The World Economic Situation and Prospects 2025 report was recently published by the United Nations Department of Economic and Social Affairs (UN DESA). This report presents a comprehensive analysis of the global economic landscape and its future trajectory. Despite facing a multitude of challenges, including geopolitical tensions, inflationary pressures and climate change, the world economy has demonstrated resilience in 2024. The report also projects a stable yet subdued global economic growth outlook, with persistent uncertainties clouding the horizon.
Through this article I will focus on what this report says with regards the outlook for European economies.
The report acknowledges the resilience of the European economy amid the energy crisis triggered by the war in Ukraine and persistent global shocks. However, it predicts a gradual recovery marked by persistent challenges and significant downside risks.
The report projects a gradual pick-up in economic growth for Europe in 2025 and 2026, following a weaker-than-expected performance in 2024. The European Union’s GDP growth is forecast to rise from an estimated 0.9% in 2024 to 1.3% in 2025 and 1.5% in 2026. Similarly, the United Kingdom is projected to experience growth acceleration, from an estimated 0.8% in 2024 to 1.2% in 2025 and 1.4% in 2026. This projected growth is attributed to a confluence of factors, primarily the easing of inflation, which is anticipated to bolster consumer spending and investment. Additionally, resilient labour markets have played a role, as European countries have experienced strong employment growth, low unemployment rates and rising real wages despite a sluggish economic performance. Furthermore, the European Central Bank (ECB) is expected to further cut interest rates and ease monetary policy as inflation aligns with its target.
On the other hand, there could be other factors that could act as a drag to economic growth in Europe. These factors are mainly fiscal consolidation as governments across Europe strive to reduce public debt and rebuild fiscal buffers resulting in contractionary fiscal policies. Additionally, geopolitical uncertainties, such as the ongoing war in Ukraine and broader geopolitical tensions, continue to cast a shadow over the region’s economic prospect and any escalation of these conflicts could disrupt supply chains and trigger commodity price spikes and hence dampen economic activity, structural challenges as long-standing structural issues such as population ageing and weak productivity growth continue to pose challenges. These structural issues necessitate structural reforms to enhance competitiveness and boost long-term growth potential. Much of these structural challenges have been clearly outlined in the now infamous Draghi report on Europe’s competitiveness.
The report confirms a downward trend in inflation across Europe, with headline inflation rates in many economies nearing central bank target rates. This disinflation is largely attributed to declining energy costs and moderating food price growth. However, the report also cautions against persistent upward pressures on services prices. Services inflation has remained stubbornly high, fuelled by strong wage growth in a tight labour market and robust consumer demand, particularly for leisure activities.
The report paints a generally positive picture of the European labour market, anticipating continued employment growth and low unemployment rates. However, it acknowledges a noticeable loosening of previously tight labour market conditions due to softening labour demand in 2024. Key trends in the European labour market include the declining job vacancy rates as these have steadily declined from their peak in mid-2022, approaching pre-pandemic levels, indicating easing labour shortages and slower employment growth as while employment growth is projected to remain positive, it is likely to be slower than in recent years. Challenges persist in the labour market, particularly in manufacturing-oriented economies like Germany, where weak industrial activity and soft export demand could lead to rising unemployment. Furthermore, the report highlights the issue of labour productivity growth faltering across Europe, attributed to firms’ reluctance to downsize their workforce amid recruitment difficulties.
The report underscores the significant fiscal challenges faced by many European countries, characterised by high government debt and substantial public investment needs. Most governments are expected to continue pursuing fiscal consolidation to reduce debt-to-GDP ratios and rebuild fiscal buffers depleted by the pandemic response. However, the report acknowledges the difficult policy trade-offs involved in fiscal adjustments, particularly in the context of modest economic growth, elevated government borrowing costs and increasing longer-term spending pressures. These pressures stem from factors such as population ageing, defence spending and climate transition.
In conclusion, the report highlights that the pace of economic recovery is projected to be uneven across different European countries, with those reliant on manufacturing and exports, like Germany, facing greater challenges, with potential downside risks to the recovery, including further escalation of geopolitical conflicts, heightened trade tensions and the possibility of protectionist measures. In essence the need for fiscal consolidation amid mounting spending pressures will require difficult policy choices and could potentially limit governments’ ability to address structural issues and invest in long-term growth. Moreover, the faltering labour productivity growth underscores the need for structural reforms to boost innovation, enhance skills development and improve the overall efficiency of the European economy.
This means that European policymakers have the difficult task to navigate a complex economic landscape, balancing short-term stabilisation measures with long-term structural reforms, to ensure a sustainable and inclusive recovery for Europe.
