The economy will grow by 2.8% this year as rising real wages and fiscal policy support demand. GDP growth should pick up to 3.4% in 2025 with EU funds boosting investment but decline to 3% in 2026 as the pace of fiscal consolidation increases. Headline inflation has risen, and a withdrawal of energy support measures will slow down its return to target. Inflation will rise to 5% in 2025 and decline to 3.9% in 2026. Continued high wage growth could lead to strong consumption growth and pose an upside risk to inflation while an escalation of the war in Ukraine would negatively impact the economy.

Monetary policy should remain restrictive and, given risks of persistent inflation, ease only slowly as underlying price pressures clearly fade. Given the large fiscal deficit, fiscal policy should tighten at a gradual pace over a number of years to improve the sustainability of public finances and ensure balanced growth. Enhancing adult training, raising the pension age, and implementing a targeted migration strategy could help alleviate labour shortages and strengthen growth.

Consumption rose in the first half of 2024 as inflation fell and nominal wages grew strongly, partly driven by a 18% rise in the national minimum wage in January and higher public sector salaries. Despite higher consumer confidence, households have remained cautious and increased their savings. The unemployment rate stayed around 3% and labour shortages affected most sectors, particularly ICT, construction, and transportation and storage. A temporary decrease in the disbursement of EU funds led to slower investment growth. Surveys suggest continued manufacturing weakness, although total industrial output has risen slightly in 2024. Preliminary estimates indicate that real GDP declined 0.2% in the third quarter relative to the previous quarter. Headline inflation picked up to 5% in October due to higher VAT on food and higher regulated energy prices, while core inflation rose to 4.1%.

Net trade dragged on growth over the first half of 2024 and preliminary data suggests it stayed weak in the third quarter. Export volumes declined as demand in the euro area remained subdued, while import volumes rose on the back of higher consumption. Falling producer prices should exert downward pressure on goods price inflation. However, service price inflation remains elevated due to strong wage growth as firms continued to experience labour shortages and immigration from Ukraine slowed.

The budget deficit will worsen to 5.8% of GDP this year and is expected to be broadly similar in 2025. However, medium-term fiscal plans envisage a consolidation of around 1% of GDP per year during 2026-28 through a combination of higher income tax and excise duty revenues and lower spending in real terms, as well as a withdrawal of energy support measures. The central bank has maintained interest rates at 5.75% this year given the strength in the domestic economy and concerns about the persistence of inflation. Monetary policy is assumed to remain restrictive, but ease slowly from mid-2025 with policy rates lowered towards 4% by the end of 2026 as inflationary pressures dissipate.

Headline inflation should eventually return to target, but an expected withdrawal of energy support measures at the end of next year will slow down its decline. Inflation is expected to average around 5% in 2025 and decline to 3.9% over 2026. Significant spare capacity should reduce labour shortages, moderate wage growth and lead to a decrease in core inflation. Private consumption should grow, supported by real wage growth and gradually decreasing interest rates. After a slowdown in investment growth this year, the disbursement of EU funds will boost investment growth in 2025. GDP is projected to grow by 3.4% next year and 3% in 2026. Faster-than-expected absorption of EU funds could increase investment, but short timeframes and labour shortages could also hinder its implementation. Continued high wage growth could further raise consumption and lead to stronger growth and inflation. An escalation of the war in Ukraine or a broadening of the conflict could push inflation up and growth down.

Given the uncertainty around the pace of disinflation, monetary policy should remain restrictive and ease as inflation durably returns to target. The planned fiscal consolidation envisages an ambitious pace of fiscal adjustment from 2026 and will narrow the deficit substantially by 2028, but will have a dampening effect on growth. Energy support measures should be fully withdrawn next year and social benefits should become more targeted. Property and environmental taxes should be increased, the latter helping also to accelerate the green transition. Labour market policies addressing skill and worker shortages, such as adult training and lifelong learning programmes, raising the pension age, and implementing a targeted migration strategy, could strengthen growth.