Brussels scales back expectations for EU’s economic recovery

The EU’s path to recovery from the economic effects of Covid-19 has been set back by the pandemic’s second wave and it will take at least two years for the bloc’s economy to return to pre-pandemic levels, Brussels has warned. 

The recovery from the EU’s deepest downturn in history will be slower than previously expected, according to new forecasts published by the European Commission on Thursday, as the resurgence in the virus has forced most member states to impose fresh restrictions on activity in recent weeks.

The commission expects a contraction of 7.4 per cent in the EU economy this year, unchanged from its previous forecast, but it downgraded its expectation for the recovery in 2021 by 2 percentage points from the 6.1 per cent expansion it forecast in May, to 4.1 per cent.

Paolo Gentiloni, EU economy commissioner, said the economy’s “very strong rebound” this summer had been “interrupted” by the resurgence of the virus as many businesses across Europe were forced to shutter again. 

“Growth will return in 2021 but it will be two years until the European economy comes close to regaining its pre-pandemic level,” said Mr Gentiloni. “Growth will stall in the fourth quarter and pick up in the first part of 2021.” 

The forecasts came as separate data showed that eurozone retail sales fell 2 per cent in September compared with the previous month, the biggest drop since much of the region was under lockdown in April. 

The steeper than expected drop came before the new lockdowns were imposed, suggesting the bloc’s economy was already losing steam before the fresh economic hit.

The biggest falls were in textiles, clothing and footwear and mail order and internet sales, both of which were down more than 5 per cent. The countries with the biggest declines were Belgium, France and Germany.

Meanwhile German industrial orders grew 0.5 per cent in September, a smaller increase than most economists had expected but a sign of the resilience of Europe’s manufacturing sector in comparison with the larger services sector, which has been worse hit by the pandemic’s effects. 

Spain is set to suffer the worst downturn of any member state this year, the commission expects, with output crashing 12.4 per cent. Italy will suffer a 9.9 per cent contraction, and Croatia will also be badly hit at 9.6 per cent. France is expected to suffer a 9.4 per cent fall in output, with Germany at 5.6 per cent and Ireland experiencing the least severe downturn in the EU at 2.3 per cent. 

Brussels’ forecast is based on the assumption that some degree of containment measures will remain in place until 2022, Mr Gentiloni said. 

The commission warned that its projection was subject to “exceptionally large” risks because of the development of the global health crisis. A worsening of the pandemic could lead “to a more severe and longer lasting impact on the economy”, it said.

“There is also a risk that the scars left by the pandemic on the economy — such as bankruptcies, long-term unemployment and supply disruptions — could be deeper and farther reaching,” said the forecast.

Mr Gentiloni urged EU countries to maintain exceptional levels of fiscal support, even though this will significantly increase government debt levels. Italy will reach a public debt-to-GDP ratio of 159 per cent in the next two years, the commission forecasts; on average the eurozone will top 100 per cent until at least 2022.

The EU is still negotiating a final deal on its €750bn recovery fund which is not expected to start disbursing money to stricken economies until later this year. Mr Gentiloni said the forecast did not include the fiscal impact of the fund, which is made up of grants and loans.

The commission expects that once it is up and running, the fund’s stimulus effect could increase EU GDP by up to 2 per cent in the years when it is active.

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