Brussels Makes U turn on its EU growth forecasts

European flags at half-mast in front of the Berlaymont building
The European Commission has slashed its growth forecasts for the EU economy this year, warning that longer than anticipated coronavirus lockdowns in many countries would cause a “significantly” deeper recession than previously predicted. In its first updated economic projections since early May, Brussels said EU gross domestic product would shrink 8.3 per cent this year — a steeper drop than the 7.4 per cent it previously forecast and the worst on record.

The commission also lowered its forecast for a potential economic rebound in 2021, estimating growth of 5.8 per cent, down from a previous forecast of 6.1 per cent. The commission said its calculations had worsened as the lifting of containment measures had been more “gradual” than expected at the start of the pandemic. While large economies such as Germany were among the first to ease restrictions on economic activity in late May, recurrent outbreaks of Covid-19 have led to the reintroduction of localised lockdowns in some member states. “The economic impact of the lockdown is more severe than we initially expected,” said Valdis Dombrovskis, the EU commission’s executive vice-president in charge of economic policy. “Looking forward to this year and next, we can expect a rebound but we will need to be vigilant about the differing pace of the recovery.” The commission warned that risks to the forecast were “exceptionally high and mainly to the downside”; it assumed that “no major second wave of infections will trigger new generalised restrictions”.

The possible failure of the EU and UK’s talks over their future relationship also “remains an important risk” to the outlook, the commission said. Brussels also warned of the risk of an uneven recovery across the continent as some economies are in line to reach their pre-crisis GDP levels much faster than others, as it slashed its growth forecasts for Italy, Spain and France while raising the one for Germany. Of all the bloc’s 27 member states, Italy will be the worst-hit this year, registering an estimated GDP contraction of 11.2 per cent, followed by Spain at 10.9 per cent, Croatia at 10.8 per cent and France at 10.6 per cent. Poland is in line to have the smallest recession with a downturn of 4.6 per cent in 2020.  The commission expects Germany, Europe’s largest economy, to suffer a recession of 6.3 per cent this year, before bouncing back to growth of 5.3 per cent in 2021. France is in line to experience the strongest rebound of any EU country with growth of 7.6 per cent next year, according to the forecasts.

The French central bank on Monday slightly revised up its forecast for the second-quarter decline in its economy and said it could also raise its forecast for a 10 per cent annual contraction in GDP if data and containment of the pandemic continued to improve. The risk of a two-speed recovery in the bloc was underlined by separate data published on Tuesday. Germany industrial production rebounded by a record 7.8 per cent between April and May, although it undershot many economists’ forecasts. German factory output was still nearly 20 per cent below its level in May last year, but in Spain it was almost 25 per cent below last year’s level, suggesting a slower recovery. Meanwhile, Italian retail sales shot up by a record 24.3 per cent in May, as shoppers reopened their wallets after lockdown was lifted. But Italian consumer spending remained 10 per cent below the levels of last year, although in several northern European countries — including Germany and the Netherlands — it rose above pre-pandemic levels in May. To help reduce the divergence between countries, the commission has presented a €750bn “Next Generation EU” spending plan to give aid to the worst-hit economies, including hundreds of billions of euros in grants that would not need to be repaid. EU27 leaders are due to hold talks on the plan at a summit next Friday. The potential impact of the proposals is not factored into the forecasts, the commission said. “This remains a story of increasing divergence, inequality and insecurity,” said Paolo Gentiloni, EU economy commissioner. “This is why it is so important to reach a swift agreement on the recovery plan. We are slowly moving from a state of hibernation to a new normal.” Economists at Morgan Stanley said the cut in the commission’s economic forecasts increased pressure on political leaders to agree on the recovery fund, which they said would be instrumental in “significantly boosting the prospects for a synchronised recovery”. Inflation in the eurozone will remained subdued at an average of 0.3 per cent in 2020, the commission said — up slightly from an earlier projection of 0.2 per cent but still far below the European Central Bank’s target of close to, but below, 2 per cent.