown is therefore a secondary but inevitable effect of monetary restriction aimed at reducing unprecedentedly high inflation.

The second factor can be considered the efforts of individual governments of the member countries of the European Union to reduce the deficit of public budgets. Public finances came under considerable pressure during the covid crisis, which was followed by the energy crisis. And although governments tried to finance extraordinary expenses with extraordinary budget revenues, the public budget deficit in the European Union will exceed three percent of GDP this year, but it is expected to decrease more significantly in the coming years.

This goes hand in hand with persistent uncertainty, especially on the part of households. Their real incomes fell in many EU countries during the energy crisis, which, together with concerns about future developments, led to a reduction in consumer spending.

The third major factor negatively affecting the economic recovery of the EU is weak foreign demand. Although it helped the EU economy to a certain extent this year, it will slow down a bit next year, mainly due to the weakening economic growth in China. Certain risks continue to be posed by the development of the war conflict in Ukraine and the Middle East.

For the following years, the current economic predictions are only slightly more optimistic. A further drop in inflation, down to the target of two percent, can be considered positive, while GDP growth in the European Union is expected to accelerate. It seems that the EU economy will stabilize in the next few years, creating the conditions for faster economic growth. Unless there is some negative surprise that we have no idea about today.

 

Economic forecast for EU 2023 – 2025 (real GDP growth in %)

Institution/year

2023

2024

2025

European Commission

0,6

1,3

1,7

International Monetary Fund

0,7

1,5

2,1

European Central Bank*

0,6

0,8

1,5

*Note: ECB forecast for euro area, not EU

 

Peter Svoreň, APME FX

 

Sources:

European Commission Autumn 2023 Economic Forecast

International Monetary Fund: Regional Economic Outlook – Europe, November 2023

European Central Bank, Macroeconomic projection, December 2023

Disclaimer:

The material herein is considered as marketing communication under the relevant laws and regulations, and as such is not a subject to any prohibition on dealing ahead of the dissemination of investment research. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and should not be construed as containing investment advice, or an investment recommendation, or an offer of or solicitation for any transactions in financial instruments. The published content is intended for educational/informational purposes only. It does not take into account readers’ financial situation, personal experience or investment objectives. APME FX Trading Europe Ltd makes no representation that the information provided is accurate, current or complete; and therefore, assumes no liability for any losses arising from investments based on the supplied content. The past performance is not a guarantee of future results.

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