The resurgence of Covid-19 has put economic recovery on hold and is giving way to a series of uncertainties and risks, according to the European Commission’s autumn economic forecasts, published on Thursday 5 November.
“In recent weeks, we have been faced with the resurgence of the pandemic and new containment measures have been taken. The economic rebound has been interrupted. Growth is set to stall in the fourth quarter but to pick up again as of the first quarter of 2021”, said European Commissioner for the Economy, Paolo Gentiloni, at a press conference.
The European Commission forecasts a contraction of the economy in 2020 of 7.8% for the euro area and 7.4% for the EU, before rebounding in 2021 by 4.2% for the euro area and 4.1% for the EU and in 2022 by 3% for both the euro area and the EU.
The Commission is finally less pessimistic for 2020 than in its summer economic forecasts (see EUROPE 12522/1), where it expected GDP to fall by 8.7% in the euro area and by 8.3% in the EU. However, it is less optimistic for 2021, forecasting growth of 6.1% in the euro area and 5.8% in the EU.
“We never counted on a V-shaped recovery. Now we know for sure we will not have one”, summed up Paolo Gentiloni.
The Commission also forecasts a surge in government deficits and debts across the EU this year. The general government deficit in the euro area is forecast to increase from 0.6% of GDP in 2019 to around 8.8% in 2020, before declining to 6.4% in 2021 and 4.7% in 2022. Belgium, Spain, France, Italy and Romania are expected to record deficits in excess of 10% in 2020.
On the unemployment front, the Commission estimates that the rise is “contained” compared to the fall in economic activity, thanks to measures taken by Member States and the EU. According to forecasts, the unemployment rate in the EU is expected to rise from 6.7% in 2019 to 7.7% in 2020 and 8.6% in 2021, before falling back to 8.0% in 2022.
No return to normal before 2022
We will have to wait until at least 2022 for the economy to barely return to its pre-pandemic level and this will not be the case for all countries, warns the Commission.
It is expected that nearly half of the Member States are not expected to return to their pre-pandemic GDP levels by the end of 2022. Among the large Member States, only Germany and Poland are expected to reach or exceed their pre-pandemic GDP levels by the end of 2022, said Paolo Gentiloni.
According to the Commission, these variations between European countries can be explained by the spread of the virus, the severity of the public health measures taken to contain it, the sectoral composition of national economies or the strength of the national policy response.
German GDP, for example, is expected to contract by 5.6% in 2020, which is less than the euro area average and less than previously forecast. Nevertheless, the second wave of Covid-19 should cushion the country’s economic recovery, with growth of 3.5% in 2021 and 2.6% in 2022.
For France, the Commission expects GDP to contract by 9.4% in 2020, before rebounding by 5.8% in 2021 and by 3.1% in 2022.
In Italy, real GDP is expected to fall by 9.9% this year and to grow by 4.1% in 2021 and by 2.8% in 2022, close to the euro area average.
For Spain, on the other hand, the Commission estimates that the country’s GDP is expected to contract by 12.4% this year, due to the impact of the second wave, which hit Spain earlier than most European countries. It expects growth of 5.4% for 2021 and 4.8% for 2022.
Uncertainties and “exceptionally large” risks
The Commission warns that, in this context, the uncertainties and risks surrounding its economic forecasts are “exceptionally large”.
Thus, it is assumed that the containment measures will remain in force to some extent until 2022. Furthermore, in its forecast, the Commission assumes that the EU and the UK will trade on the basis of World Trade Organization rules on most-favoured nation treatment from 1 January 2021and not on the basis of a free trade agreement.
In addition, the Commission has developed two alternative scenarios for the evolution of the pandemic to complement its baseline forecasts. The pessimistic scenario foresees a worsening of the pandemic which would require stricter and longer measures in 2021. Such a scenario would lead to much more negative economic consequences in terms of growth and unemployment.
Conversely, the more positive scenario is based on rapid medical advances in the treatment and prevention of Covid-19, including the widespread deployment of a vaccine in the spring of 2021, which would allow a faster return to normal economic conditions. Moreover, under this scenario, a trade agreement between the EU and the UK would have a positive impact on EU economic activity.
The European Commission also points out that the European Recovery Plan, Next Generation EU, should give a stronger than expected boost to the European economy. The forecasts only partially incorporate the benefits that could be derived from it, because the information available on national plans is still limited, it says.
Commissioner Gentiloni urged the co-legislators to reach an agreement on Next Generation EU. It also encouraged Member States to make full use of the tools made available by the EU, such as the SURE instrument for short-time workers, used by 17 countries, or the European Stability Mechanism (ESM) credit line, which has so far remained unused.
Questioned at a press conference on the duration of the maintenance of the general escape clause provided for in the Stability and Growth Pact in order to strengthen budgetary measures to combat the Covid-19 pandemic (see EUROPE 12452/1), Mr Gentiloni considered that this discussion would take place when “a little less uncertainty will surround us”.
See the Commission’s economic forecasts: https://bit.ly/2JwrptM (Original version in French by Marion Fontana)