EU Spring forecast 2021 - ‘Recovery is no longer a mirage’

Economy Commissioner Paolo Gentiloni today (12 May) presented the EU’s Spring Economic Forecast. The latest projections estimate that the EU economy will expand by 4.2% in 2021 and by 4.4% in 2022. 

While growth rates vary across the EU, the Commission forecasts that all EU countries should see their economies return to pre-crisis levels by the end of 2022.

The more rosy picture is due in part due to the efficiency and effectiveness of vaccine rollout and the growth in consumption, investment and rising demand for EU exports from a strengthening global economy. 

Gentiloni said: “For a year, we have been presenting forecasts that were very negative. Today for the first time since the pandemic hit we see some optimism prevailing over uncertainty. That uncertainty is, of course, still there and we should never forget this. But recovery is no longer a mirage. It is under way. We must avoid mistakes that could undermine it, namely a premature withdrawal of policy support. The quality, the strength, and the duration of the recovery could still be influenced by the pandemic, but our economic fate is primarily in our own hands. And that is why we need to roll up our sleeves.”

Higher levels of growth will be driven by the highest level of public investment, as a proportion of GDP, for more than a decade by 2022. This will be helped in no small part by the Recovery and Resilience Facility (RRF), the key instrument at the heart of NextGenerationEU.

Labour market

While the Commission has seen some evidence that the labour market is improving with employment rising in the second half of 2020 and unemployment rates decreasing, for some countries the levels of unemployment remain stubbornly high, with Greece at a shocking 16%. 

Public support schemes, including those underpinned by the EU’s SURE instrument, have prevented an even worse scenario, but rates of unemployment are estimated to remain higher than pre-pandemic levels after 2022. It is anticipated that companies will not be hiring until there is a further recovery. 

Inflation

Inflation rose sharply early this year, due to the rise in energy prices and a number of temporary, technical factors, such as the annual adjustment to the weightings given to goods and services in the consumption basket used to calculate inflation. The reversal of a VAT cut and the introduction of a carbon tax in Germany also had a noticeable effect. The Commission project that inflation will however remain below the target rate of 2%.

Deficit to exceed 3%

Public debt levels are expected to peak in 2021, all EU countries, except for Denmark and Luxembourg, are expected to exceed the 3% rule laid down in the Stability and Growth Pact in 2021, but this is forecasted to fall significantly in 2022. In the EU, the ratio of public debt to GDP is forecast to peak at 94% this year before decreasing slightly to 93% in 2022. 

Downside risks

Gentiloni’s main concern is the premature withdrawal of support measures which could jeopardise the recovery. On the other hand, he acknowledges that a delayed withdrawal could lead to the creation of market distortions and prolong the life of unviable firms.

There is also a warning that corporate distress and the financial sectors situation could prove worse than anticipated.

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