COVID19, Vulcan Insight

European Commission updates its Spring 2020 economic forecast

6 May 2020

According to Paolo Gentiloni, European Commissioner for the Economy, the COVID-19 crisis has been a significant shock on the European and global economy and has forced all EU Member States into a severe recession this year, at the least. The full updated Spring 2020 Economic Forecast can be found here.

It is expected that eurozone GDP will contract 7.75% in 2020, while recovering 6.25% in 2021. Overall, EU GDP is forecast to contract 7.5% in 2020 before recovering 6% in 2021.

While the impact has been symmetric, there are considerable spreads in the drop in output and expected recovery between different Member States. Specifically, Ireland’s GDP is expected to contract by 7.9% in 2020, while the UK is forecast to be the fifth most affected with its GDP expected to contract by 8.3% this year.

The Commission also expects Germany, Poland, Slovakia, Czechia to fully recover by 2021, while Italy, Spain, Netherlands are forecast to remain 2% below 2019 level.

With regard to unemployment, the eurozone rate is forecast to rise to 9.6% this year, before slightly recovering in 2021. Again, however, there are expected to be significant Member State differences with Greece expected to have 19.9% and Germany at 4%. Ireland’s unemployment rate is to rise to 7.4% in 2020, with the UK expected to record a 6.7% unemployment rate.

With regard to public finances, the aggregate general government deficit is expected to surge from 0.6% of GDP in 2019 to 8.5% of GDP in both the euro area and the EU this year. This sharp increase largely reflects the work of automatic stabilisers and sizeable discretionary fiscal measures to combat the impact of the virus on national economies. In 2021, the headline deficit is forecast to decrease to 3.5% of GDP in both areas due to the expected rebound in economic activity and the unwinding of most of the temporary measures.

The euro area’s aggregate debt-to-GDP ratio is projected to reach a new peak of close to 103% in 2020 before decreasing by about 4 percentage points in 2021 based on a no-policy-change assumption.