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We assess key dynamics shaping Europe's operational and investment environment in 2024.

Economic conditions will remain challenging for Europe in 2024, particularly during the first half of 2024.

We project that European economic activity will remain virtually stagnant, on average, during the first half of 2024. Tight credit conditions are forecast to lower investment spending, particularly in interest-rate sensitive sectors such as construction, and to renew downward pressure on house prices. Approximately one-quarter of European corporate debt obligations is due to be refinanced in 2024 at much higher interest rates, increasing interest expenses and reducing corporate profitability. We expect an acceleration in economic growth during the second half of 2024 as the European Central Bank (ECB) moves toward a softer monetary policy stance.

Falling inflation will support household real incomes, limiting economic downturn.

Household finances will be supported by still-solid wage growth, with nominal wage growth forecast to peak in early 2024 and then decelerate gradually. Cooling labor market conditions will offset some of this support to economic activity, although the increase in unemployment should be limited by the still relatively high number of unfilled vacancies, with firms reporting labor shortages, particularly in the services sector. Less positively, high labor costs represent a further adverse factor for corporate profitability in 2024.

Economic growth in Central and Eastern Europe (CEE) will outpace that in Western European countries.

Central banks in CEE were generally more aggressive in responding to the sharp increase in inflation during 2022 and have started to cut policy rates in some of the largest economies in the region. We expect the remaining CEE regional central banks to begin cutting interest rates within the first half of 2024. Likewise, CEE countries are likely to emerge as increasingly attractive investment destinations in 2024 and beyond - particularly for areas such as manufacturing and automotive production.

Energy prices will continue to be a key economic risk in 2024.

Lower European energy demand, some of which is likely to be structural, and record-high gas storage levels have in early 2024 driven European wholesale gas prices to their lowest levels since January 2022. However, global LNG markets will stay tight until 2025, suggesting that prices will remain very sensitive to changes in demand or supply. Disruption in the Red Sea has already increased shipping costs, and any lengthy disruption to Suez Canal maritime transport is likely to result in higher global LNG prices as Europe rebuilds its stocks in anticipation of the 2024/25 winter. The energy intensity of the European economy has diminished since the start of the war in Ukraine, but a renewed spike in energy prices would boost inflation and lead to interest rates remaining high for a longer period than currently projected, with negative implication for economic growth in the region.

Ongoing disruption to shipping via the Red Sea would be likely to significantly increase transportation costs and hamper production for European businesses.

If carriers are forced to continue diverting via the Cape of Good Hope, transit times and spot prices will increase significantly in 2024. Avoiding the Red Sea and Suez Canal route extends transportation times by an average of 10 additional days to reach Europe from Northeast Asia: the persisting need for rerouting would thus imply delays to production schedules and higher transport costs. These have already risen sharply in early 2024, reflecting heavy insurance surcharges to protect against loss/damage to vessels passing through the Suez Canal and additional fuel requirements for those rerouting. Global ocean freight markets currently have excess capacity, decreasing the disruptive impact of rerouting on supply chain dynamics.

No indicators signal an end to supply disruptions caused by the Russia-Ukraine war.

The limited success of Ukraine's counter-offensive during summer 2023 indicates that protracted attritional warfare is likely well into 2024: in turn, EU sanctions are unlikely to be loosened in the one-year outlook. The outcome of European Parliamentary elections in mid-2024, and national elections in several European countries including the United Kingdom, will also have a major impact on support levels for Ukraine, which remains critically dependent on continued Western military, financial, and humanitarian assistance, over which it has no control.

European Parliamentary elections in June will determine progress with the European Green Deal.

A strong showing by the European People's Party (EPP) would imply potential blockage to the rollout of pending policies such as the proposed Sustainable Use of Pesticides Regulation, and the Nature Restoration Regulation, both of which the EPP openly opposes. The EU's objectives of protecting Europe's nascent green industries while engaging mainland China as a partner for climate policy will remain in balance through 2024. The EU's reliance on mainland China to source the critical raw materials necessary for lithium-ion battery production, among other cleantech products, severely curtails the bloc's ability to find alternatives. The Commission's ongoing anti-subsidy investigation into mainland Chinese EVs, launched on Oct. 4. 2023, carries significant potential risks.

National level elections will also be important, as shown by recent developments in Poland.

At the national level, the victory in Poland of Donald Tusk's Civic Platform (PO) party over the Law and Justice (PiS) party also has implications for EU climate policy. The PO has not specified its position on the EU's carbon border adjustment mechanism (CBAM), which the previous government challenged at the Court of Justice of the European Union (CJEU). Given Poland's heavy dependence on fossil fuels, notably coal, a complete policy reversal on climate policy by Poland is unlikely even under a PO government. However, Tusk taking power is likely to facilitate more constructive talks with EU institutions, increasing the potential for compromise and the withdrawal of the CJEU challenge. That would make the eventual wider application of CBAM regulations to inputs and goods entering the EU from other countries more likely.

Short-term disruptions are likely to affect ports and ground cargo across Western Europe through 2024.

The Russia-Ukraine war will continue to disrupt shipping in and around the Black Sea, with Russian uncrewed aerial vehicle attacks on Ukraine's Danube Delta ports likely to continue throughout 2024, and the risk of free-floating sea mines in Romanian and Bulgarian waters. Wider disruption at ports in Europe is more likely to be caused by cyberattacks motivated by the Russia-Ukraine war, targeting EU and NATO member states or other countries explicitly supporting Ukraine's war effort. Unionized dock workers also remain likely to stage prolonged and disruptive labor strikes over pay, work conditions, or employment security demands.

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This article was published by S&P Global Market Intelligence and not by S&P Global Ratings, which is a separately managed division of S&P Global.