The EU economy will experience a deep recession this year due to the coronavirus pandemic, despite the swift and comprehensive policy response at both EU and national levels.
Because the lifting of lockdown measures is proceeding at a more
gradual pace than assumed in our Spring Forecast, the impact on economic
activity in 2020 will be more significant than anticipated.
The Summer 2020 Economic Forecast
projects that the euro area economy will contract by 8.7% in 2020 and
grow by 6.1% in 2021. The EU economy is forecast to contract by 8.3% in
2020 and grow by 5.8% in 2021. The contraction in 2020 is, therefore,
projected to be significantly greater than the 7.7% projected for the
euro area and 7.4% for the EU as a whole in the Spring Forecast. Growth
in 2021 will also be slightly less robust than projected in the spring.
Valdis Dombrovskis, Executive Vice-President for an Economy that works for People, said: "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. If anything, this forecast is a
powerful illustration of why we need a deal on our ambitious recovery
package, NextGenerationEU, to help the economy. 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. We need to continue protecting
workers and companies and coordinate our policies closely at EU level
to ensure we emerge stronger and united.”
Paolo Gentiloni, Commissioner for the Economy, said: “Coronavirus
has now claimed the lives of more than half a million people worldwide,
a number still rising by the day - in some parts of the world at an
alarming rate. And this forecast shows the devastating economic effects
of that pandemic. 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.”
Recovery expected to gain traction in second half of 2020
The impact of the pandemic on economic activity was already
considerable in the first quarter of 2020, even though most Member
States only began introducing lockdown measures in mid-March. With a far
longer period of disruption and lockdown taking place in the second
quarter of 2020, economic output is expected to have contracted
significantly more than in the first quarter.
However, early data for May and June suggest that the worst may have
passed. The recovery is expected to gain traction in the second half of
the year, albeit remaining incomplete and uneven across Member States.
The shock to the EU economy is symmetric in that the pandemic has hit
all Member States. However, both the drop in output in 2020 and the
strength of the rebound in 2021 are set to differ markedly. The
differences in the scale of the impact of the pandemic and the strength
of recoveries across Member States are now forecast to be still more
pronounced than expected in the Spring Forecast.
An unchanged outlook for inflation
The overall outlook for inflation has changed little since the Spring
Forecast, although there have been significant changes to the
underlying forces driving prices.
While oil and food prices have risen more than expected, their effect
is expected to be balanced by the weaker economic outlook and the
effect of VAT reductions and other measures taken in some Member States.
Inflation in the euro area, as measured by the Harmonised Index of
Consumer Prices (HICP), is now forecast at 0.3% in 2020 and 1.1% in
2021. For the EU, inflation is forecast at 0.6% in 2020 and 1.3% in
Exceptionally high risks
The risks to the forecast are exceptionally high and mainly to the downside.
The scale and duration of the pandemic, and of possibly necessary
future lockdown measures, remain essentially unknown. The forecast
assumes that lockdown measures will continue to ease and there will not
be a ‘second wave' of infections. There are considerable risks that the
labour market could suffer more long-term scars than expected and that
liquidity difficulties could turn into solvency problems for many
companies. There are risks to the stability of financial markets and a
danger that Member States may fail to sufficiently coordinate national
policy responses. A failure to secure an agreement on the future trading
relationship between the UK and the EU could also result in lower
growth, particularly for the UK. More broadly, protectionist policies
and an excessive turning away from global production chains could also
negatively affect trade and the global economy.
There are also upside risks, such as an early availability of a vaccine against the coronavirus.
The Commission's proposal for a recovery plan, centred on a new instrument, NextGenerationEU,
is not factored into this forecast since it has yet to be agreed. An
agreement on the Commission's proposal is therefore also considered an
More generally, a swifter-than-expected rebound cannot be excluded,
particularly if the epidemiological situation allows a faster lifting of
remaining restrictions than assumed.
For the UK, a purely technical assumption
Given that the future relations between the EU and the UK are not yet
clear, projections for 2021 are based on a purely technical assumption
of status quo in terms of their trading relations. This is for
forecasting purposes only and reflects no anticipation nor prediction as
regards the outcome of the negotiations between the EU and the UK on
their future relationship.
© European Commission
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