Covid-19 and the Economy. European Commission’s Autumn Forecasts

Camilla Palla

The economy in Europe was strongly affected by the Covid-19 pandemic in the first half of the year, however, has seen a marked recovery with the progressive abandoning of containment measures. This is what emerges from the European Commission’s analysis of the autumn forecasts for the EU and Eurozone economy.

In the last few weeks, however, with the worsening health situation and the new measures introduced by national authorities to limit the spread of the virus, European economies and societies are once again under strong pressure. The current epidemiological situation makes a stable assessment of growth projections extremely difficult given the high degree of uncertainty of how the scenario will evolve in the coming months.

According to the Commission’s data, the economic forecast for autumn 2020 estimates a contraction in the Eurozone economy of 7.8%. Despite this, a growth of 4.2% is expected in 2021 and 3% in 2022.

Of course, the economic impact of the pandemic has had different effects in different Member States, thus also reflecting on the prospects for recovery. The manner in which the virus spread, the crisis management and public health measures adopted are among the variables that have the greatest impact on the calculation of the estimates in question.
The Commission’s analysis focused on trends in unemployment, inflation and public deficit and debt within the Union and the Eurozone.

Although policy measures taken at national and European level have helped to mitigate the impact of the pandemic on labour markets, trying to temper the rise in the unemployment rate compared to the decline in economic activity, unemployment is expected to continue to rise in 2021. Forecasts indicate that the unemployment rate in the Eurozone will increase from 7.5% in 2019 to 8.3% in 2020 and to 9.4% in 2021, before falling back to around 8.9% in 2022. This will be similar trend for all the Union, with an increase from 6.7% in 2019 to 7.7% in 2020 and to 8.6% in 2021, before falling back to 8% in 2022.

As far as inflation is concerned, at a global level a decrease was recorded between August and September, mainly due to lower prices in the energy sector. In general, the decline in demand, the slowdown in the labour market and the strong euro exchange rate have placed a downward pressure on prices. In the Eurozone, the Harmonised Consumer Price Index (HCPI) will be around 0.3%, rising to 1.3% in 2022. The same applies to the EU as a whole, with inflation at 0.7% at the end of 2020 and an expected growth of 1.5% for 2022.

Finally, a rather complex perspective concerns the development of the deficit and public debt. A marked increase in public deficits is expected, due to the increase in public spending and the simultaneous decrease in tax revenues. The forecasts indicate that the aggregate public deficit of the euro area will increase from 0.6% of GDP in 2019 to around 8.8% in 2020, and then decrease again in 2021, settling around 4.7% in 2022. The increase in deficits will have a major impact on the debt-to-GDP ratio, leading to an increase between 2020 and 2022 from 85.9% in 2019 to 102.6% in 2022.

Growth will return in 2021 but it will be two years until the European economy comes close to regaining its pre-pandemic level” said the Commissioner for Economy Paolo Gentiloni, who then added: “In the current context of very high uncertainty, national economic and fiscal policies must remain supportive, while NextGenerationEU must be finalised this year and effectively rolled out in the first half of 2021.”.

At present, the main risk factor stems from the potential worsening of the pandemic, which would require more stringent public health interventions and a consequent more serious and lasting impact on the economy. In this scenario, it is clear that the NextGenerationEU, the Union’s economic recovery programme, will be a key resource to support the European economy in the coming months.

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