Paolo Gentiloni – Photo – © European Union
(BRUSSELS) – The European Commission upgraded its forecasts for the EU and euro area economies Wednesday, as people’s lives gradually return to normal, but it warned that many risks continue to hang over the region.
“The shadow of COVID-19 is beginning to lift from Europe’s economy,” said the economy Commissioner Paolo Gentiloni: “After a weak start to the year, we project strong growth in both 2021 and 2022.” He added that the “unprecedented fiscal support” remains essential in helping Europe’s workers and companies to weather the storm.
The Spring 2021 Economic Forecast projects that the EU economy will expand by 4.2% in 2021 and by 4.4% in 2022. The euro area economy is forecast to grow by 4.3% this year and 4.4% next year. This represents a significant upgrade of the growth outlook compared to the Winter 2021 Economic Forecast which the Commission presented in February. Growth rates will continue to vary across the EU, but all Member States should see their economies return to pre-crisis levels by the end of 2022.
The coronavirus pandemic has represented a shock of historic proportions for Europe’s economies. The EU economy contracted by 6.1% and the euro area economy by 6.6% in 2020. Although in general, businesses and consumers have adapted to cope better with containment measures, some sectors – such as tourism and in-person services – continue to suffer.
The EU economies are expected to rebound strongly as vaccination rates increase and restrictions are eased. This growth will be driven by private consumption, investment, and a rising demand for EU exports from a strengthening global economy.
Public investment, as a proportion of GDP, is set to reach its highest level in more than a decade in 2022. This will be driven by the EU’s ‘Recovery and Resilience Facility’ (RRF).
Labour market conditions are slowly improving after the initial impact of the pandemic. Employment rose in the second half of 2020 and unemployment rates have decreased from their peaks in most Member States.
The unemployment rate in the EU is forecast at 7.6% in 2021 and 7% in 2022. In the euro area, the unemployment rate is forecast at 8.4% in 2021 and 7.8% in 2022. These rates remain higher than pre-crisis levels.
Inflation rose sharply early this year, due to the rise in energy prices and a number of temporary, technical factors, such as the annual adjustment to the weightings given to goods and services in the consumption basket used to calculate inflation. The reversal of a VAT cut and the introduction of a carbon tax in Germany also had a noticeable effect.
Inflation in the EU is now forecast at 1.9% in 2021 and 1.5% in 2022. For the euro area, inflation is forecast at 1.7% in 2021 and 1.3% in 2022.*
Public support for households and businesses has played a vital role in mitigating the impact of the pandemic on the economy, but has resulted in Member States increasing their levels of debt.
The aggregate general government deficit is set to rise by about half a percentage point to 7.5% of GDP in the EU this year and by about three quarters of a percentage point to 8% of GDP in the euro area. All Member States, except for Denmark and Luxembourg, are forecast to run a deficit of more than 3% of GDP in 2021.
By 2022, however, the aggregate budget deficit is forecast to halve to just below 4% in both the EU and the euro area. The number of Member States running a deficit of more than 3% of GDP is forecast to fall significantly.
In the EU, the ratio of public debt to GDP is forecast to peak at 94% this year before decreasing slightly to 93% in 2022. The euro area debt-to-GDP ratio is forecast to follow the same trend, rising to 102% this year and then falling slightly to 101% in 2022.
The report underlines the fact that risks surrounding the outlook are high and will remain so as long as the shadow of the COVID-19 pandemic hangs over the economy.
Developments in the epidemiological situation and the efficiency and effectiveness of vaccination programmes could turn out better or worse than assumed in the central scenario of this forecast.
This forecast may underestimate the propensity of households to spend or it may underestimate consumers’ desire to maintain high levels of precautionary savings.
The impact of corporate distress on the labour market and the financial sector could prove worse than anticipated.
On the other hand, stronger global growth, particularly in the US, could have a more positive impact on the European economy than expected. Stronger US growth, however, could push up US sovereign bond yields, which could cause disorderly adjustments in financial markets that would hit highly indebted emerging market economies with high foreign currency debts particularly hard.
