EU Downgrades 2021 Growth Forecast Due to Covid-19 Resurgence

The European Commission downgraded its 2021 growth forecast this week as one by one member states entered second lockdowns due to an aggressive resurgence of Covid-19.

The Commission now estimates that the EU economy will grow 4.1 percent next year, down from the intial 6.1 percent rebound forecast in May.

The previous forecast recovery has now been interrupted as the resurgence of the pandemic deepens uncertainty, the Commission said in its Autumn 2020 Economic Forecast.

Source: European Economic Forecast – Autumn 2020

The EU’s economy commissioner Paolo Gentiloni said it will likely take two years before the European economy gets back to its pre-pandemic level.

“After the deepest recession in EU history in the first half of this year and a very strong upswing in the summer, Europe’s rebound has been interrupted due to the resurgence in Covid-19 cases. Growth will return in 2021 but it will be two years until the European economy comes close to regaining its pre-pandemic level,” said Gentiloni.

The union’s economy is expected to contract by 7.4 percent this year.

More specifically, the autumn 2020 forecast projects that the euro area economy will contract by 7.8 percent in 2020 before growing 4.2 percent in 2021 and 3 percent in 2022.

The EU economy is set to contract by 7.4 percent in 2020 before recovering with growth of 4.1 percent in 2021 and 3 percent in 2022.

Compared to the summer 2020 forecast, growth projections for both the euro area and the EU are slightly higher for 2020 but lower for 2021.

Output in both the euro area and the EU is not expected to recover its pre-pandemic level in 2022, the Commission said.

Meanwhile, with regard to unemployment, the Commission report said that measures taken, including short-time work schemes, have stemmed the rise in unemployment compared to the drop in economic activity.

Source: European Economic Forecast – Autumn 2020

Unemployment is set to continue rising in 2021 as EU governments phase out emergency support measures and new people enter the labor market, but is expected to improve in 2022 as the economy continues to recover.

More specifically, according to the Commission forecast, the unemployment rate in the euro area is set to rise from 7.5 percent in 2019 to 8.3 percent in 2020 and 9.4 percent in 2021, before declining to 8.9 percent in 2022.

The jobless rate in the EU is expected to rise from 6.7 percent in 2019 to 7.7 percent in 2020 and 8.6 percent in 2021, before declining to 8.0 percent in 2022.

The Commission forecast also projects the aggregate government deficit of the euro area to increase from 0.6 percent of GDP in 2019 to around 8.8 percent in 2020, before decreasing to 6.4 percent in 2021 and 4.7 percent in 2022.

Inflation in the euro area is forecast to average 0.3 percent in 2020, before rising to 1.1 percent in 2021 and 1.3 percent in 2022, as oil prices stabilize. For the EU, inflation is forecast at 0.7 percent in 2020, 1.3 percent in 2021 and 1.5 percent in 2022.

“In the current context of very high uncertainty, national economic and fiscal policies must remain supportive, while [recovery tool] NextGenerationEU must be finalized this year and effectively rolled out in the first half of 2021,” said Gentiloni.

Looking ahead, the autumn 2020 forecast sees uncertainty and risks, which would include even stricter measures should the pandemic persist. This would inevitably lead to bankruptcies, long-term unemployment and supply disruptions.