EU Commission projects deeper 2020 recession, weaker 2021

LONDON (ICIS)–The EU is likely to suffer a deeper contraction in 2020 than expected in May, executive body the European Commission said on Tuesday, while the 2021 recovery is likely to be weaker than forecast.

The Commission expects EU GDP contract by 8.3% in 2020 and expand by 5.8% in 2021, compared to forecasts of minus 7.7% and 6% growth, respectively, as a result of governments proving slower to lift lockdown measures than expected.

“The economic impact of the lockdown is more severe than we initially expected,” said Valdis Dombrovskis, an executive vice-president at the Commission.

“We continue to navigate in stormy waters and face many risks, including another major wave of infections.”

Italy, Spain and France are expected to be the worst-hit eurozone economies this year, with GDP contractions of 11.2%, 10.9% and 10.6%.

The Commission states that the economic shock so far has been symmetric, in that all member states have been hit by the crisis, but divergence between the extent of downturn and rebound varies dramatically across the region.

Germany’s economy is expected to contract by 6.3% this year, slightly over half of Italy’s projected downturn, while in 2021 the northern European powerhouse’s GDP is expected to grow 5.3%, compared to 6.1% for Italy.

The recovery is likely to gain traction in the second half of the year with early economic data for May and June hinting that the worst may have passed, according to the Commission.

The spectre of lockdown continues to haunt the European economy, with local restrictions imposed in parts of Spain and the UK.

Governments are reluctant to reintroduce wider lockdowns due to the impact on business and the wider shock to the global economy that would likely follow any country-scale lockdown measures.

However, the efficacy of more pinpointed lockdowns is still to be proven amid the delicate balance of allowing businesses to re-open without Covid-19 reproduction rates becoming critical.

Inflation is likely to remain significantly below European Central Bank targets of near but not exceeding 2%, but oil and food prices have risen faster than forecast in the commission’s May outlook, balanced by weaker economic growth.

Inflation is expected to average 0.3% this year and 1.1% in 2021.