This article is presented to you in association with the European Commission.
The European economy is expected to rebound faster than expected, as activity in the first quarter of the year exceeded expectations and the improvement in the health situation led to a faster easing of the restrictions to fight the pandemic in the second quarter .
Faster economic growth as economies reopen and sentiment indicators brighten
According to the interim economic forecast for summer 2021, the economy of the EU and the euro area is expected to grow by 4.8% this year and 4.5% in 2022. Compared to the previous forecast in spring, the growth rate for 2021 is significantly higher. in the EU (+0.6 pp.) and the euro zone (+0.5 pp.), while in 2022, it is slightly higher in both zones (+0.1 pp.). Real GDP is expected to return to its pre-crisis level in the last quarter of 2021, both in the EU and in the euro area. For the euro zone, this is a quarter earlier than expected in the spring forecast.
Growth is expected to strengthen due to several factors. First, the activity for the first quarter of the year exceeded expectations. Second, an effective virus containment strategy and advances in vaccination resulted in fewer new infections and hospitalizations, which allowed EU member states to reopen their economies in the following quarter. . This reopening has notably benefited companies in the service sector. The positive results of consumer and business surveys as well as the monitoring of mobility data suggest that a strong rebound in private consumption is already underway. In addition, there is evidence of a resumption of intra-EU tourism activity, which is expected to benefit more from the entry into force of the EU’s new COVID digital certificate from July 1. Together, these factors are expected to outweigh the negative impact of temporary shortages of inputs and rising costs plaguing parts of the manufacturing sector.
Private consumption and investment are expected to be the main engines of growth, supported by employment which is expected to develop in line with economic activity. Strong growth in the EU’s main trading partners is expected to benefit EU merchandise exports, while service exports are expected to suffer from persistent constraints from international tourism.
The Recovery and Resilience Facility (RRF) is expected to make a significant contribution to growth. The total wealth generated by the RRF over the forecast horizon is expected to represent around 1.2% of the EU’s real GDP in 2019. The expected magnitude of its growth boost remains roughly unchanged from previous forecasts, the information from the recovery and resilience plans officially submitted in recent months largely confirming the assessment made in the spring.
Slightly higher, but moderate inflation rates in 2022
Inflation forecasts this year and next have also been revised upwards. Rising energy and raw material prices, production bottlenecks due to capacity constraints and the shortage of certain components and raw materials, as well as strong demand both domestically and abroad are expected to exert upward pressure on consumer prices this year. In 2022, these pressures are expected to gradually ease as production constraints resolve and supply and demand converge.
Inflation in the EU is now expected to average 2.2% this year (+0.3 pp compared to the spring forecast) and 1.6% in 2022 (+0.1 pp). In the euro zone, inflation is expected to average 1.9% in 2021 (+ 0.2 pp.) And 1.4% in 2022 (+ 0.1 pp.).
The uncertainty and risks surrounding the growth outlook are high, but remain broadly balanced.
The risks posed by the emergence and spread of variants of the COVID-19 virus underscore the importance of further accelerating the pace of vaccination campaigns. Economic risks relate in particular to the reaction of households and businesses to changes in restrictions.
Inflation may turn out to be higher than expected if supply constraints are more persistent and price pressures are passed on more strongly to consumer prices.
Members of the College said:
Valdis Dombrovskis, Executive Vice-President for an economy that works for people said: “The European economy is making a strong comeback with all the right elements falling into place. Our economies were able to reopen faster than expected thanks to an effective containment strategy and progress in vaccinations. Trade has held up well, and households and businesses have also proven to be more adaptable to living with COVID-19 than expected. After many months of restrictions, consumer confidence and tourism are both on the rise, although the threat of a new variant will need to be carefully managed to secure travel. This encouraging forecast is also due to the fact that the right policy choices were made at the right time, and it takes into account the major boost that the Recovery and Resilience Facility will bring to our economies in the coming months. We will have to watch closely the rise in inflation, which can be explained in particular by the strengthening of domestic and external demand. And, as always, we must be aware of the disparities: some Member States will see their economic production return to their pre-crisis levels as early as the third quarter of 2021 – a real success – but others will have to wait longer. Support policies should continue as long as necessary and countries should gradually adopt more differentiated budgetary approaches. In the meantime, there must be no slacking off in the race to vaccinate Europeans so that we can keep the variants at bay.. “
Paulo Gentiloni, the Commissioner responsible for the economy said: “The EU economy is expected to experience its fastest growing in decades this year, fueled by strong demand both domestically and globally and by a faster than expected reopening of service sectors since the spring. Also thanks to restrictions in the first months of the year that affected economic activity less than expected, we are raising our growth forecast for 2021 by 0.6 percentage point. This is the highest upward revision we have made in over 10 years and is in line with business confidence which has reached an all-time high in recent months. With the take off of the Recovery and Resilience Facility, Europe has a unique opportunity to open a new chapter of stronger, fairer and more sustainable growth. To keep the recovery on track, it is essential to maintain political support for as long as needed. Above all, we need to redouble our efforts on vaccination, building on the impressive progress made in recent months: the spread of the Delta variant is a stark reminder that we are not yet out of the shadow of the pandemic.. “
This forecast is based on a set of technical assumptions regarding exchange rates, interest rates and commodity prices with a deadline of June 26. For all other incoming data, including government policy assumptions, this forecast takes into account information up to and including June 28. Unless new policies are credibly announced and specified in sufficient detail, projections assume that no policy changes are expected.
The European Commission publishes two full forecasts (spring and autumn) and two interim forecasts (winter and summer) each year. The interim forecasts cover annual and quarterly GDP and inflation for the current year and the following year for all Member States, as well as EU and euro area aggregates.
The next economic forecast from the European Commission will be the Fall 2021 Economic Forecast, which is expected to be released in November 2021.