EU economy still suffers by pandemic’s grip, growth set to resume in spring

GDP in the European Union is forecast to raise by 3.7% in 2021 and 3.9% in 2022

Photo: EU Paolo Gentiloni.

We remain in the painful grip of the pandemic, its social and economic consequences all too evident, yet there is, at last, light at the end of the tunnel, said Paolo Gentiloni, Commissioner for Economy, presenting the Winter 2021 Economic Forecast.

The vaccination process could lead to a faster easing of containment measures and an earlier and stronger recovery, the outlook shows.

The euro area economy is forecast to grow by 3.8% in both 2021 and 2022, and the EU economy - by 3.7% in 2021 and 3.9% in 2022.

Largely because of the stronger than expected growth momentum projected in the second half of 2021 and in 2022, the euro area and EU economies are expected to reach their pre-crisis levels of output earlier than anticipated in the Autumn 2020 Economic Forecast.

With the second wave of the pandemic and the renewed containment measures, and after strong growth in the third quarter of 2020, economic activity contracted again in the fourth quarter.

With restrictive measures still in place, the EU and euro area economies are expected to contract in the first quarter of 2021.

Growth is set to resume in the spring and gather momentum in the summer as vaccination programmes progress and containment measures gradually ease. An improved outlook for the global economy is also set to support the recovery.

As Commissioner Gentiloni pointed out the recovery is set to be uneven across Member States, mainly reflecting differences in the structure of each economy and  the relative importance of tourism and leisure activities. 

The forecast projects that inflation in the euro area is set to increase from 0.3% in 2020 to 1.4% in 2021, before moderating slightly to 1.3% in 2022. For the whole EU it has increased slightly for 2021 compared to the autumn but is, overall, expected to remain subdued.

The forecast points out that the delayed recovery is set to continue dampening aggregate demand pressures on prices. According to it, in 2021, it will be temporarily pushed up by positive base effects in energy inflation, tax adjustments - especially in Germany - and the impact of pent-up demand hitting some remaining supply constraints. Next year, as supply adjusts and base effects taper out, inflation is expected to moderate again.

Analysing the economic situation and economic developments, the Commission stipulates that uncertainties and risks surrounding the forecast are more balanced since the autumn, though they remain high.

They are linked in particular to the evolution of the pandemic, including the emergence of new variants and the success of vaccination campaigns, Commissioner Gentiloni stressed.

He explained that the impact of NextGenerationEU and in particular the Recovery and Resilience Facility has only been very partially factored into this forecast.

“This is because, in line with the customary no-policy-change assumption, our forecast only incorporates those measures that have either been adopted or credibly announced and specified in sufficient detail, notably in national budgets.”

Following this approach, the economic projections of only a few Member States take account of some of the measures expected to be financed under the RRF for 2021, Commissioner Gentiloni said noting that this means that the economic recovery in 2021 and 2022 should turn out stronger than projected in this forecast, as the national Recovery and Resilience Plans are implemented.

The forecast also outlines that in terms of negative risks, the pandemic could prove more persistent or severe in the near-term than assumed in this forecast, or there could be delays in the roll-out of vaccination programmes. If the easing of containment measures delays, it would in turn affect the timing and strength of the expected recovery.

In this scenario, there is also a risk that the crisis could leave deeper scars in the EU's economic and social fabric, notably through widespread bankruptcies and job losses. This would also hurt the financial sector, increase long-term unemployment and worsen inequalities, the forecast outlines.

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