Deeper recession forecast for EU economy

July 09, 2020 - Belgium

The European Union (EU) economy will witness a deep recession this year due to the novel coronavirus pandemic despite the swift and comprehensive policy response at both EU and national levels, the bloc said. Because the lifting of lockdown measures is proceeding at a more gradual pace than assumed in its Spring Forecast, the impact on economic activity this year will be more significant than anticipated.

The bloc’s Summer 2020 Economic Forecast projects that the Euro area economy will contract by 8.7 per cent in 2020 and grow by 6.1 per cent in 2021. The EU economy is forecast to contract by 8.3 per cent in 2020 and grow by 5.8 per cent in 2021.

The contraction in 2020 is, therefore, projected to be significantly greater than the 7.7 per cent projected for the euro area and 7.4 per cent for the EU as a whole in the Spring Forecast. Growth in 2021 will also be slightly less robust than projected in the spring.

The impact of the pandemic on economic activity was already considerable in the first quarter of 2020, even though most member states only began introducing lockdown measures in mid-March. With a far longer period of disruption and lockdown taking place in the second quarter of 2020, economic output is expected to have contracted significantly more than in the first quarter, EU said in a press release.

However, early data for May and June suggest that the worst may have passed. The recovery is expected to gain traction in the second half of the year, albeit remaining incomplete and uneven across member states.

The shock to the EU economy is symmetric in that the pandemic has hit all member nations. However, both the drop in output in 2020 and the strength of the rebound in 2021 are set to differ markedly. The differences in the scale of the impact of the pandemic and the strength of recoveries across member states are now forecast to be still more pronounced than expected in the Spring Forecast.

The overall outlook for inflation has changed little since the Spring Forecast, although there have been significant changes to the underlying forces driving prices.