Title Page
INTERNATIONAL MONETARY FUND
REGIONAL ECONOMIC OUTLOOK
EUROPE
A Recovery Short of Europe’s Full Potential
2024
OCT
Copyright Page
©2024 International Monetary Fund
Cataloging-in-Publication Data IMF Library
Names: International Monetary Fund, publisher.
Title: Regional economic outlook. Europe : a recovery short of Europe’s full potential.
Other titles: Europe : a recovery short of Europe’s full potential. | A recovery short of Europe’s full potential. | Regional economic outlook : Europe.
Description: Washington, DC : International Monetary Fund, 2024. | Oct. 2024. | Includes bibliographical references.
Identifiers: ISBN:
9798400287312 (paper)
9798400292286 (epub)
9798400292262 (Web PDF)
Subjects: LCSH: Economic forecasting—Europe. | Economic development—Europe. | Economic conditions—Europe.
Classification: LCC HC240.A1 R445 2024
The Regional Economic Outlook: Europe is published once a year, in the fall, to review developments in Europe. Both projections and policy considerations are those of the IMF staff and do not necessarily represent the views of the IMF, its Executive Board, or IMF Management.
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International Monetary Fund, Publication Services
P.O. Box 92780, Washington, DC 20090 (USA)
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Contents
Executive Summary
A Recovery Short of Europe’s Full Potential
Europe Is Slowly Recovering but Uncertainty Is Muting the Rebound
Inflation Has Fallen, but Services Inflation Remains Sticky
Outlook: A Tepid Recover y
Absent a Strong Reform Effort, Growth Will Remain below Its Full Potential
Risks
Policies: Navigate the Recover y and Push for Grow th Reforms
Monetary Policy: Steady Hands Needed
Fiscal Policy: Secure Sustainability, Build Buffers, and Prioritize
Financial Sector Policy: A Watchful Eye on Downside Pressures
Structural Policies: Single Market Key to Europe’s Full Growth Potential
References
BOXES
Box 1. Europe’s Shift to Electrical Vehicles amid Intensifying Global Competition: Who Will Be Affected?
Box 2. Monetary Policy and Uncertain Neutral Rate Estimates
Box 3. What Is Constraining Europe’s Productivity Growth? Evidence from a Firm-Level Study
Box 4. How Large Are Europe’s Convergence Effect and What Are Their Main Drivers?
Box 5. Ukraine: Heightened Risks, Longer War, and Continued Resilience
FIGURES
Figure 1. A Slow Recovery despite Healthy Income Rebound
Figure 2. Uncertainty, Near-Term Sentiment, and Long-Term Growth Expectations
Figure 3. Demand and Supply Conditions
Figure 4. Incomes and Productivity
Figure 5. Inflation Developments
Figure 6. Sticky Core Inflation
Figure 7. Baseline Macroeconomic Forecast and Consumption
Figure 8. Baseline Macroeconomic Forecast and Investment
Figure 9. Long-Term Growth Forecast
Figure 10. Risk to Growth and Inflation
Figure 11. Monetary Policy
Figure 12. Public Debt and Fiscal Policy
Figure 13. Expenditure Pressures
Figure 14. Financial Sector
Figure 15. European Economic Integration and Scope for Deepening the Simple Market
Box Figure 1.1. Battery Electric Vehicle Sales
Box Figure 1.2. Short-Term GDP Impact of Electric Vehicle Shock with Tariffs
Box Figure 2.1. Real Natural Rates of Interest in the Euro Area
Box Figure 2.2. Illustrative European Central Bank Monetary Policy
Box Figure 3.1. Listed Firms’ R&D Intensity over Sales
Box Figure 3.2. Nonfinancial Corporations Funding Structure, 2023
Box Figure 3.3. Share of Young Firms
Box Figure 4.1. Per Capita Convergence across Regions (95-24)
Box Figure 4.2. European Union Integration and Returns from Enlargement: Cumulative per Capita Increase
Box Figure 4.3. Integration in European Union Global Value Chains
Box Figure 4.4. Structural Reforms pre- and post-Accession
Box Figure 5.1. Real GDP
TABLES
Annex Table 1.1 Real GDP Growth
Annex Table 1.2. Headline Inflation
Executive Summary
Europe’s economic recovery continues, benefiting from a strong response to crises. Yet, the recovery is falling well short of Europe’s full potential. Uncertainty about persistent core inflation, the direction of economic policies, and geopolitical conflicts are weighing down the outlook in the short term. In the longer term, perennially weak productivity growth and new headwinds from the uncertainty of the effects of fragmentation, climate change, and other structural shifts are holding back potential growth. Addressing key policy uncertainties and removing structural barriers would strengthen growth in both the short term and the long term.
The outlook for 2024 and 2025 remains for a modest increase in growth. In advanced European economies and the Central, Eastern, and Southeastern Europe (CESEE) region, the projected growth rate for 2024 is 1.0 and 2.3 percent, and for 2025, it is 1.4 and 3.1 percent, respectively, broadly unchanged since our previous forecast. Gradually strengthening private domestic demand, supported by further disinflation and progressively easing financial conditions, is expected to more than offset the effects of necessary fiscal consolidation. However, Europe’s recovery path is more protracted compared to previous crises, and the risks to the outlook are on the downside. Given high core inflation persistence, inflation targets will only be reached in 2025 in advanced European economies and in 2026 in most CESEE countries.
In this context, policymakers need steady macroeconomic policies to help firms and households navigate an uncertain environment. Over the near term, this means transitioning to a neutral monetary policy stance while reducing deficits without jeopardizing a smooth landing.
Central banks have appropriately started to ease. In advanced European economies, rate reductions should continue steadily. Since policy rates are closer to targets and the effects of monetary policy better understood, policy decisions can become more forecast-driven, although central banks should respond flexibly to any large data surprises or developments. Central banks in the CESEE region, where inflation is further above targets and stickier, should pursue a more data-dependent and meeting-by-meeting approach. Here, monetary policy still needs to internalize the asymmetric (high) costs of inflation overshooting and avoid premature or too rapid easing. Given the uncertainties around the level of neutral rates, central banks will have to approach the end of the easing cycle with care and be ready to adjust the terminal rate with an eye on economic and inflation outcomes.
The time has come for fiscal policy to rebuild buffers and secure debt sustainability. Public debt has risen substantially since 2020 as governments provided necessary policy support during the crises. With inflation closer to target and moderate levels of growth, high debt would become a vulnerability if not addressed through medium-term adjustment efforts. A welcome fiscal policy pivot is now under way. The new European fiscal governance framework presents a crucial step to reduce debt and strengthen sustainability, and should be implemented as planned. Managing the needed fiscal adjustment, while addressing rising expenditure needs, will require spending prioritization and structural fiscal reforms. In high-debt countries, fiscal adjustment should be front-loaded to demonstrate resolve, secure market confidence, and create room for addressing future spending needs.
In light of elevated uncertainty, financial sector policymakers and supervisors need to keep a watchful eye on downside risks. Banks have substantial capital buffers; however, vulnerabilities such as exposure to commercial real estate could be exacerbated by a potential downturn. Rebuilding macroprudential buffers could provide protection against such an eventuality. In addition, it is important to prevent the migration of risks to nonbank financial intermediaries, especially those with high portfolio concentration, elevated leverage, and liquidity mismatches.
Finally, policymakers need to provide a clear direction on how to raise potential growth. An in-depth analysis of Europe’s productivity growth and convergence process accompanying this report (see October 2024 Regional Economic Outlook: Europe Note 1 Europe’s Declining Productivity Growth: Diagnoses and Remedies and October 2024 Regional Economic Outlook: Europe Note 2 Accelerating Europe’s Income Convergence through Integration) sheds light on the underlying issues. Consistent with the two recent reports on the long-term outlook for the European Union (EU) by Enrico Letta and Mario Draghi,1 the analysis reveals that, in advanced European economies, a lack of market scale and access to capital and skilled labor constrain firms from operating at the global technology and innovation frontier. In CESEE countries, lagging structural reforms and low investment rates are slowing the convergence process. For Europe to achieve its full growth potential, a larger and more integrated single market—especially for goods, services, and capital—is needed. A fully developed single market will provide firms and entrepreneurs with the room to innovate and sustainably raise growth; it will also facilitate structural reforms and raise investment incentives in converging countries. CESEE countries also need to upgrade infrastructure, enhance worker skills, and improve institutions to resume their income growth catch-up.
Deepening European integration is also the best response to accumulating uncertainties. By insulating businesses and labor markets from global fragmentation pressures, a more complete single market would strengthen economic resilience in a shock-prone world. These are formidable policy challenges, but Europe can overcome them with steady macroeconomic policies and a strong commitment to economic integration and continued multilateral collaboration.