Slowing Economic Growth in the European Union: Reasons and Consequences

The economy of the European Union is facing challenges and slowing economic growth, which can be attributed to high inflation and restrictive monetary policies being implemented throughout the Union. While the rate of inflation is gradually slowing, and economic indicators show signs of recovery, the overall tone of economic growth remains weak in most member states. Projections for economic growth in 2024 suggest that the EU GDP will increase by 1.0%, while growth in the eurozone is expected to reach 0.8%. An acceleration of growth is expected in 2025, but with cautious optimism due to numerous challenges that remain present.

Despite global challenges, the economy of the European Union has maintained a certain level of resilience, particularly evident in strong employment figures. By the end of 2023, the employment rate for people aged 20 to 64 reached a new record of 75.5%, and the unemployment rate in March 2024 was 6.0%, the lowest recorded unemployment rate in EU history. These positive trends in the labor market provide some impetus for growth in private consumption, though a high savings rate continues to limit consumption. In 2025, further acceleration in real disposable income growth is expected, which could further support economic recovery.

On the other hand, inflation in the European Union is gradually decreasing. The harmonized index of consumer prices (HICP) fell from 5.4% in 2023 to 2.5% in 2024 for the eurozone area, while a decrease in inflation in the EU is expected from 6.4% to 2.7%. This decline in inflation is primarily driven by lower energy prices and non-energy industrial goods, while services continue to maintain moderately high prices due to wage pressures. The growth of nominal wages in the EU was 5.8% in 2023, but it is expected to gradually decrease over the coming years, further reducing inflationary pressures.

Labor Market and Its Impact on Economic Growth

The recovery of the labor market and high employment rates are key elements that supported economic growth in the EU during the first quarter of 2024. Economic activity increased by 0.3% in both areas, concluding a period of stagnation that began in the last quarter of 2022. The growth of employment and real wages will continue to support the increase in disposable income, although a strong propensity to save continues to be a partial brake on private consumption. According to projections, in 2024, economic growth will largely be driven by consumption, while investment growth is expected to gradually improve, alongside a moderate stabilization of credit conditions.

Despite positive developments in the labor market, some industries, particularly those associated with residential construction, are experiencing a decline. Investments in new housing projects have significantly slowed down, affecting related industries and limiting economic growth. It is expected that credit conditions will improve over the coming years, potentially prompting a renewed increase in investments.

The Impact of Geopolitics on the Economy

The economic forecast for the EU in 2024 is marked by a high degree of uncertainty due to numerous geopolitical risks. The war in Ukraine, as well as conflicts in the Middle East, are putting pressure on the global economy and affecting economic conditions within the Union. High inflation in the United States and possible further delays in interest rate reductions are exacerbating global financial conditions. On the domestic front, the slowing decline in inflation may lead to further delays in interest rate cuts by EU central banks, which could have far-reaching consequences for economic growth.

However, despite all these challenges, there are also positive indicators. Consumption is expected to increase due to a reduction in the propensity to save, while investments in residential construction could experience a faster recovery than currently anticipated. Risks associated with climate change also significantly impact economic prospects, but authorities hope that policies aimed at sustainable growth and further investments will help mitigate these risks.

Conclusion

The economy of the European Union is entering a phase of slow recovery, with positive developments in the labor market and a gradual decrease in inflation. Nevertheless, challenges such as geopolitical risks, slowing investments, and high savings levels continue to pose serious obstacles. Forecasts for 2024 and 2025 indicate modest economic growth, supported by rising consumption and stabilization of credit conditions, but with considerable caution due to uncertainties in the global environment.