Despite some gloomy prospects (shortages of raw materials and certain goods, rising energy prices, pandemic), the European Commission’s autumn economic forecasts, published on Thursday 11 November, remain positive with the same growth rate for the EU and the euro area of 5% for 2021, 4.3% for 2022 and finally a rate of 2.5% for the Union and 2.4% for the euro area for 2023.
“An unprecedented policy response has cushioned the impact of Covid-19 on workers and businesses and a successful vaccination campaign has allowed our economies to reopen since the spring [...], fuelling a growth spurt which in turn is helping to stabilise our public finances”, commented Commissioner for Economy Paolo Gentiloni. “And with the support of Next Generation EU, public investment is expected to reach its highest level in over a decade”, he said.
The European growth rate is indeed at exceptional levels. At almost 14%, the GDP growth rate in the EU in the second quarter of 2021 was the highest ever recorded, the European Commission said in its press release.
In some ways, this increase reflects the sharp fall in GDP at the same time the previous year as the pandemic hit Europe and the world (see EUROPE 12596/1).
The European economy has returned to its pre-health crisis level of output by the third quarter of 2021 and “has moved from recovery into expansion”, the institution says.
Strong growth in employment
Similarly, the labour market is doing well. In the second quarter of 2021, the European economy generated around 1.5 million new jobs, although the rate is still 1% below its pre-pandemic level. At 6.8%, the EU unemployment rate in August was just above the rate recorded at the end of 2019.
Specifically, employment in the EU is expected to grow at a rate of 0.8% in 2021, 1% in 2022 and 0.6% in 2023 and even exceed its pre-crisis level as early as 2022. Over the same period, unemployment is expected to fall from 7.1% this year to 6.7% and 6.5% in 2022 and 2023 respectively. In the euro area, it is expected to be 7.9, 7.5 and 7.3% respectively over the same period.
Deficits halved by 2023
This strong growth is also good news for the reduction of national deficits, which is proceeding faster than expected, according to the European Commission. After reaching 6.9% of GDP in 2020, the overall EU deficit is expected to fall slightly to 6.6% in 2021 “on the back of the still high fiscal support in the beginning of the year”.
With the recovery and the return to normal fiscal and economic policies, this deficit should halve to around 3.6% of GDP in 2022 and fall to 2.3% in 2023, the European Commission predicts.
With regard to the average European debt, the ratio of overall debt to GDP is expected to reach a certain equilibrium in 2021, at around 92% in the European Union and 99% in the euro area. The institution hopes that, from 2022 onwards, the trend will be downwards, reaching around 89% of GDP in 2023 for the European Union and 97% in the euro area.
Rampant inflation and the pandemic
“As demand picks up, Europe’s economy should grow by 5% in 2021. But there are still risks and uncertainty with the virus”, Executive Vice-President Valdis Dombrovskis said on his Twitter account.
He added: “Rising prices and supply chain bottlenecks are a concern. We are watching inflation closely as a potential risk and will adjust policies if needed”. In addition, the trend of the pandemic, which is experiencing a strong upsurge (see EUROPE 12826/11), could affect the forecasts.
Inflation is high, largely due to energy prices. Annual inflation in the euro area rose from a negative -0.3% in the last quarter of 2020 to 2.8% in the third quarter of 2021. This rate was 4.1%, “a rate matched only once since the publication of euro area inflation data began in 1997”.
Inflation in the euro area is expected to peak at 2.4% in 2021 before falling to 2.2% in 2022 and 1.4% in 2023, with energy prices expected to stabilise gradually. For the EU, inflation is expected to reach 2.6% in 2021, 2.5% in 2022 and 1.6% in 2023.
Inflation could rise, if supply constraints persist and wage increases above productivity are passed on to consumer prices, the EU institution said.
To see the European Commission’s economic forecasts: https://bit.ly/3c9760J (Original version in French by Pascal Hansens)