- The impact of the COVID-19 pandemic on the EU economy
The COVID-19 pandemic has led to a severe global recession with differential impacts within and across countries. Globally, the IMF warned in its latest economic outlook report, that the world economy is still in deep recession and that 2021 is likely to witness a slow, long and uneven recovery. The COVID-19 crisis has had an abrupt impact on the EU27 economy and triggered unprecedented policy responses across Europe and the globe. Compared to the global economy, the euro area has experienced a larger hit in 2020 and will experience a slower recovery in 2021. According to the European Winter 2021 Economic Forecast, the real Gross Domestic Product (GDP) is now expected to reach pre-crisis levels by mid-2022 on average in both the EU and the euro area. For 2021, the projections for the real GDP growth in the euro area range from 3.6 to 4.2%. This is a positive adjustment of the outlook as compared to the initial forecasts that followed the start of the pandemic.
There are remarkable differences in performance across, but also within sectors. A large part of the digital industry has performed well, and so has the healthcare industry. Enabling industries like chemicals, construction, and the food and drinks sector are likely to experience a V-shaped recovery from the crisis. Despite the initial shocks, automotive and textile industries appear to be on a recovery path since the first lockdowns. Sectors that are dependent on human contact and interaction, such as the cultural and creative industries and the aerospace industry (due to the decrease in mobility and tourism activities), have experienced substantial hits by the crisis, and they are likely to suffer for extended periods from these unprecedented shocks.
According to the Summer 2021 interim Economic Forecast, the economy in the EU and the euro area is set to expand by 4.8% this year and 4.5% in 2022. Compared to the previous forecast in the spring, the growth rate for 2021 is significantly higher in the EU (+0.6 pps.) and the euro area (+0.5 pps.), while for 2022 it is slightly higher in both areas (+0.1 pp.). Real GDP is projected to return to its pre‑crisis level in the last quarter of 2021 in both the EU and the euro area. For the euro area, this is one quarter earlier than expected in the Spring Forecast.
- The impact of the COVID-19 on Inflation
The 2020 global recession brought about the smallest inflation decline and the fastest subsequent inflation upturn of the last five global recessions. While global inflation is likely to continue to rise over the remainder of this year, inflation is expected to remain within target ranges in most inflation-targeting countries. In those emerging market and developing economies where inflation rises above target, a monetary policy response may not be warranted provided it is temporary and inflation expectations remain well-anchored.
“Higher global inflation may complicate the policy choices of emerging market and developing economies in coming months as some of these economies still rely on expansionary support measures to ensure a durable recovery,” World Bank Prospects Group Director Ayhan Kose said. “Unless risks from record-high debt are addressed, these economies remain vulnerable to financial market stress should investor risk sentiment deteriorate as a result of inflation pressures in advanced economies.”
The economic risks depend on how households and companies respond to any new tightening of restrictions to stop the spread of variants. It also warned that inflation could rise if supply restrictions last and price pressures are passed on to consumer prices. For now, inflation in the EU is forecast to average 2.2% this year, up 0.3 percentage points over predictions in May, and 1.6% in 2022. It’s forecast to average 1.9% in the euro area in 2021, up 0.2 percentage points, and 1.4% next year.
In Central Europe, growth is projected at 4.6% in both 2021 and 2022, supported by a recovery in trade. Exceptional policy accommodation is expected to continue through 2021, and sizeable EU fund packages for member states should help mitigate weakness in investment. Growth in the Western Balkans is forecast to rebound to 4.4% this year and moderate to 3.7% in 2022, assuming consumer and business confidence revives as vaccination takes place and political instability eases. The South Caucasus is projected to return to growth in 2021, expanding 3.6% and strengthening to 4.2% in 2022, predicated on dissipation of shocks related to the pandemic and to conflict. Eastern Europe is projected to expand 1.9% in 2021 and 2.8% in 2022, as the recovery is constrained by geopolitical tensions, subdued domestic demand, and structural weakness.
The EU economy is set to see its fastest growth in decades this year, fueled by strong demand both at home and globally and a swifter-than-expected reopening of services sectors since the spring,” Economy Commissioner Paolo Gentiloni said. But he warned that the EU “must redouble the vaccination efforts, building on the impressive progress made in recent months: the spread of the delta variant is a stark reminder that we have not yet emerged from the shadow of the pandemic.”