EU cuts economic forecasts for the region

EU cuts economic forecasts for the region

Waiters work at the terrace of a cafe in Paris, on June 15, 2020, one day after French president announced the reopening of dining rooms of Parisian cafes and restaurants.

PHILIPPE LOPEZ

The European Commission, the EU’s executive arm, slashed its 2020 and 2021 projections on Tuesday as the coronavirus pandemic takes its toll on the 27 member states.

The Brussels-based institution expects the 27-member region to contract by 8.3% this year, followed by a rebound of 5.8% in 2021. In May, the Commission estimated a 7.4% contraction for total GDP across the region this year, with a rebound of 6.1% in 2021.

“The economic impact of the lockdown is more severe than we initially expected. We continue to navigate in stormy waters and face many risks, including another major wave of infections,” Valdis Dombrovskis, vice-president of the European Commission, said in a statement Tuesday.

The outlook has worsened over the last two months irrespective of the steps that most European countries have taken to reopen their economies.

The Commission said Tuesday that economic activity is expected to pick up in the second half of the year, though it will remain “incomplete” and “uneven” on the back of social-distancing measures. 

In recent days, concerns have also emerged about regional outbreaks. The Spanish authorities have re-imposed restrictions in the region of Galicia, and Portugal reinstated some measures in Lisbon after a growing number of infections.

Italy to contract the most

The latest forecasts show that the Italian economy will contract the most among all EU members, by 11.2% this year.

The country started easing its strict lockdown measures in May but expectations are that tourism and other consumer-related services will take time to recover. This is expected to limit any economic rebound for the remainder of 2020. Nonetheless, the Commission forecast a rebound of 6.1% in Italian GDP for 2021.

France and Spain are also expected to face significant economic contractions this year. Brussels now projects a drop of 10.6% and 10.9%, respectively. In comparison, back in May, the European Commission estimated falls of 8.2% and 9.4% in GDP for the respective economies.

The International Monetary Fund said in June that the euro area, the 19-member region that shares the euro, would contract by more than 10% in 2020. France, Italy and Spain could contract by about 12% this year, according to the IMF. 

Germany, meanwhile, is the only country in the euro area that has seen its growth expectations revised upward. According to the Commission, the country will now contract by 6.3% in 2020, instead of 6.5%. This is due to further stimulus measures announced by the German government in June.

“Since spring, the German government took further sizable measures to stabilize the economy in the wake of the outbreak of the pandemic. The initial response in March included vast liquidity support for companies in the form of public guarantees for loans, tax deferrals, grants for small businesses and extended and simplified access to short-time work schemes … On top, in early June the government announced a fiscal stimulus package of about 130 billion euros,” the Commission said Tuesday.

Recovery fund still in the making

To boost any economic recovery, the EU is working on an unprecedented fiscal stimulus plan. However, differences of opinion between the 27 heads of state mean a compromise is still to be found. They will be gathering in Brussels next week to discuss the proposed 750 billion euro rescue fund.

“The policy response across Europe has helped to cushion the blow for our citizens, yet this remains a story of increasing divergence, inequality and insecurity. This is why it is so important to reach a swift agreement on the recovery plan proposed by the Commission, to inject both new confidence and new financing into our economies at this critical time,” Paolo Gentiloni, the EU’s commissioner for economic affairs, said Tuesday in a statement.

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