Brussels slashes EU growth forecasts

The European Commission has slashed its growth forecasts for the EU economy this year, warning the bloc will suffer a “significantly” deeper recession than previously anticipated due to the length of the sweeping lockdowns imposed to tackle the coronavirus pandemic.

In its first updated economic projections since May, Brussels said EU gross domestic product would shrink by 8.3 per cent this year — a deeper drop than the 7.4 per cent that 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 lift 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 scale and duration of the pandemic, and of possibly necessary future lockdown measures, remain essentially unknown,” it said.

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.

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. 

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.

To help reduce the divergences, 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.”

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.