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What awaits EU economy in 2021?

What awaits EU economy in 2021?

Information is not investment advice

No doubt that the pandemic-ridden EU economy will be recovering this year but it will happen at a slower pace than expected earlier. Indeed, despite the rollout of the first Covid-19 vaccines, the economic outlook for 2021 remains gloomy. According to the OECD, the European economy fell by 7.2% in 2020—its largest dip since World War II. Notably, it was worse than the turmoil the EU suffered in 2008-2009—the worst years of the Eurozone crisis. That’s because of months of lockdowns and social restrictions imposed by governments to contain the Covid-19 spread.

IMF forecast: bad news for EU

As you can see in the picture below, the IMF predicts Europe to grow by 4.2% in 2021 with the assumption that the largest part of the growth will come in the second half of 2021 as more people will get vaccines against Covid-19, travel constraints and social-distancing curbs will soften. 

In fact, the IMF lowered its projections for the Euro Area from 5.2% to 4.2% as the EU heads for a double-dip recession. This is all because of rising infection cases, new virus variants, longer lockdowns, and, more importantly, vaccine delays. The disputes between the EU and AstraZeneca haven’t still been resolved. 

At the same time, the IMF made upward revisions for the US (5.1% vs 3.1% in October 2020) and Japan (3.1% vs 2.3%). 

According to HSBC, “China is already back above pre-pandemic levels and, on our projections, the US will be by the end of 2021. For the Eurozone, it’ll be the end of 2022.” 

ECB President Christine Lagarde has dark projections for the first quarter of 2021. She claimed that the contraction from the fourth quarter of 2020 will “travel” into the first quarter of 2021. “The short-term risk is tilted to the downside. Uncertainty is in the air.”

imf.PNG

Germany: “long and rocky road to go”

The German government claimed on Wednesday that it revised down Germany’s growth to 3% from 4.4% as longer virus shutdowns slow the pandemic recovery. If Germany, the leading EU economy, downgrades its forecast, it seems that there is nothing to talk about others. 

Germany has done better so far than its peers, in part due to massive government support measures. Anyway, there are concerns that new, more contagious virus strains may trigger a fresh surge in infections, and health officials speak out against lifting curbs too early. "The German economy has a long and rocky road to go before it can return to growth," said DIW economist. 

What EU authorities think?

Since the article is getting too long, let us finish it with short quotes from policymakers and economists of some European countries. 

French Finance Minister Bruno Le Maire: “We have to divide the year 2021 into two parts. We have everything that is required to have a very strong, very quick rebound as soon as the pandemic is over.”

Dutch central bank Governor Klaas Knot: “There is optimism, but then of course we will be stuck with the legacy of the corona pandemic. The output will be below potential for some time to come.”

Italian professor of economic statistics: “We don't know how stable the political situation will be going forward, or how strong companies will be when they emerge from the pandemic once it is over.” Economists say forecasting Italy's economic performance in the near- or medium-term is a guessing game. Indeed, Italy’s political crisis added more risks to the economic rebound. 

ECB President Christine Lagarde told that the EU economic recovery has been “delayed, not derailed”. 

 

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