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Euro zone 2021 rebound muted by second COVID wave - Commission

Jan Strupczewski
·2-min read
European Union flags flutter outside the European Commission headquarters in Brussels
European Union flags flutter outside the European Commission headquarters in Brussels

By Jan Strupczewski

BRUSSELS (Reuters) - The euro zone will rebound in 2021 from its unprecedented coronavirus recession this year, but the recovery will be smaller than previously expected because of the second wave of infections, the European Commission forecast on Thursday.

In its regular economic forecasts for the 27-nation European Union and the 19 countries sharing the euro currency, the EU executive arm cautioned however, that uncertainty surrounding the predictions was exceptionally high.

It cut the euro zone growth forecast for next year to 4.2% from 6.1% predicted in July and saw 3.0% growth in 2022 after an unprecedented 7.8% recession this year.

The Commission said its forecast assumed COVID-related restrictions would remain, to some degree, until 2022, but that they would be gradually ease next year and that their economic impact would diminish over time.

The forecast also makes a technical assumption that there will be no trade deal between the EU and Britain in place on Jan1, 2021 when the current transition period ends, and that trade will be based on basic World Trade Organization terms.

SECOND WAVE IN Q4

The Commission expects the euro zone economy will contract 0.1% in the last quarter against the previous three months due to new restrictions to stem the second wave of the pandemic.

Ireland, France and Belgium are to be the hardest hit by the second wave of COVID-19, with Ireland's economy contracting 1.1% quarter-on-quarter, France shrinking 1.0% and Belgium 0.7%.

The biggest economy Germany, however, is to weather the storm quite well, registering quarter on quarter expansion of 0.6%, in the last three months, the Commission said.

Euro zone inflation, which the European Central Bank wants to keep below, but close to 2% over the medium term, is to stay at 0.3% this year, and rise to 1.1% in 2021 and 1.3% in 2022.

Thanks to government short-time work schemes introduced at the start of the pandemic, unemployment in the euro zone is to rise to only 8.3% this year despite the deep recession, from 7.5% in 2019. It is to increase to 9.3% in 2021 and then fall again to 8.9% of the workforce in 2022.

But the pandemic will take a huge toll on public finances, the Commission forecast. The aggregated euro zone budget deficit will surge to 8.8% of gross domestic product this year from a 0.6% surplus in 2019 before shrinking to 6.4% next year and 4.7% in 2022.

That will boost euro zone debt to 101.7% of gross domestic product this year from 85.9% last year. The debt will keep rising to 102.3% in 2021 and 102.6% in 2022.

(Reporting by Jan Strupczewski)