EU economy forecast to rebound faster thanks to Covid vaccine
The economy of the EU will bounce back more quickly than expected, owing in part to the quickening pace of its vaccination programme after a “slow start”, the European Commission has forecast.
The brighter outlook from Brussels also takes into account payouts from the EU’s €800bn (£686bn) recovery package and a sharper than predicted rebound in global trade and activity, largely driven by the performances of the US and China.
The commission forecast the EU’s GDP would grow by 4.2% in 2021 and by 4.4% in 2022, compared with a prediction in February of 3.7% and 3.9%. The eurozone’s GDP is forecast to grow by 4.3% and 4.4%, respectively.
Paolo Gentiloni, the EU’s economics commissioner and former prime minister of Italy, said: “The faster pace of vaccinations in recent months should allow restrictions to be eased further in the second half of the year, and in fact this is already happening, and thereby allow the economy to bounce back.”
Europe plunged into a double-dip recession early this year but the easing of Covid-19 restrictions and huge public investment programmes facilitated by payouts from the next generation EU package are expected to fuel a sharp recovery.
Of the biggest European economies, Germany’s GDP contracted by 1.7% in the first quarter of 2021 – compared with 1.5% in the UK over the same period – but it is expected to recover to pre-crisis levels towards the end of this year. Growth is projected at 3.4% in 2021 and 4.1% in 2022.
Economic activity in France is expected to rebound by 5.7% this year and grow by 4.2% next year, while GDP in Spain, the European economy hardest hit, is expected to grow by 5.9% in 2021 and 6.8% in 2022. Both countries are forecast to reach pre-pandemic levels of output by the end of 2022.
By comparison, the commission expects UK GDP to rise by 5% in 2021 and by 5.3% in 2022, noting that “the rollout of vaccinations has progressed rather quickly”. The latest forecasts published by the Bank of England last week suggest economic growth in the UK will reach 7.25% in 2021 and 5.75% in 2022.
The commission expects the UK to hit pre-pandemic levels by the third quarter of 2022, while the Bank of England believes the UK will be back at early 2020 levels by the end of this year. The economy suffered a 9.8% fall in GDP in 2020, the second biggest drop in Europe after Spain.
The forecast adds that the “UK’s departure from the EU is expected to weigh on trade and growth”.
“This became evident in early 2021 when UK trade volumes with the EU fell sharply,” the commission’s forecast says. “While some of these disruptions will be temporary, as businesses get used to the new rules, UK trade is expected to remain permanently lower over the forecast period as compared to a situation with unchanged EU-UK trading relations.”
There is praise, however, for a measure announced in Rishi Sunak’s budget known as the “super-deduction”, which allows businesses to offset 130% of eligible investment spending.
This is expected to have a positive impact on business investment, the commission says. “Business investment is forecast to pick up more strongly in the second half of 2021 and in 2022, as uncertainties regarding the further evolution of the pandemic and the new EUUK trade relationship fade away.”
Gentolini said the decisions by European governments to spend huge sums on supporting households and businesses through the Covid crisis had been “the right decisions to take”, and that without such intervention “the long-term budgetary impact of the crisis would be far worse”.
Only two member states, Denmark and Luxembourg, are projected to have a budget deficit of less than 3% of GDP in 2021, the threshold that EU countries are normally expected to keep within. Under the EU’s stability and growth pact, which will remain suspended until 2023, debt should also not exceed 60% of output, but GDP to debt ratios are projected to peak at 95% this year.
Gentolini called on EU governments to be cautious in removing the support provided during the pandemic, with the unemployment rate expected to rise to 7.6% this year before falling to 7% in 2022 but above the rate of 6.7% in 2019.
“The shadow of Covid-19 is beginning to lift from Europe’s economy,” he said. “After a weak start to the year, we project strong growth in both 2021 and 2022. Unprecedented fiscal support has been – and remains – essential in helping Europe’s workers and companies to weather the storm.”