The economic impact of Russia’s full-scale invasion of Ukraine materialised with a significant lag compared to most forecasts produced in the spring of 2022. As a result, although real economic growth in the EU and the euro area was still around ½%, it was nevertheless much weaker than initially expected and, more importantly, much weaker than in 2022. By contrast, inflation exceeded forecasts by a considerable margin. The war caused a marked deterioration of the terms of trade. This in turn fuelled a strong and persistent increase in inflation eroding households’ real purchasing power well into 2023. This, together with the increase in borrowing costs and the geopolitical tensions, translated into lower private consumption and investment. Real economic growth varied significantly between EU Member States, reflecting their different energy mixes and policy responses. Despite the significant slowdown in economic growth compared with 2022, labour markets were remarkably resilient in 2023, maintaining high employment levels and vacancy rates.
In spite of the sustained increase in nominal economic activity, the budget balance of the euro area and the EU remained broadly unchanged in 2023 compared with 2022. The government debt-to-GDP ratio in both the euro area and the EU remained on a downward path. Once revenue growth stabilis on the back of moderating inflation, government deficits are poised to rise unless expenditure growth is realigned with a sustainable trajectory. When fiscal guidance was issued for 2023, short-term fiscal sustainability risks across the EU Member States were considered to be mostly low due to the stronger-than-expected recovery. However, the medium-term outlook flagged nine Member States as being at high risk due to unfavourable debt dynamics, and the longterm perspective identified eight Member States as being at high risk due to increasing ageing costs.