After a slow start to the year due to the third wave of Covid-19, economic growth in the European Union is expected to rebound sharply in 2021, especially in the third quarter, and to remain strong in 2022, thanks to stronger-than-expected global trade and the gradual lifting of health restrictions as vaccination campaigns gain momentum.
“The recovery is no longer a mirage, it is underway”, said Commissioner for Economy Paolo Gentiloni on Wednesday 12 May, presenting the Commission’s spring economic forecasts. He said that “mistakes” that could jeopardise this recovery, such as “premature withdrawal of policy support” for the economy that has kept people employed, should be avoided.
The Commission has revised upwards its economic forecasts for 2021 and 2022, after the pandemic inflicted an unprecedented recession in 2020 of 6.6% of GDP in the euro area and 6.1% in the EU. The euro area economy is expected to grow by 4.3% of GDP in 2021 and 4.4% in 2022, while growth at EU level is expected to reach 4.2% this year and 4.4% next year. In February, the European institution expected a smaller rebound, at 3.8% of GDP for the euro area and 3.7% of GDP for the EU (see EUROPE 12656/1).
While at the beginning of the year, downside risks to the economy predominated, the Commission observes a rebalancing between downside risks (evolution of the pandemic) and upside risks (vaccination campaigns, private consumption, European Recovery Plan, global growth).
Mr Gentiloni referred to a “differentiation” between Member States depending on the extent of the recovery at national level. Spain (5.9% of GDP) and France (5.7%), Romania (5.1%), Hungary, and Croatia (both 5.0%) are expected to have the highest growth rates in the EU in 2021. GDP will grow by 4.2% in Italy, 4.0% in Poland, and 3.4% in Germany. In contrast, the economic rebound will be least pronounced in the Netherlands (2.3%), Finland (2.7%), Estonia (2.8%), Lithuania and Denmark (2.9% each), partly because the recession was much more moderate in these countries last year.
While Germany is expected to return to its pre-crisis level of wealth by the end of this year, other countries will do so later: early 2022 for France and late 2022 for Spain and Italy.
According to the European Commissioner, these forecasts support the Commission’s position in March that the general escape clause of the Stability and Growth Pact should be activated until the end of 2022 (see EUROPE 12670/1). The institution will make a formal proposal at the end of May.
Expected positive impact of the European Recovery Plan.
The spring economic forecasts incorporate the reforms and investments set out in the (draft) National Recovery Plans that Member States are required to submit to the Commission under the Next Generation EU Recovery Plan.
In particular, the EU institution estimates that, with the support of the Recovery and Resilience Facility , the budgetary instrument at the heart of Next Generation EU, public investment is expected to grow by 3.5% of GDP (baseline 2019) in 2022. “This will be the highest level since 2010”, Mr Gentiloni said. He noted that the Member States planned to consume almost 40% of the Facility’s financial envelope in 2021 (€62 billion) and 2022 (€77 billion).
Moreover, while in 2020 emergency public support measures for the economy reached 4% of EU GDP, they should gradually decrease to be better targeted on the most distressed sectors and regions and stabilise at 1% of GDP.
While the overall fiscal stance in the EU remains expansionary, there are significant differences in the public deficit across Member States. “In 2021, only Luxembourg (-0.3%) and Denmark (-2.1%) will have a deficit of less than 3% of national GDP”, said Mr Gentiloni. While the euro area deficit is expected to reach -8.0% in 2021 (-7.2% in 2020), Malta (-11.8%), Italy (-11.7%), Greece (-10.0%), France. and Slovenia (both -8.5%) and Lithuania (-8.2%) will have an even higher deficit. In Germany, the public deficit will be -7.5% and in Spain -7.6%.
The economic crisis caused by the pandemic has also forced Member States to take on large debts. However, this debt is expected to “peak” this year, Mr Gentiloni predicted.
Forecasts indicate that the public debt ratio in the euro area will peak at 102% of GDP in 2021, before declining slightly to 101% in 2022. In the EU, this ratio is expected to follow the same trend: 94% in 2021 and 93% in 2022. This year, seven Member States—Greece (208.8%), Italy (159.8%), Portugal (127.2%), Spain (119.6%), France (117.4%), Belgium (115.3%), and Cyprus (112.2%)—will have a public debt of more than 100% of national GDP.
Mr Gentiloni also warned that, despite the economic rebound, the risk of widening socio-economic inequalities remains real. And it will take time for hiring to resume. Unemployment is forecast at 8.4% in 2021 (7.8% in 2022) in the euro area and 7.6% in 2021 (7% in 2022) in the EU.
Finally, inflation for the EU as a whole is expected to be 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.
See the spring economic forecast: https://bit.ly/2RKVAl9 (Original version in French by Mathieu Bion)