With the faster than expected lifting of health restrictions supporting a rapid recovery of economic activity, the European Commission on Wednesday 7 July revised its growth forecasts upwards sharply for 2021 and moderately for 2022.
The economy is expected to grow by 4.8% of GDP in 2021 and 4.5% in 2022 at both the euro area and EU level. Compared to the Commission’s May forecast (see EUROPE 12719/2), this adjustment amounts to an upward revision for the EU of “+0.6%” for 2021 and “+0.1%”, noted the Commissioner for Economy, Paolo Gentiloni. The growth momentum forecasts will gradually ease, but it will remain “solid” over the period as a whole, he said.
He noted that the balance of risks was broadly balanced, but urged caution. The cut-off date for the data used for these summer forecasts was the end of June and the effect of the spread of the Delta variant of the SARS-CoV-2 virus is not fully known.
However, Mr Gentiloni said he does not see a trend towards the imposition of new across-the-board health restrictions in the EU. The watchword, for him, is “vaccination, vaccination, vaccination” against Covid-19, which appears to be effective also against variants of the virus.
While robust, the economic rebound is uneven across Member States. In 2021, the strongest growth is expected in Romania (7.4% of GDP), Ireland (7.2%), Hungary (6.3%), Spain (6.2%), France (6.0%) and Slovenia (5.7%). It will be lowest in Finland (2.7%), the Netherlands (3.3%), Germany (3.6%) and Latvia, Lithuania and Austria (3.8% each), partly because the recession caused by the pandemic in 2020 was less severe in these countries.
Last year, the fall in GDP was strongest in Spain (-10.8%) and Italy (-8.9%) and weakest in Lithuania (-0.9%), Luxembourg (-1.3%), Denmark and Poland (-2.7%). Ireland was the only Member State to experience growth (+3.4%).
The European Commission has also raised its forecast for inflation, due in particular to higher energy and commodity prices and shortages of certain raw materials. Thus, the average price increase is expected to be 1.9% (+0.2% compared to the May forecast) in 2021 and 1.4% in 2022 for the euro area. At EU level, it is expected to be 2.2% (+0.3%) this year and 1.6% next year.
Maintain the expansionary fiscal stance until the end of 2022
“The economies of all Member States are forecast to reach or surpass their pre-pandemic GDP levels by the third quarter of 2022 at the latest, and most already by the end of this year”, Mr Gentiloni noted.
At the aggregate level, the return to the level of GDP recorded at the end of 2019 would take place in the third quarter of 2021, 3 months earlier than was expected in May.
However, according to the Commissioner, the improvement observed does not call into question the decision of Member States to keep the general escape clause of the Stability and Growth Pact active and to maintain an expansionary fiscal stance in 2021 and 2022.
With public support and national stimulus plans, “we need to transform the rebound into a more stable and sustainable growth”, Mr Gentiloni said.
In particular, the European Commission points to the fact that economic activity in the fourth quarter of 2022 would remain about 1% shy of the level that was expected before the pandemic, based on an extrapolation of the Winter 2020 Interim Forecast.
See the summer economic forecast: https://bit.ly/3wn1qI7 (Original version in French by Mathieu Bion)