GDP growth is projected to strengthen to 2.6% in 2025 and 2026, driven by a recovery in domestic and external demand. Private consumption will be supported by a tight labour market and sustained real wage growth as inflationary pressures slowly recede. Investment growth will gradually strengthen on the back of improved external demand, reconstruction following the devastating floods in 2023, and the inflow of EU funds.

Fiscal policy will be neutral in 2025 reflecting continued reconstruction spending and a rise in public wages, before tightening in 2026. Structural measures include a gradual increase in ageing-related spending on long-term care, reaching 1% of GDP in 2026, funded by an increase in the social security contribution rate. Further reforms are needed to preserve fiscal sustainability and raise potential growth, including measures to improve the labour force participation of older workers and address labour shortages.

Economic activity has been weaker than expected, with 0.3% quarter-on-quarter growth in the third quarter of 2024, reflecting subdued private investment. Private and government consumption, and exports supported growth. Recent indicators point to improving economic momentum, with industrial production increasing by 1.6% month-on-month in September. The labour market remains tight with the unemployment rate at 3.4% in September and the job vacancy rate at 2.4% in the second quarter, down from its peak in 2022 but still high compared to pre-pandemic levels. Labour shortages are particularly pressing in construction and hospitality. The tight labour market has spurred strong wage growth, with hourly labour costs increasing by 6.4% year-on-year in the second quarter. Wage pressures have contributed to service inflation of 3.9% and core inflation of 2.1% in October (year-on-year). Headline inflation stood at 0% in October, reflecting a fall in energy prices.

Exports are strengthening on the back of slowly recovering external demand. In the third quarter of 2024, merchandise and service export values grew by 8.4% year-on-year. With easing financial conditions in the euro area, credit growth has improved: year-on-year growth in loans to the non-banking sector was 1.4% in August 2024, up from 1% in July.

The fiscal policy stance is expected to remain broadly neutral in 2025, before tightening by around 0.4% of GDP in 2026 in part due to lower spending on post-flood reconstruction. Revenue-raising measures will also contribute to fiscal tightening and include a temporary increase in the corporate income tax rate by 3 percentage points, a temporary bank levy, and an increase in the levy on CO₂ emissions. The government announced flood recovery support of 0.7% of GDP in 2025, down from 0.9% of GDP in 2024. In addition, structural measures include an increase in spending on public wages by 0.5% of GDP in both 2025 and 2026 due to public sector wage reforms, and an increase in spending on long-term care by 0.2% of GDP in 2025 and 1% of GDP in 2026, although labour shortages and other implementation issues might lead to lower spending. The additional spending will be funded by a 2 percentage points increase in the social security contribution rate.

Growth is projected to pick up to 2.6% in 2025 and 2026 on the back of strengthening domestic and external demand. Private consumption will be supported by a tight labour market and sustained real wage growth as inflationary pressures slowly recede. Investment growth will gradually rebound on the back of improved external demand, post-flood reconstruction, and the inflow of EU funds. The labour market will remain tight, with historically low unemployment contributing to strong wage growth. Wage pressures will slow disinflation, with price inflation remaining above 2% in both 2025 and 2026. Downside risks include weaker than expected demand from trading partners, and stronger than expected wage growth that could further reduce competitiveness. Labour shortages could slow the post-flood reconstruction, lowering investment activity. On the upside, stronger immigration could alleviate labour shortages.

Implementing fiscal consolidation as announced in the national medium-term fiscal plan will be necessary to restore fiscal buffers and make space for post-flood reconstruction spending without slowing disinflation. Further reforms are needed in the pension system to address ageing-related cost pressures and labour shortages. This entails measures to improve the labour force participation of older workers, including by increasing the contribution period required for a full pension and stronger incentives to remain in the work force after the statutory retirement age. Directing training subsidies to older jobseekers with high assistance needs would help. Such efforts should be complemented with a growth-friendly tax reform to lower the labour tax burden, financed by higher consumption, environmental and recurrent taxation of immovable property. In addition, labour supply would benefit from easing immigration processes for workers from outside the European Union and removing tax disincentives for second earners and single parents, often women, to move from part-time to full-time employment.