![]() Profit margins, which expanded notably last year, are expected to provide a buffer to the pass-through of labour costs to final prices in the medium term. Wage growth is expected to decline gradually from mid-2023, albeit remaining high over the projection horizon, driven by increases in minimum wages and inflation compensation, in a context of a tight, though cooling, labour market. The projected disinflation is due to fading effects of the past energy price shocks and other pipeline price pressures, with strong growth in labour costs gradually becoming the dominant driver of HICP inflation excluding energy and food. HICP inflation excluding energy and food is also expected to gradually decline, however, it is projected to stand above headline inflation until early 2024. Headline inflation in the euro area is projected to continue to decline over the projection horizon owing to easing cost pressures and supply bottlenecks, as well as the impact of monetary policy tightening. Compared with the June 2023 Eurosystem staff projections, the outlook for GDP growth has been revised down by 0.2 percentage points for 2023, 0.5 percentage points for 2024 and 0.1 percentage points for 2025, reflecting a significant downgrade of the short-term outlook, amid deteriorating survey indicators, tighter financing conditions – including more adverse credit supply effects – and the stronger euro exchange rate. Overall, annual average real GDP growth is expected to slow down from 3.4% in 2022 to 0.7% in 2023, before recovering to 1.0% in 2024 and to 1.5% in 2025. ![]() However, growth will continue to be dampened as the ECB’s monetary policy tightening and adverse credit supply conditions feed through to the real economy and as fiscal support is gradually withdrawn. Growth is expected to pick up from 2024 as foreign demand approaches its pre-pandemic trend and real incomes improve, underpinned by declining inflation, buoyant nominal wage growth and still low, though slightly increasing, unemployment. Moreover, these effects have largely waned and short-term indicators point to stagnation in the near term in the face of tighter financing conditions, weak business and consumer confidence and low foreign demand in the context of a strengthening of the euro. ![]() Euro area economic activity grew at a subdued paced in the first half of 2023, despite the elevated level of manufacturing order backlogs and the unwinding of high energy prices. The short-term outlook for growth in the euro area has deteriorated, while over the medium term the economy should gradually return to moderate growth as both domestic and foreign demand recover.
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