Real GDP growth is projected to ease to 1.7% in 2024 and reach 2.0% in 2025 and 2026. The tight labour market and falling inflation are supporting real wage growth and private consumption. The implementation of the Recovery and Resilience Plan (RRP) is set to further raise investment and public consumption in 2025 and 2026. A progressive strengthening of external demand will raise exports. As labour demand slows, inflation will moderate to 2.1% in 2026.

Fiscal policy will remain supportive. The implementation of the RRP, as well as household and corporate tax cuts will raise internal demand, while sustained fiscal surpluses will push public debt down to 89.3% of GDP in 2026 (Maastricht definition). Lowering entry barriers in services, especially the retail sector, further streamlining regulations, improving counselling for students and workers, and enhancing childcare services would boost productivity and curb labour shortages. Over the medium term, regular spending reviews would help to address mounting spending pressures from an ageing population and strong investment needs.

Growth was 1.9% in the year to the third quarter of 2024. Private consumption has accelerated and RRP spending is supporting investment. A strong labour market and tax cuts have supported steady gains in real disposable income and consumer confidence, as headline price inflation eased to 2.6% in October. Services turnover have increased further and retail sales remained strong in September, but tourism revenues have moderated. Employment growth slowed to 1.4% in the year to September 2024, with new vacancies declining. Labour shortages persist, notably in construction, healthcare, and high-tech occupations.

Following the sharp increase in borrowing costs for households and firms in 2022-23, monetary policy rate cuts have slowed the decline in business loans and led to a partial recovery in consumption and housing loans. With still high saving incentives and uncertainty, the recent strong real disposable income gains have also translated into a historically high household savings rate. In the first nine months of 2024, the current account improved further with significant term-of-trade gains, though goods and services imports have outpaced exports.

Fiscal policy is set to remain supportive. However, persistent fiscal surpluses and high nominal growth will lower public debt to 89.3% of GDP in 2026 (Maastricht definition). Spending from RRP grants is expected to increase from 1.3% of GDP in 2024 to 1.6% in 2025 and 1.7% in 2026, boosting investment and public consumption, without affecting the budget balance. Activity will also be supported by increasing disbursements of RRP loans, higher public wages, the indexation of pension benefits, a further reduction in the personal income tax, and business tax cuts. Increasing environmental taxes and efforts to curb tax evasion will boost public revenues. At the same time, the minimum wage rose by 7.9% in 2024, and further increases expected in 2025 and 2026 will raise household incomes.

GDP growth is projected to reach 1.7% in 2024 and rise to 2.0% in 2025 and 2026. The spending of European funds and easier monetary policy are boosting investment, and the projected recovery in activity in European trading partners will support exports. Strong wage growth and high employment rates will raise consumption, especially as inflation and debt-servicing costs ease. Tax cuts, increasing social transfers and higher public wages will support household incomes, but also slow the decline in inflation. Headline consumer price inflation will moderate to 2.1% by 2026 as energy and food prices stabilise and services price pressures diminish slowly. A further decrease in the household saving rate and stronger-than-expected wage developments would strengthen consumption but also fuel inflation. By contrast, the implementation of the RRP could materialise more slowly than projected, implying both lower growth and lower inflation.

Sustained productivity growth, higher employment and more efficient public spending are needed to face rapid population ageing and significant investment needs, including in human capital. Continuing to roll out new accounting standards, developing performance budgeting and reducing tax expenditures would improve the efficiency of public spending and help to shift its structure towards investment. Strengthening environmental and property taxation while protecting vulnerable groups would help to attain ambitious climate goals and make room to lower taxes on low-wage workers. Reducing entry barriers in services, including in the retail sector, and making further use of regulatory impact assessments would raise investment and productivity. Improved counselling to guide study and reskilling choices and strengthening active labour market policies that focus on smaller firms, would reduce skill and labour shortages. Better childcare services for low-income households could further raise the labour force participation of women, further easing labour shortages.