Europe presents a picture of moderate optimism. This is what emerges from the forecasts contained in the report compiled by the European Commission in spring 2024. The document, which is produced twice a year, reviews the current European economic situation and forecasts for the months to come, analysing the main economic variables. It is also a valuable tool for industry and should be taken into consideration when setting corporate strategy. An economist helps us examine the numbers in the “European Economic Forecast – Spring 2024”
The economic scenario in which companies operate is a decisive part of their market strategies. Knowing how it evolves and understanding in which direction it is likely to develop over the next few years can be very helpful in imagining what difficulties may be encountered and, conversely, what opportunities may present themselves.
Twice a year, in April and October, the European Commission publishes the ‘European Economic Forecast’, a statistical report which, on the basis of macroeconomic models, expresses overall forecasts of what is likely to happen in the next two years, both within the European Union as a whole and at the level of each individual Member State. The forecasts include a wide range of economic indicators for all EU Member States, candidate countries, Efta (European free trade association) countries and other major advanced and emerging market economies.
“It is an interesting and useful work, not only to give a feeling of what we will have in front of us, but also to understand what differences there are within the European Union, which is our political horizon of reference and, to a large extent, also economic and commercial, and to understand how much these differences affect our country in particular”. This was spoken by Carlo Stagnaro, Director of Research and Studies at Istituto Bruno Leoni, who reported and commented on the data of the European Commission’s Spring Report at the Gipea Congress, held in Genoa in June 2024.
The Economic Variables
In producing the “European Economic Forecast” report, the European Commission focuses in particular on a few major variables: gross domestic product, inflation, deficit, unemployment and debt. “Variables that,” says Stagnaro, “tell us, on the one hand, how one imagines the economy as a whole will go and, on the other hand, how one should expect the general price index to evolve, thus giving an indication of the investment policies that it is reasonable to adopt. Also important for companies’ strategic policies are the data on the development of public finances – which the report deals with – as they contribute, to a significant extent, to determining the business risk for each company. Similarly, expectations with respect to the economic policy action of governments weigh on the strategic and investment choices of companies and on their ability to have or not have flexibility in managing the market”.
It is therefore important to know how the economic variables of the European market evolve and to learn to understand them (Figure 1).
The gross domestic product
The first figure Stagnaro considers is the GDP (gross domestic product). “An interesting element that emerges when considering GDP trends,” he says, “is that while there are limited differences between the Eurozone and the European Union, in the case of Italy there is a substantial difference, with GDP growth higher than in the rest of Europe. While at EU and Eurozone level 2023 was a year of substantial stagnation, amounting to 0.4 per cent growth, followed by two years in which growth is expected to accelerate, in the case of Italy there is no such acceleration”. Our country, Stagnaro explains, had a much higher growth rate than the rest of Europe in 2023, about twice as high, and although it is expected to grow by around +1% in 2024 and the following year as well, it is still a third lower than the rest of Europe. Not a worrying figure, but indicative of a country essentially stuck at pre-2020 growth. The significant growth recorded from 2021 to 2023 is due to the significant drop in 2020. Growth in subsequent years, therefore, as well as growth in economic activity, was essentially a rebound.
Another element that explains the dynamics of GDP in Italy, especially in 2022 and ‘23, is the choice of “making a strongly anti-cyclical policy, opening more than others in proportion to GDP the taps of public spending, such as the superbonus that alone moved about 200 billion euro”. Once the impetus of this manoeuvre had worn off, the country returned to the growth rate it had before the cyclical phenomena that have occurred in recent years, i.e. a growth rate ranging between 0.5 and 1 GDP points, thus ‘slower than the rest of Europe’ (figure 2).
Employment and inflation
The data of the European Commission’s spring report say, therefore, that for Italy a sort of return to normality is underway and will be for the coming months. “Within this return to normality, Italy is characterised by a level of unemployment that, by our standards, is relatively low”. “This is a unique phenomenon,” says Stagnaro, “however, by combining low unemployment with modest GDP growth, inevitably the average productivity of the economic system as a whole goes down and therefore more people are employed for the same amount of research. We remain, unfortunately, a country that continues to struggle in terms of its technological upgrade”.
Another element affecting the country’s performance is inflation, and fortunately in this respect the spring data from the European Commission provides some good news. It seems that, both at European and national level, the numbers are falling. “This inflation trend is consistent with the idea that much of last year’s inflationary flare-up was mainly due to supply-side reasons, i.e. higher energy prices, although some demand-side inflation also contributed. However, the expectation is that we will return to the vicinity of 2 per cent, which is the European Central Bank’s target”.
Public finances
On the subject of public finances, comparing Italy’s deficit with the average deficit in the rest of Europe, it can be seen that the Belpaese has a debt dynamic that is about twice as high as that of the other states. “While in the rest of Europe the debt/GDP ratio has stabilised, after having witnessed, in the past few years, a significant growth in debt motivated by exceptional public spending for contingent situations – from the Covid to the war in Ukraine to the energy problem – in Italy it has continued to grow”. The data, Stagnaro explains, say that from 137% last year we will pass to almost 142% in 2025. A situation that also ends up weighing on the dynamics of the debt/GDP ratio of the whole of Europe – without Italy, the projections say that in the rest of the continent this ratio would fall rather than stabilise. “We are therefore in absolute counter-trend and, not only that, it is likely that within three or four years, in 2027 and 2028, we will be the country with the highest debt/GDP ratio in Europe”. Greece, the director reminds us, is pursuing a difficult but effective policy of fiscal consolidation, unlike Italy.
The numbers say, therefore, that public finances are the main medium-term critical issue for Italy. The tax burden in the coming years is set to remain constant on average, if not increase. This is an important factor to be aware of for businesses that will have to move in a context of economic growth that is probably positive but not particularly significant.
Energy Uncertainties: Gas
In this context, Stagnaro examines some of the main macroeconomic variables capable of specifically affecting the production costs of companies. Once again, energy variables, and in particular gas and oil prices, have been the main drivers in recent years.
As far as gas is concerned, both the TTF (title transfer facility), the natural gas stock exchange index that represents the benchmark in Europe on the price trend of this raw material, and the trend of standardised futures contracts – which are those contracts stipulated between two parties at a fixed price and an expiry date – with delivery in the first quarter of 2025 show a fall in prices, after the peaks reached in the summer of 2022 at €300/MWh and a resumption of their growth from March of this year. “The level at which gas stands today, €30 to €45/MWh, is still very high compared to the price fluctuation band in the previous 20 years, during which costs stood at €10 to €25/MWh.”
The motivation for this situation is twofold, on the one hand there is a contingent cause behind the price increase due to the imminent expiry – 31 December 2024 – of the contract between Russia and Ukraine for the use of the gas pipeline that brings some Russian gas to Europe, and on the other hand there are trends in gas demand that have been fairly constant in recent years. “The numbers tell us that, all in all, the market remains in balance because demand for gas is not expected to grow particularly in Europe and the rest of the world. However, it is a very tight equilibrium, with little room for manoeuvre, where little is needed – a disruption at the wrong time on another pipeline, escalating geopolitical tensions or, again, simply a particularly cold winter – to create matching problems between supply and demand, and consequently push prices up. In any case, we should not be particularly worried, the director emphasises, because prices are not heading for critical levels like we have experienced in the past, rather they will remain at levels that are not particularly low but still much higher than gas prices, for example, in the North American basin. We are also likely to run some risk of volatility in the second part of next winter, i.e. when storages begin to empty and in the event of low temperatures or a particularly long winter”.
The black gold factor
As far as oil is concerned, says Stagnaro, the numbers provide some additional reassurance. “Oil prices continue to stay in a band to which we have become accustomed, between 75 and 90 dollars, with markets not particularly nervous about this”. Here again, however, there are two considerations to be made.
The first concerns the conflict in the Middle East which, “having remained essentially localised to the region where it erupted, has not particularly affected the markets at the moment, even though it affects such a critical area for oil supplies. Even the analyses of geopolitical scholars, at the moment, exclude possible contagion in wider areas”.
The second consideration is that “the balance between oil supply and demand in the coming months will remain fairly tight. This is also because, unlike at other times in the past, the production cuts decided by Opec are working”. Basically, the members of the Organisation of Petroleum Exporting Countries, starting with Saudi Arabia, “are keeping their commitment to be fair to each other. At the moment, therefore, there does not seem to be an expectation of particularly high geopolitical risk and this tends to keep prices in a band of normality or, at least, acceptability”.
Markets between comfort and uncertainty
Considering all the elements analysed, the conclusion that can be drawn is that we are facing a scenario that can be described as “moderately optimistic”. “At least if we look at Europe,” says Stagnaro, “there is an expectation of growth that is relatively sustained by European standards, a growth rate of around 1.5% in a complicated phase is relatively comforting, and the Italian 1% is also consistent with this situation. So, even for our house, the scenario that lies ahead is one of ‘reasonable and moderate optimism”, however, the director emphasises, there are some important elements of uncertainty.
A first unknown factor is the performance of the world economy as a whole in the coming months. “As far as energy variables are concerned, for example, forecasts of not excessive prices for both oil and gas are based on a fairly tense market from the point of view of supply and demand. On top of that there are a number of elements of uncertainty external to Europe, which are the development of the Chinese economy and that of the American economy and politics. And there is also a series of internal uncertainties linked to the recent European elections,” one wonders, in essence, how the old continent will move politically and economically with the new legislature.