European Commission predicts modest yet resilient economic growth

The European Commission’s Spring 2025 Economic Forecast paints a picture of modest yet resilient economic growth for the European Union, despite rising global trade tensions and heightened policy uncertainty. According to the latest projections, real GDP in the EU is expected to expand by 1.1% this year, with the euro area slightly trailing at 0.9%. A stronger rebound is forecast for 2026, when growth is set to reach 1.5% and 1.4% respectively.

The forecast, published today, reflects the economic recovery’s ongoing fragility amid a deteriorating global outlook, with world GDP growth now projected at 3.2% for both 2025 and 2026 – a downgrade from previous estimates. Nevertheless, the EU economy has shown resilience, buoyed by domestic demand, a robust labour market, and steadily declining inflation.

Resilient start to 2025, despite weaker outlook

Stronger-than-expected growth in the final quarter of 2024 (0.4%) and continued expansion in early 2025 (0.3%) provided a firmer-than-anticipated start to the year. However, the forecast revises growth expectations downward from previous projections due to a more pessimistic view of global trade and the ongoing impact of trade policy uncertainty.

Trade tensions, particularly between major economies like the US and China, continue to ripple through the global economy. Although a May 12th agreement between the two countries resulted in lower tariffs than anticipated, they remain high enough to weigh heavily on bilateral trade. EU exporters are not immune: exports are expected to grow by just 0.7% in 2025, with services faring better than goods.

Inflation easing, consumption holding steady

Inflation continues its downward trajectory. In the euro area, Harmonised Index of Consumer Prices (HICP) inflation is expected to decline from 2.4% in 2024 to 2.1% in 2025 and drop further to 1.7% in 2026, slipping below the ECB’s 2% target. Falling energy prices and a stronger euro are helping to ease price pressures across the bloc.

Meanwhile, private consumption is projected to grow by 1.5% in 2025 and 1.6% in 2026, slightly outperforming previous estimates. This improvement stems from real wage gains and a resilient labour market, even as high savings continue to dampen household spending.

Investment recovery gathers pace

After a 1.8% contraction in gross fixed capital formation in 2024, investment is forecast to rebound moderately in 2025, growing by 1.5%, and accelerate further to 2.4% in 2026. Infrastructure, R&D, and residential construction – supported by EU funding instruments like the Recovery and Resilience Facility and the Cohesion Fund – are expected to lead this recovery.

Jobs growth continues, real wages recover

Despite moderate growth, the EU’s labour market remains a bright spot. Following the creation of 1.7 million jobs in 2024, employment is projected to increase by another 2 million by the end of 2026. Unemployment is forecast to reach a historic low of 5.7% that year. Real wages are also recovering, with nominal wage growth expected to ease but still outpace inflation, allowing workers to regain lost purchasing power.

Fiscal outlook: slight deficit increase, debt edging up

Public finances are set to loosen slightly. The EU-wide general government deficit is forecast to rise marginally from 3.2% in 2024 to 3.3% in 2025 and remain stable through 2026. The debt-to-GDP ratio, after several years of decline, is projected to rise modestly to 83.2% in 2025 and 84.5% in 2026.

Risks tilted to the downside

The Commission warns that risks to the economic outlook remain significant and skewed to the downside. Persistent trade fragmentation, geopolitical tensions, and climate-related disasters could dampen growth and reignite inflation. However, upside potential exists if trade relations improve or EU reforms to boost competitiveness gain traction. Increased defence spending and further integration of the Single Market and Savings and Investments Union could also bolster growth.

The Spring Forecast is based on economic data and policy assumptions available up to 30 April. It will be followed by the Autumn 2025 Economic Forecast, scheduled for release in November, which will provide updated projections based on emerging trends and policy developments.