Recovery is no longer mirage, EU economy is forecast to grow by 4.2% in 2021

The Commission warns that uncertainty is still there

Photo: EU Paolo Gentiloni.

Today, for the first time since the pandemic hit, we see optimism prevailing over uncertainty, Paolo Gentiloni, EU Commissioner for Economy while presenting to the press on Wednesday the Spring 2021 Economic Forecast.

Uncertainty is still there, but recovery is no longer a mirage: it is underway, he specified noting that should be avoided mistakes as a premature withdrawal of policy support.

The EU economy is forecast to grow by 4.2% in 2021 and to strengthen to around 4.4% in 2022. In the euro area, GDP growth is forecast at 4.3 this year and 4.4% next year.

Commissioner  Gentiloni explained that the resurgence of the pandemic and the need to tighten health-related restrictions resulted in a weak start to the year.

"The faster pace of vaccinations in recent months should allow restrictions to be eased further in the second half of the year – in fact, this is already underway – and thereby allow the economy to bounce back."

The Commissioner made clear that the brighter outlook than expected in the winter forecast, is due to two main factors. Global activity and trade have a stronger than previously expected rebound and the growth impulse coming from the integration in the forecast of the initial boost of the Recovery and Resilience Facility. (RRF)

Employment is expected to grow next year and unemployment to decline. While government support schemes, including the EU-backed SURE instrument, have prevented unemployment rates from rising dramatically, labour markets will take time to fully recover, Commissioner Gentiloni said but accented that youth unemployment has risen more than for the labour force as a whole. He also warned that the risk of worsening of poverty, social exclusion and inequality, is very real.

Fiscal measures have sheltered the economy and pave the way for the recovery. Significant EU expenditures are assumed to be financed by grants from the Recovery and Resilience Facility (RRF).  The cumulative impact on EU GDP over the 2020-2022 period is estimated, in this forecast, at 1.2% of the EU's 2019 real GDP.

Inflation is set to peak this year under the impact of some transitory factors, such the sharp rise in oil prices, but it is set to moderate again in 2022.

Europe lived through a ‘third wave' of the pandemic early this year, the Commissioner stressed adding that after a slow start, vaccination campaigns across the EU have accelerated significantly.

“Common procurement and distribution prove to be the right thing to do. This progress should lead to a steadily more marked fall in infections. To date, on average in the EU, more than 76% of people aged 80 years and above have received at least one vaccine dose, and more than half are fully vaccinated.”

Our assumption is that the pandemic will evolve in a way that allows for restrictions to be marginally eased in the course of the second quarter and we are already observing such steps in a number of countries, Commissioner Gentiloni outlined.

An improved outlook at home and abroad is expected to propel investment. A continuation of favourable financing conditions, recovering profitability among firms and increasing capacity utilisation rates all push in the same direction. The global outlook has improved considerably for both advanced and emerging market economies.

The EU's public investment-to-GDP ratio is forecast to rise to almost 3.5% in 2022, up from 3.0% in 2019. This would be its highest figure since 2010.

Economic activity in the EU is now projected to recover to its pre-crisis level in the fourth quarter of 2021. In the euro area, this threshold should be crossed in the first quarter of 2022.

Talking for the NextGenerationEU, the Commissioner underscored that it represents an unprecedented boost to the EU economy. The spring forecast for the first time incorporates the impact of the RRF for all Member States.

The amount of expenditures and other costs financed by RRF grants included in this forecast varies quite a lot across Member States. This reflects their differences in RRF allocations and their assumed absorption profiles.

The total EU expenditure assumed to be financed by RRF grants amounts to €62bn in 2021 and €77bn in 2022. Cumulatively, this is around 40% of the total RRF grant allocation, the lifetime of which extends until 2026. This implies that on average, Member States count on fast absorption of their RRF allocation.

The RRF is expected to boost EU GDP by approximately 1.2% of the EU's 2019 real GDP over the period 2020-2022. After shrinking last year, all EU economies are forecast to join the recovery this year, and grow strongly in 2022.

The quality, strength and duration of the recovery could still be influenced by the pandemic, but our economic fate is primarily in our own hands and that is why we need to roll up our sleeves, Commissioner Gentiloni, urged.

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