Euro zone growth in 2021 to rebound less than expected
The euro zone economy will rebound less than earlier expected from the coronavirus slump this year as a second wave of the pandemic put economies in new lockdowns, the European Commission said.
But it added that growth in 2022 will be stronger than earlier thought.
The Commission forecast economic growth in 19 countries sharing the euro would be 3.8% this year and the same in 2022, rallying from a 6.8% drop in 2020.
Last November, the Commission forecast 2021 euro zone growth at 4.2% and 2022 growth at 3.0% against a 7.8% recession in 2020.
“The near-term outlook for the European economy looks weaker than expected last autumn, as the pandemic has tightened its grip on the continent,” the EU executive arm said in an interim economic forecast for the 27-nation bloc.
“The European economy is thus expected to have ended 2020 and started the new year on a weak footing,” it said.
“However, light has now appeared at the end of the tunnel. As vaccination campaigns gain momentum and the pressure on health systems to subside, containment measures are set to relax gradually,” it added.
With the lockdowns still in place, the euro zone economy will contract again in the first quarter of 2021 after shrinking in the last three months of 2020.
But activity is to pick-up moderately in the second quarter and more vigorously in the third, led by private consumption with additional support from global trade, as the vaccination campaign accelerates.
France and Spain will see the strongest growth rallies this year of 5.5% and 5.6% respectively, having suffered some of the deepest contractions last year.
They will also continue to be among the highest growth countries also in 2022.
Meanwhile, Ireland’s overall GDP growth is projected to come in at 3.4% in 2021 and is set to reach 3.5% in 2022 on the back of strong private consumption, exports and a recovery in investment.
Consumer price growth is to accelerate closer to the European Central Bank’s goal of below, but close to 2% over the medium term, the Commission said.
It forecast inflation at 1.4% in 2021 and 1.3% in 2022, up from 0.3% in 2020.
“These projections are subject to significant uncertainty and elevated risks, predominately linked to the evolution of the pandemic and the success of vaccination campaigns,” the Commission said.
“There is also a risk of deeper scars in the fabric of the European economy and society inflicted by the protracted crisis, through bankruptcies, long-term unemployment, and higher inequalities,” it said.
UK to take much bigger GDP hit from Brexit than EU
The European Commission also said today that Britain’s exit from the European Union will cost the bloc around 0.5% of economic growth over the next 24 months, but Brexit will be more than four times more painful for the UK.
Britain left the EU at the end of January last year, but kept its full access to the 27-nation bloc’s single market until the end of 2020, when it was replaced by a trade agreement.
“For the EU on average, the exit of the UK from the European Union on Free Trade Agreement terms is estimated to generate an output loss of around 0.5% of GDP by the end of 2022, and some 2.25% point for the UK,” the Commission said.
The EU-UK trade deal covers goods, services, investment, competition, subsidies, tax transparency, air and road transport, energy and sustainability, fisheries, data protection, and social security coordination.
In goods trade, the agreement sets zero tariffs and zero quotas on all goods complying with the appropriate rules of origin – a more trade-friendly option than standard trading terms under World Trade Organisation rules.
“Compared to the ‘WTO assumption’ that was modelled in the autumn forecast, the EU-UK FTA reduces this negative impact for the EU on average by about a third and for the UK by about a quarter,” the Commission said.
But the Commission also said that while there were no tariffs and quotas on goods, there were significant non-tariffs barriers for trade in both goods and services.
“In sum, while the FTA improves the situation as compared to an outcome with no trade agreement between the EU and the UK, it cannot come close to matching the benefits of the trading relations provided by EU membership,” the Commission said.