EY - European Economic Outlook, Oct 23

The European economy has been stagnant since the summer of 2022, with high inflation affecting real incomes and consumer spending. Weak consumer demand, increased energy prices, limited inventory growth, and a shift from goods to services have all contributed to a decline in European manufacturing and exports. Tightening monetary policy has also had a negative impact. While the recovery of tourism and other services, along with improved labor markets, has prevented a recession, GDP growth has stalled. However, there are significant differences among sectors and countries within Europe. Southern and Southeastern Europe have experienced GDP growth due to the recovery of services, while Germany, Central European countries, and the Baltic states have fallen into a recession. The economic downturn continued in the third quarter of 2023, with euro area GDP either declining slightly or remaining stagnant. However, declining inflation and positive real wage growth are expected to support consumer demand. Increased government investment and the absorption of NextGenEU funds will also contribute to economic activity. Manufacturing activity is expected to improve gradually, leading to a return to GDP growth in early 2023/24. However, the recovery is projected to be slow due to tight monetary policy and a gradual recovery of external demand. The withdrawal of fiscal measures put in place during the pandemic and the energy shock will also impact demand. As a result, GDP growth in the euro area is predicted to accelerate modestly to 1.1% in 2024 and 1.5% in 2025, following a slowdown from 3.5% in 2022 to 0.6% in 2023. Central and Eastern European countries are expected to experience a stronger rebound and realize their higher growth potential, supported by disinflation. However, most European economies will remain below pre-Covid trends, indicating the long-term negative effects of the pandemic and the war in Ukraine.