Our Economics department keeps track of all the important developments in the financial markets in both advanced economies and emerging markets. We are publishing periodic briefings with analytical assessments of the current macroeconomic and financial market situation. Find out more about the EIB Group's response to the crisis
EU economy – The European Commission expects the EU economy to shrink by 7.4% in 2020 and grow by around 6.1% in 2021, highlighting that risks to the baseline scenario are tilted to the downside. The magnitude of the projected recession varies significantly across EU countries (from -4.3% in Poland to -9.7% in Greece), and so does the strength of the rebound in 2021. Unemployment and public debt are also expected to increase substantially. Unemployment in the European Union is forecast to rise from 6.7% in 2019 to 9% in 2020 and then fall to around 8% in 2021. Public debt – on a declining trend since 2014 – is also set to rise, from 79.4% of GDP on average in 2019 to around 95% in 2020. It is expected at 196.4% of GDP in Greece this year, 158.9% in Italy, 131.6% in Portugal, followed by France (116.5%), Cyprus (115.7%), Spain (115.6%) and Belgium (113.8%).
This severe recession forecast is backed by data releases of retail trade, industrial production, electricity and mobility. The volume of both retail trade and industrial production in the European Union dropped by an unprecedented 10.4% in March compared to February, by far the largest contraction since the series began. On the positive side, high-frequency indicators, such as electricity usage and mobility, are improving in recent weeks but remain depressed overall.
Exit strategies across the European Union – Member states have gradually started to ease restrictions on economic activity and public life as the spread of the pandemic eases, and the economic costs of the lockdown rise. While it is still too early to compare the economic costs of different confinement strategies, it is clear that the exit is going to take months rather than weeks. Consumption and investment are unlikely to revert to pre-COVID patterns in the near term, also due to enormous uncertainty regarding the evolution of the pandemic in the coming months. For this reason, strategies to boost economic recovery in the medium-term remain crucial.
The economic outlook for this year remains gloomy and subject to severe downside risks. The spring 2020 economic forecast by the European Commission projects that the EU economy will contract by 7.4% in 2020 and grow by around 6.1% in 2021. Growth projections have been revised down by around 9 percentage points compared to the autumn 2019 forecast. While, according to the Commission, the COVID-19 shock is symmetric, both the drop in output in 2020 (from -4.3% in Poland to -9.7% in Greece – Figure 1) and the strength of the rebound in 2021 are set to differ markedly across member states. This is also the case with unemployment, which is forecast to rise from 6.7% in 2019 to 9% on average in 2020 before falling to around 8% in 2021. Unemployment is expected to rise to almost 20% in Greece, and only marginally in Germany (Figure 1). IMF announced that it would release a downward revision of its World Economic Outlook in June, as the lack of immediate medical solutions may generate more adverse scenarios for some countries. “With the crisis still spreading, the outlook is worse than our already pessimistic projection”, said Kristalina Georgieva, IMF managing director. The IMF predicts a 3% contraction in global output.
EU countries have started to ease restrictions on economic activity and public life. By mid-March, most member states had entered a “confinement stage”: measures were put in place to limit the spread of the Coronavirus, including closures of schools/daycare services, restaurants and non-essential shops, restrictions on other economic activities, public gatherings and mobility within and across countries. By mid-May, most EU countries had managed to flatten the curve and began easing the measures.
Confinement strategies have varied in intensity, but all member states are gradually relaxing them. Italy has seen the strictest and lengthiest lockdown, starting already in early March and including severe limits on mobility, contacts and economic activity. Most other member states had followed suit and imposed containment measures by mid-March, albeit in varying degrees of severity. In terms of strictness, France, Austria, Denmark and several Central and Eastern European member states (Poland, Romania, Hungary, Bulgaria and Croatia), relied on a more rigid approach. On the other end of the spectrum are Estonia, Latvia and Sweden, with relatively lighter measures and relying more on voluntary restrictions. Variations in confinement strategies reflect both the actual occurrence of the virus as well as capacities to deal with a potential worsening of the outbreak. While measures are now being lifted, the process is going to be gradual, with some variation persisting across EU countries (Figure 5).
The declining new infection rates and the gradual reopening of European economies provide some signs that the worst may be behind us. Exit strategies and the pace at which restrictions are lifted should take into account the pandemic outlook. At this time, it is clear that economic activity will remain substantially depressed in the coming months. For economies to return to pre-crisis economic activity levels, providing support to vulnerable groups – whether employees, enterprises or countries - is essential.
Focusing on the short term will not be enough. Coordinated action at the European level, such as jointly responding to the health challenges facing Europe, restoring Schengen and finalising the agreed EU-wide policy measures, can improve medium and long-term prospects. Reviving and deepening the single market and tackling climate issues will also be crucial to guarantee a level playing field and bring about prosperity in Europe.