Real GDP is projected to contract by 0.3% in 2024, before growing by 1.9% in 2025 and 2.5% in 2026. Low headline inflation and rising nominal wages will boost real incomes and consumption. Public investment will gradually strengthen, helped by the absorption of EU funds, while lower interest rates will support business and residential investment. Exports will pick up as key export markets recover. Core inflation will remain high due to strong wage growth related to labour shortages and high public sector salary growth. Rising geopolitical risks could adversely affect risk premiums and derail growth.

Fiscal policy should be tightened to avoid high deficits and lower inflationary pressures. Listing large state-owned enterprises and strengthening competition in the financial sector could help deepen capital markets and improve access to finance. Reducing the labour tax wedge for low-income earners and shifting the tax burden towards other income, property, and environmental taxes would help lower informality. Bolstering competition enforcement and addressing skills shortages by improving training opportunities and facilitating skilled immigration would support business dynamism and innovation.

GDP contracted by 0.4% in the third quarter of 2024. Private consumption fell due to low confidence, despite the 8% annual increase in real average net monthly wages in the second quarter. Tight financing conditions and slow absorption of EU funds have weighed on business and public investment. Industrial production declined by 1.3% in September compared to August and was around 2% lower in than a year earlier. Annual inflation rose from 1.6% in September to 2.1% in October due to rising food prices, and core inflation decreased only slightly to 3.6%, reflecting strong wage growth. The unemployment rate was 6.9% in September and the vacancy rate was 2.6% in the second quarter of 2024, reflecting increased shortages of technicians, professionals, craft workers and tradespeople.

Subdued export market growth contributed to a sharp fall in quarterly export volumes in the second quarter of 2024. The merchandise trade deficit has narrowed in the third quarter of 2024, with export values stagnating and import values falling by 14% year-on-year in September. Despite continued monetary easing in the euro area, average annual mortgage interest rates fell only to 5.7% in September, weighing on credit demand and house price growth.

EU Recovery and Resilience Facility grants will finance investment, training and digital adoption measures for small businesses, with average yearly spending of about 1.5% of GDP in 2025-26. Spending on social protection and public services will increase by 1.5% and 0.4% of GDP, respectively, and internal security and defence spending will be raised by 0.3% of GDP by 2026. An increase of 0.5% of GDP in both government consumption and interest expenses add to spending pressures. According to the 2025 budget, this will be only partly financed by additional revenues from a tax on undistributed profits of credit institutions, the transfer of 1 percentage point of gross wages from the mandatory asset-backed private pension pillar to the solidarity-based public pension pillar, and rising excise taxes, resulting in a projected rise in the public debt-to-GDP ratio. The replacement of the differentiated non-taxable minimum income by a common non-taxable minimum will be financed by higher personal income tax rates.

Real GDP growth will rebound to 1.9% in 2025 and 2.5% in 2026. Increasing household real incomes will boost private consumption over the next two years but rising unit labour costs will restrain export growth. Delays in the absorption of EU funds due to skilled labour shortages, rising construction costs and weak capacity in infrastructure planning will limit public investment growth. Business and residential investment will pick up as financing conditions ease. Tight labour markets and planned increases in minimum wages will generate strong wage growth and sticky core inflation. Intensified regional geopolitical risks could increase risk premiums and hamper foreign direct investment inflows. On the upside, stronger-than-expected growth in the rest of the euro area would boost exports.

Listing state-owned enterprises would help improve their governance and attract investors. This could deepen capital markets and raise access to finance for other firms. Improving public procurement and infrastructure planning capacity is key for the successful implementation of EU funds and raising productivity. Reducing social security contributions for low-income earners or raising the progressivity of personal income taxes and stepping up enforcement efforts would help to reduce informality. This also requires raising trust in institutions and continuing the fight against corruption, for example by applying the heavy fines for tax evasion and bribery that current legislation allows, while ensuring that they are proportionate. Lowering occupation-specific restrictions for migrants can help to reduce skilled labour shortages, while investing more in childcare facilities would increase the labour supply of women. Establishing a tri-partite training fund and improving cooperation in training design and implementation among firms and training providers would help address skilled labour shortages. Phasing out tax expenditures for fossil fuels, as used for example in agriculture and heating, would help achieve the planned reduction in GHG emissions.