Spring 2021 economic forecast: rolling up the sleeves – The European Sting – Critical News & Insights on European Politics, Economy, Foreign Affairs, Business & Technology


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This article is presented to you in association with the European Commission.


The spring 2021 economic forecast projects the EU economy to grow 4.2% in 2021 and 4.4% in 2022. The euro area economy is expected to grow by 4.3% this year and 4.4% next year. This represents a significant improvement in the growth outlook compared to the winter 2021 economic forecast that the Commission presented in February. Growth rates will continue to vary across the EU, but all member states are expected to see their economies return to pre-crisis levels by the end of 2022.

Economic growth resumes as vaccination rates rise and containment measures loosen

The coronavirus pandemic represents a shock of historic proportions for European economies. The EU economy contracted by 6.1% and the euro area economy by 6.6% in 2020. Although in general, businesses and consumers have adapted to cope better. to containment measures, some sectors – such as tourism and in-person services – continue to suffer.

The rebound in the European economy that started last summer stagnated in the fourth quarter of 2020 and the first quarter of 2021, as new public health measures were introduced to contain the increase in the number of COVID-19 cases . However, the EU and Eurozone economies are expected to rebound strongly as vaccination rates rise and restrictions are relaxed. This growth will be driven by private consumption, investment and growing demand for EU exports from a strengthening global economy.

Public investment, as a proportion of GDP, is expected to reach its highest level in more than a decade in 2022. This will be driven by the Recovery and Resilience Mechanism (RRF), the key instrument at the heart of NextGenerationEU.

Labor markets are slowly improving

Labor market conditions are slowly improving after the initial impact of the pandemic. Employment increased in the second half of 2020 and unemployment rates fell from their peaks in most Member States.

Public aid schemes, including those supported by the EU through the SURE instrument, have kept unemployment rates from rising significantly. However, labor markets will need time to fully recover, as it is possible to increase working hours before companies need to hire more workers.

The unemployment rate in the EU is forecast at 7.6% in 2021 and 7% in 2022. In the euro area, the unemployment rate is forecast at 8.4% in 2021 and 7.8% in 2022. These rates remain above pre-crisis levels.

Inflation

Inflation rose sharply at the start of the year, due to the rise in energy prices and several temporary technical factors, such as the annual adjustment of the weights given to goods and services in the consumption basket used for calculate inflation. The cancellation of a VAT cut and the introduction of a carbon tax in Germany also had a notable effect.

Inflation will vary considerably during this year, as assumed energy prices and changes in VAT rates generate noticeable price level fluctuations compared to the same period last year.

Inflation in the EU is now forecast at 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. *

Public debt will peak in 2021

Public support to households and businesses played a key role in mitigating the impact of the pandemic on the economy, but led Member States to increase their debt levels.

The overall general government deficit is expected to increase by around half a percentage point to reach 7.5% of GDP in the EU this year and by around three quarters of a percentage point to reach 8% of GDP in the area. euro. All Member States except Denmark and Luxembourg are expected to record a deficit of over 3% of GDP in 2021.

By 2022, however, the overall budget deficit is expected to halve to just under 4% in both the EU and the euro area. The number of Member States with a deficit of more than 3% of GDP is expected to decrease significantly.

In the EU, the public debt-to-GDP ratio is expected to peak at 94% this year before falling slightly to 93% in 2022. The euro area debt-to-GDP ratio is expected to follow the same trend, rising to 102%. this year, then drop slightly to 101% in 2022.

Risks to the outlook remain high but are now broadly balanced

The risks to the outlook are high and will remain so as long as the shadow of the COVID-19 pandemic hangs over the economy.

The evolution of the epidemiological situation and the efficiency and effectiveness of vaccination programs could prove to be better or worse than expected in the central scenario of this forecast.

This forecast may underestimate the propensity of households to spend or it may underestimate the desire of consumers to maintain high levels of precautionary savings.

Another factor is the timing of the withdrawal of political support, which, if premature, could jeopardize the recovery. On the other hand, a delayed withdrawal could lead to the creation of market distortions and barriers to the exit of non-viable firms.

The impact of corporate distress on the labor market and the financial sector could turn out to be worse than expected.

Stronger global growth, especially in the United States, could have a more positive impact than expected on the European economy. However, stronger growth in the United States could push up US sovereign bond yields, which could lead to disorderly adjustments in financial markets that would particularly hit heavily indebted emerging market economies and heavily indebted in foreign currencies.

College members declared:

Valdis Dombrovskis, Executive Vice-President for an economy that works for people said: “Although we are not yet out of the woods, Europe’s economic outlook looks much brighter. As vaccination rates rise, restrictions ease and people’s lives slowly return to normal, we have revised our forecast for the EU and Eurozone economies for this year and year. next. The Recovery and Resilience Mechanism will contribute to the recovery and make a real game-changer in 2022, when it takes public investment to the highest level for more than a decade. We still have a lot of work to do and many risks will hang over us as long as the pandemic does. Until we reach solid ground, we will continue to do whatever is necessary to protect people and keep businesses afloat.. “

Paulo Gentiloni, the Commissioner responsible for the economy said: “The shadow of COVID-19 is starting to rise over the European economy. After a weak start to the year, we expect strong growth in 2021 and 2022. Unprecedented budget support has been – and remains – essential to help workers and businesses in Europe weather the storm. The corresponding increase in deficits and debt is expected to peak this year before starting to decline. The impact of NextGenerationEU will start to be felt this year and next, but we have a lot of work to do – in Brussels and in the national capitals – to make the most of this historic opportunity. And of course, sustaining the now sustained pace of vaccinations in the EU will be crucial – for the health of our citizens as well as for our economies. So let’s roll up all our sleeves. “

Background

The spring 2021 economic forecast is based on a set of technical assumptions regarding exchange rates, interest rates and commodity prices, with a cut-off date of April 28, 2021. For all other incoming data, including including the assumptions concerning government policies, this forecast takes into account information on the examination up to and including April 30. Unless policies are credibly announced and specified in sufficient detail, projections assume that there is no change in policy.

Following the final adoption of the RRF regulation and significant progress in the preparation of the recovery and resilience plans, the spring forecast incorporates the reform and investment measures set out in the RRF plans for all Member States. However, at the time of the deadline, details of some plans were still under discussion in a number of Member States. In such cases, simplified working assumptions were used for the recording of transactions related to the RRF, in particular with regard to the temporal profile of expenditure (assumed linear over the lifetime of the RRF) and its composition (assumed to be split between public investment and capital transfers.)


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