Brussels
The European Commission's "Spring 2024 European Economic Forecast" report has been released.
The report, titled "Gradual Expansion Due to High Geopolitical Risks," forecasts that the EU economy will grow by 1% in 2024 and 1.6% in 2025, while the Eurozone economy is expected to grow by 0.8% in 2024 and 1.4% in 2025.
In the previous "Winter" report, the EU's growth was predicted to be 0.9% in 2024 and 1.7% in 2025, and the Eurozone's growth was expected to be 0.8% in 2024 and 1.5% in 2025.
With the latest report, the growth forecasts for 2025 for both the EU and the Eurozone have been revised downward.
The report anticipates that Germany will grow by 0.1% this year and 1.4% next year, France by 0.7% this year and 1.3% next year, Italy by 0.9% this year and 1.1% next year, and Spain by 2.1% this year and 1.9% next year.
The report recalls that inflation was 6.4% in the EU and 5.4% in the Eurozone last year. It is projected that inflation will decrease to 2.7% in the EU and 2.5% in the Eurozone this year, and to 2.2% in the EU and 2.1% in the Eurozone by 2025.
Following the broad economic stagnation last year, the beginning of 2024 has shown better-than-expected growth and a decrease in inflation. This has paved the way for gradual expansion during the forecast period.
The report indicates that growth is primarily driven by the acceleration of private consumption. It states, "The growth in economic activity this year and next is expected to be largely driven by the steady expansion of private consumption due to increases in real wages and employment sustaining disposable income."
The report notes that a strong savings tendency has somewhat restricted private consumption. It also mentions that investment growth has slowed, and the negative cycle in housing construction is expected to recover slowly.
The report forecasts an improvement in credit conditions and suggests that markets now expect a more gradual reduction in interest rates compared to the winter period.
It is expected that the global trade recovery will support EU exports. The report notes, "As internal demand in the EU revives, the acceleration in imports is expected to largely offset the positive contribution of exports to growth."
The report predicts that the decrease in inflation will primarily result from non-energy goods and food, with energy inflation rising only modestly and service inflation declining only gradually.
The report highlights that uncertainties and downward risks to the economic outlook have increased in recent months due to the developments in the Russia-Ukraine war and conflicts in the Middle East. It adds, "Wider geopolitical tensions continue to pose risks. Persistent inflation in the US could lead to further delays in interest rate cuts in the US and beyond, causing global financial conditions to tighten somewhat."
The report also suggests that the decline in inflation might be slower than anticipated, which could lead the central bank to delay interest rate cuts until service inflation decreases.
Germany's Economic Growth Forecast Revised Downwards
The report indicates that the economic growth forecast for Germany, Europe's largest economy, has been reduced from 0.3% to 0.1% for this year due to weak external demand, stagnant private consumption, and investments. The German economy is projected to grow by 1% in 2025.
Germany managed to avoid a technical recession by growing by 0.2% in the first quarter of the year after two years of stagnation. However, the German economy remains fragile due to persistent weakness in the manufacturing sector, which plays a significant role compared to other countries in the region.
The German government had previously revised its official growth forecast for 2024 from 0.2% to 0.3% on April 24, citing "signs of slight cyclical improvement."
Turkey's Economic Situation
The report also includes an assessment of the Turkish economy, noting that "economic activity remains optimistic in the first quarter of 2024, although internal demand is gradually decreasing."
It further states, "The significantly tightened monetary and fiscal stance is expected to lead to a more pronounced decrease in internal demand and a further slowdown in economic growth, allowing imbalances, including inflation, to gradually reduce."
The report highlights that policy uncertainty has significantly decreased but managing the economy's rebalancing remains challenging. It is expected that the costs of reconstruction after the earthquake and policy normalization will continue to put pressure on the budget, with Turkey's budget deficit expected to decrease and public debt to remain moderate.
The report recalls that despite a slowdown in internal demand, economic growth remained strong at 1% quarter-on-quarter in the fourth quarter of 2023. It notes that economic activity in the first quarter of 2024 is still optimistic.
Economic Confidence Improving
The report points out that economic confidence in Turkey has improved since the beginning of the year, stating, "Industrial production showed strong growth in February, indicating a recovery."
It predicts that "economic rebalancing is expected to accelerate in the second half of the year." The report mentions that the tightened monetary and fiscal stance since mid-2023, along with continued policy normalization, is expected to lead to a more noticeable decrease in internal demand before the end of the year.
It highlights that the labor market is cooling, the impact of wage increases at the end of 2023 is diminishing, and consumers are lowering their inflation expectations, which is expected to rapidly slow down household consumption growth.
The slowdown in household consumption growth is seen as a key driver of economic rebalancing, and the report anticipates that public consumption growth will also be lower following recent spending restrictions.
The report forecasts a decrease in employment growth and an increase in the unemployment rate in 2024. It anticipates a "soft landing" due to lower real growth and the gradual resolution of imbalances.
It is expected that the recovery in exports and the slowdown in import growth will result in a slight positive contribution of net exports to growth over the next two years.
The report notes that, as a reflection of increased confidence, the current account deficit narrowed in 2023 due to improved trade and reduced gold imports. It is anticipated that the deficit will continue to decrease over the next two years, allowing for sustainable rebuilding of foreign exchange reserves.
While the report acknowledges that decisive policy actions have yielded some results, it also notes that inflation remains high. It highlights that geopolitical and external risks, as well as uncertainties, have been at a high level for many years. However, it observes that the Turkish economy has managed these risks relatively well so far.
The report projects that the Turkish economy will grow by 3.5% in 2024 and 3.8% in 2025, with the Consumer Price Index (CPI) expected to be 57.4% this year and 31.5% in 2025.
