Eurozone
Pauliina Sandqvist
The eurozone experienced significant economic stagnation over 2023,25 although it proved more resilient than previously anticipated. The year started better than expected since the energy crisis turned out to be less dramatic than feared, but the eurozone economy overall worked in low gear over the course of the year. High inflation and interest rates weighed on private consumption as well as corporate investment. The construction sector cooled down noticeably, and the manufacturing sector struggled due to lower (foreign) demand and high (energy) costs. On the other hand, most service sectors did better. All in all, economic activity remained sluggish, although there were cross-country differences, with economies more orientated to services and less exposed to Russia faring better.
The economic outlook for 2024 looks sedate. The good news is that inflation—and in particular, core inflation—slowed more than expected, energy-related risks seem to be less pronounced than a year ago, and labor markets are still quite robust. The latest Deloitte European CFO Survey26 showed that hiring expectations in the euro area have softened but the net balance is still slightly positive indicating a minor expansion over the coming year.
There are several reasons for prudence. Real income increases are still smallish, consumers are keeping their purse strings tight, and savings have been rising, motivated by the higher interest rates. Restrictive monetary policy will likely keep restraining economic activity at least until rate cuts start (our assumption is that this is unlikely to happen before the middle of this year). This is the case for many other geographies, meaning that foreign demand is also likely to remain subdued. The existing geopolitical tensions and numerous elections to come keep uncertainty elevated—influencing consumption and investment decisions and keeping energy price developments skittish. Additionally, fiscal consolidation is set to start, as most eurozone countries must tighten their public spending.
Altogether, economic activity should remain relatively weak at the beginning of 2024 and gradually pick up over the course of the year, as inflation comes down and tight monetary policy starts to ease. Private consumption will likely be supported by still robust labor markets, increasing real incomes, and lower saving rates as interest rates come down. Also, NextGen EU funds should underpin investment moderately. Export activity is expected to recover modestly as world trade growth is expected to rebound in 2024 to 2.7% from 1.1% in 2023.27
There are some upside risks as well. If inflation keeps easing—as it has during the past few months—real incomes could increase more quickly than expected and support private consumption. The European Central Bank could start with the rate cuts somewhat earlier, boosting aggregate demand even more. Hence, the pace of inflation reduction is key for the eurozone’s economic outlook for 2024. Furthermore, traction in the deployment of NextGen EU funds could provide an additional boost to growth across major recipient EU economies.
Germany
Alexander Börsch
The German economy had a difficult 2023, with two very different halves. The first half turned out to be better than expected. Despite the halting of Russian gas deliveries, there was no serious energy shortage in winter 2022 and early 2023, which could have pushed the economy into a deep recession. At the same time, the opening of China as well as the resilient US economy, nourished hopes for Germany’s export-oriented sectors.
However, in the second half, inflation turned out to be considerably more stubborn than expected, so the interest rate cycle became very steep. Restrictive monetary policy had the desired effects on inflation—in Germany, inflation fell from 8.7% in January to 3.2% in November 2023.
These headwinds resulted in a small contraction of the German economy (–0.3%) in 2023. The industrial sector had to confront a recession with falling industrial production, while the services sector held up much better. This was due to a considerable amount of extra savings and pent-up demand from the pandemic, but also due to a very stable labor market. At the end of 2023, it seemed that the economic downturn was slowing. One of the key early indicators, the purchasing managers’ index, is still at a low level and in contractionary territory, but it stabilized and showed a slight uptick in November.
Looking at 2024, several of last year’s constraining factors are expected to continue to shape Germany’s economic performance. There will not be much tailwind from foreign demand, as Germany’s two most important export markets—China and the United States—are facing declining growth rates in 2024. At the same time, high interest rates are a drag on corporate investment. This implies that any economic recovery will depend mainly on consumer expenditure.
At first glance, consumers are an unlikely candidate to drive growth in 2024, as inflation has pushed consumer sentiment into strongly negative territory. However, on the positive side, labor markets continue to be very stable. According to the Deloitte CFO Survey,28 labor shortages are the no. 1 risk for large German corporates in 2024. Demographic change and a declining labor force play a key role in this respect. Due to tight labor markets and good job prospects even in a recessionary environment, consumers do not necessarily curtail their consumption. Even more important, inflation is likely to decline further, and the first interest rate cuts are likely to happen later in the year. Lower inflation means higher real incomes and higher consumption. Therefore, Germany’s economic performance in 2024 will depend to a large degree on these questions—how fast inflation will decline further and when the European Central Bank will start cutting policy rates.
Deloitte’s economic research assumes in its baseline forecast for the German economy that it will experience growth in 2024, but at a very moderate pace of 0.4%. The key assumption behind this forecast is gradually declining inflation and a first interest rate cut early in the third quarter. If inflation falls faster, a growth rate of 0.9% is possible; if it falls slower, the German economy faces a repetition of 2023 characterized by light recession (–0.1%). In the baseline scenario, we forecast inflation at 2.7% over the year. The first quarter of 2024 is likely to be the weakest, with the economy stabilizing and picking up pace in the second quarter and onward.
In all, 2024 will be a transition year for the German economy. As a very export-oriented economy with a strong industrial base, it has been particularly affected by the multiple supply shocks over the past years, ranging from the COVID-19 pandemic to interrupted supply chains and from the energy crisis to new geopolitical risks. In this new context, the German economy has not returned to its growth trajectory of the pre–COVID-19 era and 2024 will indicate whether it can do so in the medium term.
France
Maxime Bouter, Olivier Sautel, and Pauliina Sandqvist
The French economy had a challenging 2023. Next to high inflation and financing costs, social tensions related to the unpopular pension reform depressed confidence in the first months of the year. The pension reform, which raised the state pension age from 62 to 64 starting September 2023, was passed in April after a long and controversial process.29 Besides that, French economic growth was somewhat stronger than in the eurozone on average—supported by a flourishing tourism sector. Yet, the growth momentum did weaken in the second half of the year due to a worsening trade balance and a contracting construction sector.
Sentiment indicators remained depressed at the end of the year. The labor market remains strong, with the unemployment rate close to the historical low. Less dependent on oil and gas than other European countries, and thanks to public subsidies for energy measures, France was less severely affected by the consequences of the war in Ukraine and the post–COVID-19 global fossil fuel supply shock. This has resulted in lower inflation than the European average. Inflation peaked in 2023 but is falling more slowly than in other European countries due to a relatively lower price level. In the absence of a major external shock, all inflation drivers are expected to slow down (stabilization of energy, retail, and manufactured goods prices, but also a moderate fall in employment) so that headline and core inflation should continue to fall gently over the coming quarters.
The outlook for 2024 is subdued for France. The political situation in the country is likely to remain challenging given Macron’s lack of a majority in parliament, which complicates the implementation of further reforms.Fiscal stimulus will probably turn out to be less expansionary compared to 2023, as most of the high inflation– and energy-related measures run out during 2024. The end of the energy-related measures should reduce pressure on the government’s primary deficit. On the other hand, interest payments on public debt are expected to surge as new issuance will carry higher rates than those maturing. The much-needed fiscal consolidation is set to start and will remain relevant in the coming years, as the debt-to-GDP ratio of about 110% is far above the European Union’s debt rule of 60%.30 With a relatively low GDP growth rate and in the absence of any major reforms, the public deficit is unlikely to fall significantly. As a result,France’s debt ratio should remain higher than the euro area average.
Despite these challenges, economic activity should pick up gradually over the year in line with easing inflation, less tight monetary policy, and slowly strengthening foreign demand. Moderate growth will be supported mainly by private consumption.Despite a slowdown in nominal wage growth, the fall in inflation should allow households to see their purchasing power increase. Households could also see their disposable income increase as a result of tax relief, with the abolition of the housing tax for the last segment of the population who, unlike the rest of the population, were still subject to this tax in 2023.
Despite particularly resilient business investments, their contributions to growth are likely to be moderate as high interest rates take their toll. The NextGen EU funds should foster public investment, making investment in climate and energy transition an important driver of growth. On the other hand, it is unclear how the pension reform will affect the labor market. It will cause an increase in the labor supply, but this can either be absorbed and ease labor shortages in specific sectors, or it could lead to slightly higher unemployment. A bright spot for the French economy is the Olympic Games in Paris in August 2024, which are expected to boost domestic demand, especially in the tourism sector.
Spain
Ana Aguilar
The Spanish economy has shown resilience to recent headwinds, outperforming expectations and European growth in 2023. In 2024, Spain is expected to continue to grow above the European average,31 although at a lower rate than in 2023,32 as a result of the higher interest rate environment progressively feeding through to the economy, and a more muted external sector. Spain has benefited from the global trend of greater resilience of services vis-a-vis manufacturing, with services-related purchasing managers’ indices remaining in expansionary territory at the end of 2023. In contrast, the manufacturing PMIs anticipate ongoing contraction—though comparatively less pronounced than the eurozone.
Consumer spending is expected to be the main driver of growth in 2024. The labor market should continue to grow, albeit less than last year. The unemployment rate will inch lower, although it will remain markedly above the EU average. Wages are expected to continue to rise, following an agreement between businesses and labor union representatives last year, that suggested a progressive recovery of household’s purchasing power in the form of a 4% annual wage rise in 2023, and annual wage rises of 3% in 2024 and 2025.33 Meanwhile, inflation is expected to remain stable in 2024. Food prices and core inflation should continue to moderate, while the expiry of some of the anti-inflation measures taken by the Spanish government and the contribution from energy keep some pressure on inflation.
Although higher interest rates progressively feed through to households, repayment is expected to remain within reasonable levels for most households. Spanish households have continued to deleverage—household debt to GDP is at 50%, about 6 percentage points lower than in June 2022, and 35 percentage points lower than its peak during the global financial crisis.34 The Bank of Spain has recently estimated that three in four households that have taken up a new mortgage dedicate less than 30% of their income to servicing mortgage debt.35 Out of new mortgages taken in 2021, 2022, and 2023, about 75% are on fixed rates, protecting those households from sharp volatility in interest rate payments.36
Investment grew in the first part of 2023 but stagnated in the third quarter, as uncertainty continued to influence decision-making. Against the environment of high interest rates, businesses have continued to deleverage. Net business debt to GDP is at 67%, 8 percentage points lower than in June 2022 and 53 percentage points lower than at its global financial crisis peak.37 As the prospect of interest rates starting to moderate takes hold, investment growth is expected to accelerate. This trend should be assisted by the progressive deployment of the NextGen EU funds, which should make loans available to businesses at favorable rates.
The flip side to the strength of households and businesses balance sheets is public finances. Although fiscal deficit and debt-to-GDP ratios have progressively come down from their pandemic peaks, they are still expected to remain elevated.38 The deficit is expected to continue to decrease in 2024, assisted by the partial expiry of anti-inflation support measures. The effects of higher interest rates are only expected to feed through gradually given the extended maturity of Spanish debt. The reinstatement of EU fiscal rules will require Spain to set out a medium-term path of fiscal consolidation.
The external sector stopped being a significant driver of growth in the second half of 2023. The sector is not expected to make a significant contribution to growth in 2024, as a result of subdued growth in the European Union. Nonetheless, tourism has continued on a strong trajectory and could surprise upwards, with tourist arrivals in November 2023 up 10% from November 2019 levels.39 Nontourist services exports are also expected to maintain dynamism, with Spain gaining global market share since 2019.40
Italy
Marco Vulpiani and Claudio Rossetti
After its postpandemic recovery, the Italian economy slowed down last year, recording modest growth rates that characterized the previous decade. Inflation and high interest rates were the main reasons for the weakening of the Italian economy. A significant decline in consumption growth in 2023, after the dynamic postpandemic recovery the year before, also played a role. Unfortunately, these negative effects are not expected to vanish, and the modest real GDP growth rate last year is expected to be repeated in 2024.
Higher interest rates are affecting domestic demand through the credit channel. On the business side, the cost of credit increased sharply last year. The cost of borrowing was, on average, more than twice what it was the year before. In addition, the lending criteria have also been tightened, leading to a significant reduction in the supply of loans available to businesses. Therefore, many businesses had to use up any available excess liquidity over the past year, and gross fixed capital formation recorded a striking negative growth rate.
Moreover, the construction sector will no longer act as a driving force because of the severe reduction in tax credits for housing renovation.41 Further, public investments, especially those related to the National Recovery and Resilience Plan, are expected to slow down in 2024. Gross fixed capital formation should be only partly propped up by the planned rollout of investments, especially in digital and green projects. On the household side, the picture related to the cost of credit is quite similar, with increasing interest rates negatively affecting housing mortgages and consumer credit.
Although core inflation is easing in Italy, internal pressures hampering its descent remain. Increasing labor cost is expected to make a significant contribution in 2024, because of the strengthening of contractual wages after the dramatic inflation seen in recent years. Overall, inflation remained quite high last year in Italy—at around 6.1%—and it is not clear whether the expected reduction in 2024 will be enough to foster stronger economic growth.
Given the downward trend in real income in the last two years and more restrictive financial conditions, consumption was mainly financed by a sharp decrease in savings rates. In 2024, we expect household consumption to benefit from a recovery of purchasing power resulting from higher household income in real terms, due to higher wages and lower inflation. Employment recorded a positive trend in the last year, but higher labor costs could cool labor demand.
Italy’s trade balance has significantly improved in the last year, mainly because of the moderate upward trend in Italian export prices, recovering the significant decline recorded in 2022. Nevertheless, the contribution to GDP growth that comes from international trade is modest and, although it is a source of strength for the Italian economy, it is not expected to provide a strong stimulus to economic growth.
Finally, it is well known that Italy’s economy is geographically divided, with GDP per capita ranging from more than twice the EU average in some regions in the north to about half in many regions in the south. The Italian subsidy known as citizens’ income (Reddito di cittadinanza) provided support for household consumption post pandemic, especially for residents in the south of Italy. Nevertheless, challenges remain. Results from the Deloitte Observatory on Italian regions confirm that a significant gap in productivity and efficiency between different areas of the country remains in most economic sectors. Although some progress has been made, this is also linked to deep institutional and infrastructural differences.
The United Kingdom
Ian Stewart
The United Kingdom’s economic growth slowed over 2023 in the face of rising interest rates, high inflation, and elevated levels of uncertainty. Like most major European economies, the United Kingdom has suffered from the effects of high energy—and particularly gas—prices. While economic growth outperformed depressed expectations and avoided a recession in the first half of 2023, activity contracted marginally in the third quarter. With the effects of high interest rates still feeding through to fixed-rate mortgages and to the corporate sector, and the labor market softening, UK economic activity is likely to, at best, stagnate in the fourth quarter of 2023. For 2023 as a whole, growth stands at around 0.5%, similar to the euro area average but far below previous UK growth trends of around 1.5%.
The good news is the United Kingdom has so far avoided a recession and the sort of deep stress in the financial system that has often followed previous periods of high inflation. While business insolvencies have risen, they have been concentrated in smaller- and medium-sized businesses. Profitability in the dominant service sector has provided resilience, and corporate balance sheets are, by and large, in reasonable shape. Consumer spending has grown modestly in the face of high inflation with consumers drawing down on savings and benefitting from low unemployment and strong wage growth.
Yet the country is not in a trough of the economic cycle. Inflation has peaked, but the backwash from the squeeze on incomes and high interest rates is likely to exert a significant dampening effect on growth in the first half of 2024. Our central case is for activity to reach a trough around the second quarter, with lower inflation and rising real incomes helping drive a gradual pickup in activity in the second half of 2024. This would leave the United Kingdom posting growth of 0.4% for 2024 as a whole, close to the lackluster rate seen in 2023, but with the crucial difference that the pace of growth is picking up.
This sort of outcome would represent a relatively soft landing for an economy that has experienced double-digit inflation, the biggest monetary tightening in 40 years, and a major energy-price shock. Our forecasts are predicated on underlying inflation pressures easing materially and geopolitical risks, and energy prices, remaining contained in 2024. Such outcomes are not assured and as such we think the balance of risk to our 2024 GDP forecast of 0.4% lies on the downside.
The year 2024 could well be one of political change in the United Kingdom. A general election is due by January 28, 2025; but it is far more likely to take place in 2024, probably in the fourth quarter of the year (the timing of general elections is decided by the governing party). Opinion polls currently signal—and have done so for over a year—that the Labour Party is on course to form the next government, supplanting the Conservatives who have governed since 2013.
A change of government would probably make little difference to the medium-term path of UK growth, which will be determined by the global cycle and domestic monetary policy. The Labour Party has committed itself to fiscal rules, which would constrain its capacity to materially raise public expenditure or debt levels. A Labour government would face the same central economic challenge as the current government, namely, how to raise trend productivity growth and similar constraints.
The Nordic countries
Bryan Dufour
The Nordic region is expected to expand modestly in 2024—to the tune of 0.9%. This is driven by disparate situations in different economies, but no country is expected to show negative yearly growth, despite multiple technical recessions observed in the second half of 2023 (in Denmark, Norway, and Sweden). Denmark and Iceland are the two countries expected to expand more than 1%, while other economies will be battling inflation (Norway), a subdued job market (Sweden), and a depressed construction sector (Finland).
The decline of the real estate sector—which is trickling down to the construction industry and its multiple inputs—is, however, a common theme among the Nordic economies. A decrease in central policy rates will be key to remedy this situation and catalyze investment across all sectors. Further rate increases seem unlikely (except perhaps in Norway) as inflationary pressures are easing. Both headline and core inflation are, however, expected to remain above the 2% target, which makes the decrease of central bank rates rather unlikely for the first few months of 2024.
Denmark
Denmark’s 2024 GDP growth is expected to remain within the range it grew in 2023, though possibly slightly slower. Continued wage pressures and a high cost of capital (private investment is seen contracting by 1.3%, which is an improvement over 2023) are expected to dampen economic growth in 2024. The former is driven by the momentum gathered in 2023 (the Organisation for Economic Co-operation and Development estimates average wage growth of 5.5% in 2023) but is subdued by an increase in unemployment, which was seen reaching 5.8%, up by 0.8 percentage points. Wage increases will nevertheless continue to impact core inflation, which should decelerate compared to 2023 but remain above the 2% target. As per the cost of capital, the Danish central bank is expected to keep high interest rates throughout 2024 to maintain the peg to the euro. The expected 2024 slowdown of export activities (driven by a reversal of the surge in the medical industry, which lifted the entire Danish economy in 2023) will support that objective.
Finland
Finland’s economy is expected to grow by less than 1% in 2024, hampered by the depressed confidences of both consumers and businesses. Therefore, private consumption is expected to remain stagnant, which is still an improvement over the 0.5% reduction in 2023. The unemployment rate is expected to average 7.4% over the year and will contribute to subdued consumer spending, which will help dampen imports and enable a positive contribution of international trade to 2024 growth. While interest rates are high, further increases seem unlikely (Finland is the only country among the Nordics that has adopted the euro), which should support private investment. Another growth enabler should be fiscal policy, with increased defense and security spending outweighing cuts in other spaces.
Iceland
Iceland’s GDP growth in 2024 is expected to slow down considerably to about 2.0%, from an estimated 4.9% in 2023. In 2023, among the Nordics, Iceland had the highest inflation (core inflation of 8.3%)—a trend expected to continue in 2024 (within the range of 4.0%) despite a marked slowdown. This impacts real wage growth and private consumption—the latter being a growth engine Iceland depends on more than the other countries in the region (53% of growth typically comes from private consumption, versus 46% for the other Nordic countries). Tourism reaching capacity limits, the fastest unemployment increase (expected at 4.2%, from 3.5%), and fiscal and monetary policies (central policy rate at 9.5% since August) will act as additional growth dampeners in 2024.
Norway
The Norwegian economy is expected to stagnate in 2024. The so-called “mainland” economic growth (referring to the Norwegian economy exclusive of offshore oil and gas activities) should be approximately 0.5%, down from 1.1% in 2023 (total GDP growth should be 0.7%). A key factor in the outlook will be inflation (with core inflation being among the highest in the region), which has been difficult to contain due to the weakening of the Norwegian crown and continued pressure on the job market. The Norwegian central bank is the only one in the region that increased its policy rate in the fourth quarter of 2023.
In such an environment, private investment is expected to decline further than in 2023 (around 0.9%), while the expansion of government expenditures (enabled by transfers from the country’s oil fund) should play a role in keeping the country in positive growth territory.
Sweden
After contracting in 2023, 2024 should bring the Swedish economy back into positive growth territory, although at a limited pace (approximately 0.9%). Both private consumption and investment are expected to rise in 2024, while being restrained by negative economic sentiment shared by consumers and businesses (at least in the first half of the year). The economy will also continue to suffer from the highest unemployment rate in the region, which could grow slightly in 2024. But this should help keep inflationary pressures in check, with Sweden expected to record the lowest inflation rate of the Nordics in 2024 (2.6% core inflation), after being the second highest in 2022 and 2023. Swedish fiscal policy is expected to remain neutral in 2024, but the natural expansion of government expenses will contribute to growth.
Central Europe
Aleksander Laszek and Rafal Trzeciakowski
Among Central European economies, 2023 has been a year of varied levels of economic slowdown. While the two biggest economies—Poland and Romania—avoided recession tentatively, Czechia, Hungary, and the Baltics are at risk of recording negative growth. Measured by GDP, this decline could comprise one-fourth to one-third of the region defined as 11 EU member states of the former Eastern Bloc.
The most curious development in 2023 has been the divergence between Poland and Germany. In the past, economic conditions in Poland and Central Europe have largely followed Germany due to their vast trade ties and the sheer size of Germany’s economy. Central Europe’s GDP is less than two-thirds that of Germany, while Poland stands at less than one-fourth. Despite that, economic sentiment in Poland and Germany has been diverging for the past year.
While in December 2022, the European Commission’s economic sentiment indicator appeared to be transitioning from contractionary territory into an upswing for both countries, this dynamic quickly changed, with Poland going into an upswing and progressing toward expansion, while Germany slid back deep into contractionary territory. The sentiment indicator is a composite of five sectoral indices for industry (weight 40%), services (30%), consumers (20%), retail (5%), and construction (5%). Balances are constructed as the difference between the percentages of respondents giving positive and negative replies.
Economic growth in Central Europe is expected to rebound next year, led primarily by Romania and Poland. This growth will be supported by expansion into Western Europe as inflation and interest rates decline but remains at risk of the unfavourable outlook in Germany. We looked at how exposure of Polish manufacturing subsectors to Germany drags their business sentiment. We cross-referenced the change in 28 business tendency survey indicators with sectoral exposures to the German economy, proxied by the share of German-controlled firms. While the sentiment has generally improved in the past year (from October 2022 to October 2023), the subsectors more exposed to Germany have been less optimistic. This single factor explains around 40% to 50% of the changes in business expectations about foreign order books, general economic situation of the enterprise, production, domestic and foreign order-books, and financial situation of the enterprise.
According to Ignacy Morawski, chief economist of Puls Biznesu, a Polish business daily, in the second half of 2023, industrial production has been declining in the parts of manufacturing focused on foreign markets, while increasing in the ones catering to the domestic market. And according to Reuters, the Ifo, RWI, and DIW institutes all cut their 2024 GDP forecasts for Germany in mid-December from their previous expectations published in September. Questions thus remain on how long this divergence between Poland and Germany can last.
Central Europe is forecasted to grow much faster than Western Europe. In terms of GDP growth, according to the Autumn 2023 Economic Forecast prepared by the European Commission, in 2024, Central Europe will grow more than twice as fast as the rest of the European Union (2.5% versus 1.1%). Poland and Romania—the biggest economies in the region and the fastest growing large economies in the European Union—will contribute two-thirds of this growth. The region is still benefiting from the convergence premium, as its standard of living is gradually catching up with Western Europe.
Nevertheless, labor costs remain much lower, which, coupled with improving infrastructure and access to common market, makes it attractive for investors interested in nearshoring or friendshoring42 amid growing geopolitical tensions. Although Central European countries are facing several structural challenges like aging or the need to decarbonize, most of them have vibrant, flexible economies. Their strengths were at full display recently, when they managed to house and integrate into the labor market enormous number of refugees from Ukraine.
