Spring 2020 Economic Forecast: A deep and uneven recession, an uncertain recovery

crisis eu

(Credit: Unsplash)

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


The coronavirus pandemic represents a major shock for the global and EU economies, with very severe socio-economic consequences. Despite the swift and comprehensive policy response at both EU and national level, the EU economy will experience a recession of historic proportions this year.

The Spring 2020 Economic Forecast projects that the euro area economy will contract by a record 7¾% in 2020 and grow by 6¼% in 2021. The EU economy is forecast to contract by 7½% in 2020 and grow by around 6% in 2021. Growth projections for the EU and euro area have been revised down by around nine percentage points compared to the Autumn 2019 Economic Forecast.

The shock to the EU economy is symmetric in that the pandemic has hit all Member States, but both the drop in output in 2020 (from -4¼% in Poland to -9¾% in Greece) and the strength of the rebound in 2021 are set to differ markedly. Each Member State’s economic recovery will depend not only on the evolution of the pandemic in that country, but also on the structure of their economies and their capacity to respond with stabilising policies. Given the interdependence of EU economies, the dynamics of the recovery in each Member State will also affect the strength of the recovery of other Member States.

Valdis Dombrovskis, Executive Vice-President for an Economy that works for People, said: “At this stage, we can only tentatively map out the scale and gravity of the coronavirus shock to our economies. While the immediate fallout will be far more severe for the global economy than the financial crisis, the depth of the impact will depend on the evolution of the pandemic, our ability to safely restart economic activity and to rebound thereafter. This is a symmetric shock: all EU countries are affected and all are expected to have a recession this year. The EU and Member States have already agreed on extraordinary measures to mitigate the impact. Our collective recovery will depend on continued strong and coordinated responses at EU and national level. We are stronger together.”

Paolo Gentiloni, European Commissioner for the Economy, said:“Europe is experiencing an economic shock without precedent since the Great Depression. Both the depth of the recession and the strength of recovery will be uneven, conditioned by the speed at which lockdowns can be lifted, the importance of services like tourism in each economy and by each country’s financial resources. Such divergence poses a threat to the single market and the euro area – yet it can be mitigated through decisive, joint European action. We must rise to this challenge.”

A large hit to growth followed by an incomplete recovery

The coronavirus pandemic has severely affected consumer spending, industrial output, investment, trade, capital flows and supply chains. The expected progressive easing of containment measures should set the stage for a recovery. However, the EU economy is not expected to have fully made up for this year’s losses by the end of 2021. Investment will remain subdued and the labour market will not have completely recovered.

The continued effectiveness of EU and national policy measures to respond to the crisis will be crucial to limit the economic damage and facilitate a swift, robust recovery to set the economies on the path of sustainable and inclusive growth.

Unemployment is set to increase, though policy measures should limit the rise

While short-time work schemes, wage subsidies and support for businesses should help to limit job losses, the coronavirus pandemic will have a severe impact on the labour market.

The unemployment rate in the euro area is forecast to rise from 7.5% in 2019 to 9½% in 2020 before declining again to 8½% in 2021. In the EU, the unemployment rate is forecast to rise from 6.7% in 2019 to 9% in 2020 and then fall to around 8% in 2021.

Some Member States will see more significant increases in unemployment than others. Those with a high proportion of workers on short-term contracts and those where a large proportion of the workforce depend on tourism are particularly vulnerable. Young people entering the workforce at this time will also find it harder to secure their first job.

A steep drop in inflation

Consumer prices are expected to fall significantly this year due to the drop in demand and the steep fall in oil prices, which together should more than offset isolated price increases caused by pandemic-related supply disruptions.

Inflation in the euro area, as measured by the Harmonised Index of Consumer Prices (HICP), is now forecast at 0.2% in 2020 and 1.1% in 2021. For the EU, inflation is forecast at 0.6% in 2020 and 1.3% in 2021.

Decisive policy measures will cause public deficits and debt to rise

Member States have reacted decisively with fiscal measures to limit the economic damage caused by the pandemic. ‘Automatic stabilisers’, such as social security benefit payments compounded by fiscal discretionary measures are set to cause spending to rise. As a result, the aggregate government deficit of the euro area and the EU is expected to surge from just 0.6% of GDP in 2019 to around 8½% in 2020, before falling back to around 3½% in 2021.

After having been on a declining trend since 2014, the public debt-to-GDP ratio is also set to rise. In the euro area, it is forecast to increase from 86% in 2019 to 102¾% in 2020 and to decrease to 98¾% in 2021. In the EU, it is forecast to rise from 79.4% in 2019 to around 95% this year before decreasing to 92% next year.

Exceptionally high uncertainty and risks tilted to the downside

The Spring Forecast is clouded by a higher than usual degree of uncertainty. It is based on a set of assumptions about the evolution of the coronavirus pandemic and associated containment measures. The forecast baseline assumes that lockdowns will be gradually lifted from May onwards.

The risks surrounding this forecast are also exceptionally large and concentrated on the downside.

A more severe and longer lasting pandemic than currently envisaged could cause a far larger fall in GDP than assumed in the baseline scenario of this forecast. In the absence of a strong and timely common recovery strategy at EU level, there is a risk that the crisis could lead to severe distortions within the Single Market and to entrenched economic, financial and social divergences between euro area Member States. There is also a risk that the pandemic could trigger more drastic and permanent changes in attitudes towards global value chains and international cooperation, which would weigh on the highly open and interconnected European economy. The pandemic could also leave permanent scars through bankruptcies and long-lasting damage to the labour market.

The threat of tariffs following the end of the transition period between the EU and United Kingdom could also dampen growth, albeit to a lesser extent in the EU than in the UK.

For the UK, a purely technical assumption

Given that the future relations between the EU and the UK are not yet clear, projections for 2021 are based on a purely technical assumption of status quo in terms of their trading relations. This is for forecasting purposes only and reflects no anticipation or prediction with regard to the outcome of the negotiations between the EU and the UK on their future relationship.

Background

This forecast is based on a set of technical assumptions concerning exchange rates, interest rates and commodity prices with a cut-off date of 23 April. For all other incoming data, including assumptions about government policies, this forecast takes into consideration information up until and including 22 April. Unless policies are credibly announced and specified in adequate detail, the projections assume no policy changes.

The European Commission publishes two comprehensive 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 and following year for all Member States, as well as EU and euro area aggregates.

The European Commission’s next economic forecast will be the Summer 2020 Interim Economic Forecast which is scheduled to be published in July 2020. This will cover only GDP growth and inflation. The next full forecast will be in November 2020.

the sting Milestone

Featured Stings

Can we feed everyone without unleashing disaster? Read on

These campaigners want to give a quarter of the UK back to nature

How to build a more resilient and inclusive global system

Stopping antimicrobial resistance would cost just USD 2 per person a year

5 surprising ways to reuse coffee grounds

These 5 countries are home to more than half the world’s forests

IMF – World Bank meetings: US – Germany clash instituted, anti-globalization prospects visualized

Could Rwanda become Africa’s healthcare leader?

Inequality threatening human development, new global UN report warns

Big oil’s climate pledges will fail without workforce equality

Taxation: Commission refers Hungary to the Court for failing to apply the minimum EU excise duty on cigarettes

Human health – litmus paper for the climate change?

EU Commission and ECB rebuff Germany on the Banking Union

Wednesday’s Daily Brief: Women boost work profits, saving biodiversity, UK loses Chagos Islands vote, Gaza funding, malaria-free in Argentina, Algeria

Bold measures needed to protect cross-border and seasonal workers in EU, MEPs say

How young people are turning the tide against corruption

At COP24, countries agree concrete way forward to bring the Paris climate deal to life

6 ways social innovators are responding to the COVID-19 pandemic

Russia won’t let Ukraine drift westwards in one piece

Can agroforestry save India’s rivers and the farms that depend on them?

‘Historic’ moment: Palestine takes reins of UN coalition of developing countries

‘Ground Zero’: Report from the former Semipalatinsk Test Site in Kazakhstan

Hiring more female leaders is good for profits. Here’s the evidence

In Marrakech, UN chief urges world leaders to ‘breathe life’ into historic global migration pact

Air quality: Commission takes action to protect citizens from air pollution

Cloud computing under scrutiny in the EU?

One good reason to feel less blue about the future of our oceans

How TV has brought mental health issues into the light – and helped to banish stigma

German opposition win in Lower Saxony felt all over Europe

Human rights: breaches in Russia, the Rakhine State and Bahrain

COVID-19: Why we must take the widescreen view of workforce uncertainty

Libya’s migrants and refugees with tuberculosis ‘left to die’ in detention centres

EU long-term budget deal must be improved for Parliament to accept it

European Commission Joint Research Centre opens world-class laboratories to researchers

UN chief welcomes start of Church-mediated national dialogue in Nicaragua

Longer hours, more emails and shorter meetings – working from home in the time of COVID

European Business Summit 2014: The role of youth entrepreneurship education in EU’s Strategy for Competitiveness

The Fourth Industrial Revolution needs a social revolution, too. Here’s how we can make this happen

Livelihoods of millions in East and Southeast Asia at risk from Swine Fever epidemic

Commission welcomes political agreement on the ESF+

So different, so close – for two twinning cities

Technology companies have power. They must assume responsibility

Renewable energy could power the world by 2050. Here’s what that future might look like

Around 260,000 children in DR Congo’s Kasai region suffering severe acute malnutrition

Trump’s Pandemic Failure: A Missed Opportunity

Unity, regional cooperation and international support needed for Horn of Africa to develop sustainably

Brexit: Britain and the Continent fighting the battle of Waterloo again

This is what happened to CO2 emissions in the EU last year

Can China deal with climate change without the U.S.?

How COVID-19 might help us win the fight against climate change

New UN agriculture agency report underscores value of fishing in fight against global hunger

‘Protracted crisis’ in Venezuela leads to ‘alarming escalation of tensions’: UN political chief

What living abroad does to your self-awareness

Climate change is speeding up. Our response needs to be even faster

Parliament: No consent to EU budget until €11.2 billion unpaid bills are settled

Repression, use of force risk worsening Bolivia crisis: UN human rights chief

How quantum computing could beat climate change

Long-term EU budget: It is not possible to do more with less, say MEPs

As we switch to cleaner energy, there are three dangers we must not overlook

The issues of practicing medicine in Pakistan

Technological innovation can bolster trust and security at international borders. Here’s how

The China-US trade deal will be signed on time; the path is set

More Stings?

Advertising

Speak your Mind Here

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s