(Source: EU Commission)
“Check against delivery”
Let me begin with the five key messages emerging from this forecast. We have five key messages.
First, the EU economy is set to grow robustly this year and next. The resurgence of the pandemic and the need to tighten health-related restrictions resulted in a weak start to the year. But the faster pace of vaccinations in recent months should allow restrictions to be eased further in the second half of the year – in fact, this is already underway – and thereby allow the economy to bounce back.
Overall, the EU economy is forecast to grow by 4.2% in 2021 and to strengthen to around 4.4% in 2022. In the euro area, GDP growth is forecast at 4.3 this year and 4.4% next year.
This is a brighter outlook than expected in the winter forecast, due to two main factors.
- First, a stronger-than-previously expected rebound in global activity and trade.
- Second, and not least, the growth impulse coming from the integration in the forecast of the initial boost of the Recovery and Resilience Facility.
Second, employment is expected to grow next year and unemployment to decline. While government support schemes, including the EU-backed SURE instrument, have prevented unemployment rates from rising dramatically, labour markets will take time to fully recover. And we know that youth unemployment has risen more than for the labour force as a whole. In short, the risk of scarring, with a worsening of poverty, social exclusion and inequality, is very real. When we present overall positive forecasts, we should not forget this.
Third, fiscal measures have sheltered the economy and pave the way for the recovery.
In this context, significant EU expenditures are assumed to be financed by grants from the Recovery and Resilience Facility (RRF). The cumulative impact on EU GDP over the 2020-2022 period is estimated, in this forecast, at 1.2% of the EU’s 2019 real GDP.
Fourth, inflation is set to peak this year under the impact of some transitory factors, such the sharp rise in oil prices. However, it is set to moderate again in 2022.
And fifth, the uncertainty surrounding the outlook will remain elevated. Overall, the risks, which are related to both epidemiological and economic factors, are considered to be broadly balanced.
Europe lived through a ‘third wave’ of the pandemic early this year.
After a slow start, vaccination campaigns across the EU have accelerated significantly. Common procurement and distribution prove to be the right thing to do. This progress should lead to a steadily more marked fall in infections.
To date, on average in the EU, more than 76% of people aged 80 years and above have received at least one vaccine dose, and more than half are fully vaccinated.
Going forward, our assumption is that the pandemic will evolve in a way that allows for restrictions to be marginally eased in the course of the second quarter. We are already observing such steps in a number of countries.
The global outlook has improved considerably for both advanced and emerging market economies.
After somewhat stronger-than-expected growth last year, the global economy continued with positive momentum early this year as restrictive measures were loosened and aggressive policy support was put in place, especially in advanced economies.
We know that there are exceptions. For example, we all look to India with worries about the situation and in solidarity with the suffering people.
Global GDP excluding the EU is expected to grow by 5.9% in 2021 and by 4.2% in 2022, amid a solid expansion in global trade (excl. EU). EU export markets are thus set to increase by 8.3% in 2021 and 6.4% in 2022.
This increase in EU export market is part of the strength of the possible growth that we estimate.
Countries and regions are expected to recover at varying rates, due also to the different strength of the pandemic around the world.
We have differences at global level, national level and sectoral levels.
The prospects for the US economy have improved significantly, notably in 2021. This reflects both progress in vaccinations and the two large fiscal packages adopted in late 2020 and early 2021. More robust US growth is expected to create positive spillovers for the global economy. For the EU, the estimated benefit is a cumulative boost of about 0.5 percentage points in 2021-22.
In China, growth is set to continue at a rapid pace, aided by its early control of the pandemic and buoyant external demand.
It’s important to keep this international perspective in mind when assessing the improved outlook for the European economy.
Elsewhere, many emerging and developing economies are in a more challenging situation. The low-income countries are in a very difficult situation, with difficult access to vaccines and limited policy space weighing on their growth prospects.
The EU economy faced another setback in late 2020 as the resurgence of the pandemic prompted a new round of containment measures. With output falling again in the last quarter of 2020 and the first of 2021, by a cumulative 0.9%, the EU was pushed back into a technical recession.
However, the EU economy is set to rebound strongly this year and next. The latest Commission survey results suggests this.
As vaccinations accelerate, containment measures are set to be progressively lifted, allowing the EU economy to rebound this quarter and even more so during the third quarter as the impact of the RRF also kicks in. Growth is then forecast to remain solid in the last quarter of 2021.
Private consumption will be the main growth engine as household spending benefits from dissipating uncertainty and some households start to spend more and save less once restrictions are eased.
An improved outlook at home and abroad is expected to propel investment. A continuation of favourable financing conditions, recovering profitability among firms and increasing capacity utilisation rates all push in the same direction.
These tailwinds are likely to be strongly reinforced by the support for public and private investment through the RRF. The EU’s public investment-to-GDP ratio is forecast to rise to almost 3.5% in 2022, up from 3.0% in 2019. This would be its highest figure since 2010.
Finally, the strong rebound in the EU’s major trading partners is likely to have a positive impact on EU exports. This will particularly be the case for merchandise exports while the recovery of services, exports such as tourism, is set to take longer.
Economic activity in the EU is now projected to recover to its pre-crisis level in the fourth quarter of 2021.
In the euro area, this threshold should be crossed in the first quarter of 2022.
Still, the economy will remain below its pre‑crisis trend, illustrated here by the autumn 2019 forecast prepared before the outbreak of the health crisis. The risk of scarring effects remains real, and underlines the ongoing importance of appropriately targeted supportive policies.
This need is still there.
NextGenerationEU represents an unprecedented boost to the EU economy. The spring forecast for the first time incorporates the impact of the RRF for all Member States.
The amount of expenditures and other costs financed by RRF grants included in this forecast varies quite a lot across Member States. This reflects their differences in RRF allocations and their assumed absorption profiles.
Overall, the total EU expenditure assumed to be financed by RRF grants amounts to €62 billion in 2021 and €77 billion in 2022. Cumulatively, this is around 40% of the total RRF grant allocation, the lifetime of which extends until 2026. This implies that on average, Member States count on fast absorption of their RRF allocation.
With a horizon of less than two years, this forecast could assess only the RRF’s immediate and direct impact on GDP from increased domestic demand. It could only partially capture the indirect effects that will be there.
Overall, the RRF is expected to boost EU GDP by approximately 1.2% of the EU’s 2019 real GDP over the period 2020-2022. After shrinking last year, all EU economies are forecast to join the recovery this year, and grow strongly in 2022.
But as we have been warning for some time, just as the depth of the recession has varied widely, so too will the speed of the recovery.
Still, all EU economies are now forecast to reach or surpass their pre-pandemic GDP levels by the end of 2022 at the latest, but not the previously estimated trends, as I said.
A few words on the largest EU economies.
Germany’s GDP contracted by 1.7% in the first quarter, but the lifting of restrictions and the ongoing strength of exports are expected to see GDP recover to its pre-crisis level towards the end of this year. Growth is projected at 3.4% in 2021, and 4.1% in 2022.
In France, economic activity is forecast to rebound by 5.7% in 2021. After a slight contraction in the second quarter of 2021, GDP is expected to bounce back in the second half of the year as restrictions are eased. In 2022, the national recovery plan is set to support GDP growth, which is forecast at 4.2%. Overall, GDP is forecast to reach its pre-crisis level at the beginning of 2022.
For Italy, real GDP is projected to increase by 4.2% this year and 4.4% in 2022. After a strong rebound in the second half of 2021, the economy is set to embark on a sustained expansion path, which should allow output to return to its pre-pandemic level by the end of 2022. RRF-supported investments and reforms will play an important role in sustaining the recovery.
In Spain, real GDP is projected to grow by 5.9% in 2021 and 6.8% in 2022. Spain’s GDP is expected to return to its pre-pandemic level by the end of 2022. The implementation of the recovery plan is expected to play a decisive role, driving the rebound this year and more strongly in 2022.
Finally, in Poland after one of the shallowest recessions in the EU, the economy is expected to grow by 4.0% in 2021 and 5.4% in 2022. The RRF is expected to take full-effect and propel growth in 2022.
The magnitude of COVID-19-related fiscal measures, which includes measures taken as a consequence of EU decisions, is expected to reach around 4% of GDP in both 2020 and in 2021 in the EU as a whole. These include spending on healthcare as well as on temporary support to households and businesses to shield them against income losses, to protect employment, and to avoid a surge in insolvencies during the acute phase of the pandemic.
Next year, as governments should be able to start phasing out emergency support, remaining measures are expected to amount to around 1% of GDP. Fiscal policy in the EU is then expected to remain slightly supportive, also thanks to the support from the expected acceleration in spending financed by the RRF grants I refered to earlier.
Such massive public support contributed to an increase in the aggregate budget deficit in the EU from 0.5% of GDP in 2019 to around 7% in 2020 and it is set to increase further this year to 7.5% of GDP. A similar evolution is set for the euro area. In 2022, thanks to the continued recovery and the phasing out of much of the policy support, the deficits in the EU and the euro area are both expected to halve to 3.7% and 3.8% of GDP respectively.
Let me stress once again that without the decisive policy actions to contain the pandemic and limit its economic fallout, the long-term budgetary impact of the crisis would be far worse.
So I think that those decisions were the right ones to take.
In 2021, only two countries, Denmark and Luxembourg, are projected to run a deficit of less than 3% of GDP. In 2022, 15 Member States are forecast to still register a deficit greater than 3% of GDP.
In 2021, debt-to-GDP ratios are projected to peak at around 95% and 102% in the EU and the euro area, respectively. The peak year will be this year, before decreasing slightly in 2022. The debt-to-GDP ratio is expected to remain over 100% in seven Member States (Belgium, Greece, Spain, France, Italy, Cyprus and Portugal), up from three at the end of 2019.
The widespread use of job retention schemes across Member States has enabled many employees to hold on to their jobs.
Labour market conditions slowly started to improve in the second half of last year. Many people returned to the labour force and many workers no longer needed short-time work schemes.
Forward-looking indicators have also improved markedly this year.
Labour markets, however, will take time to fully recover as there is scope for working hours to increase before companies need to start hiring again. While the unemployment rate in the EU has only increased slightly since last year, it is set to rise further this year.
Next year, as headcount employment is expected to start rising again, the unemployment rate should decline to around 7%, slightly more than the 6.7% rate in 2019.
It is important to highlight that the labour market outlook hinges not only on the speed of the recovery, but also on the timing of policy support withdrawal and the pace at which workers are reallocated across sectors and firms. The Commission therefore continues to call for such national support measures to be phased out gradually and thoughtfully.
Rising energy prices, positive base effects and a host of temporary factors have pushed headline inflation up this year.
These factors will continue to shape the profile of inflation this year but should wear off gradually in 2022. Other factors should broadly offset:
- One the one hand, the strong recovery in demand and some supply-side constraints, such as in transport, are set to push inflation up.
- On the other hand, the remaining slack in the economy is expected to keep underlying inflationary pressures muted.
Overall, inflation in the EU is expected to increase from 0.7% in 2020 to 1.9% in 2021 and to moderate to 1.5% in 2022.
In the euro area, it is forecast to moderate from 1.7% in 2021 to 1.3% in 2022.
The risks surrounding the GDP forecast are high and will remain so as long as the pandemic hangs over the economy.
On the epidemiological front, developments concerning the pandemic and the efficiency and effectiveness of vaccination programmes could turn out better or worse than assumed in our central scenario.
On the economic side, the upsides could come from stronger global growth, particularly in the US. This would have a more positive impact on the European economy than expected. Also, households’ willingness to spend, a key factor in this forecast, could turn out higher than projected.
On the downside, the premature withdrawal of policy support could jeopardise the recovery. Also, the impact of corporate financial distress on the labour market and the financial sector could prove worse than anticipated.
Overall, the risks surrounding the outlook are broadly balanced.
In conclusion, for a year, we have been presenting forecasts that were very negative. Today, for the first time since the pandemic hit, we see optimism prevailing over uncertainty. That uncertainty is of course still there. We should not forget this. But recovery is no longer a mirage: it is underway. We must avoid mistakes that could undermine it: namely, a premature withdrawal of policy support.
The quality, strength and 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.