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The economy of the euro area is expected to continue to recover gradually in the coming years, despite geopolitical and economic uncertainties.
After moderate expansion in 2024, a short-term slowdown is expected due to low consumer confidence and high uncertainty, which increase household savings incentives.
However, the increase in real wages and employment should support a recovery, with consumption as the main growth driver.
Domestic demand will be supported by more favorable financing conditions and market expectations on interest rates.
Fiscal policies will follow a path of consolidation, while funds from the Next Generation EU (NGEU) will support economic expansion until 2027.
External demand is expected to strengthen, supporting exports, and the unemployment rate should fall to historically low levels.
Productivity is expected to accelerate, with real GDP growth rates projected at 0.7% in 2024, 1.1% in 2025, and 1.4% in 2026, before declining to 1.3% in 2027.
Overall inflation, measured by the Harmonized Index of Consumer Prices (HICP), is expected to increase at the end of 2024, then stabilize around the ECB’s 2% target from the second quarter of 2025.
Energy goods inflation is expected to remain negative until the second half of 2025, while food goods inflation would increase until mid-2025 before stabilizing.
Core inflation (HICPX), excluding energy and food, is expected to decrease in early 2025, with a reduction in internal and external price pressures.
One of the most concerning aspects of the current situation is the weak wage dynamics in the euro area.
Despite the decrease in inflation, real wages are not increasing sufficiently to compensate for the rise in the cost of living in previous years.
Inflation prospects have been slightly revised downwards for 2025.
This situation also indicates a series of broader economic dynamics that deserve in-depth analysis.
Monthly inflation, negative in recent months, suggests that price pressures are finally easing.
Companies, concerned about the economic recession and global uncertainty, have been reluctant to increase wages, leading to a deficit in purchasing power for workers.
This wage stagnation could contribute to a deflationary spiral, making it difficult for European economies to fully recover from the pandemic’s impact.
According to a report by the European Central Bank (ECB), wage increases must be sustained to ensure sustainable and healthy growth in the euro area.
Among the various elements influencing inflation, the energy sector stands out for its decisive impact.
In particular, the shift to renewable energy sources has shown potential not only to reduce long-term costs but also to improve the energy security of the entire region.
This is a crucial step, especially considering the instability caused by international conflicts that can affect energy supplies.
In this context, the decision by the European Central Bank to lower interest rates has been welcomed by many analysts.
Lowering interest rates can stimulate investments and incentivize consumption, thus favoring economic recovery.
However, this approach also presents risks, as it could lead to higher inflation if not managed correctly.
The ECB has demonstrated a clear and targeted strategy to address current economic challenges.
As highlighted in various press releases and reports, the central bank is ready to adapt its monetary policy in response to changes in the real economy.
In summary, the euro area is at a crucial moment in its economic history.
While inflation decreases and the economic outlook promises recovery, there are significant issues to address, including stagnant wage dynamics and energy dependence.
The ECB’s choices, along with the fiscal policies of member states, will be crucial in building sustainable and inclusive growth.
It is essential that policymakers remain vigilant and ready to act in the face of an ever-evolving context.
SOURCE :
CLARISSA VAN VUUREN
Honorary President
PROYTEC PANAMA CORP
