COVID-19 resurgence sets back Europe’s economic recovery hopes

November 5, 2020, 10:28 AM UTC

Europe’s economic outlook is looking less grim this year than previously feared—but its planned recovery from next year could be even weaker than previously hoped, thanks to the resurgence in COVID-19 case numbers across the continent.

That’s according to the European Union’s executive body, the European Commission, which on Thursday issued its fall economic forecast and pleaded for the European Parliament and Council—the EU’s two big political beasts—to wrap up negotiations around its $860 billion coronavirus recovery fund.

In the summer, the Commission forecast an overall 8.3% contraction in EU GDP for 2020—worse than the 7.4% shrinkage forecast back in the spring, in the early days of the pandemic—and growth of 5.8% next year.

Now, the predicted contraction for 2020 is back to 7.4%. Meanwhile, the forecast for 2021’s growth has pulled back to just 4.1%, followed by 3% in 2022. That means the recovery wouldn’t be complete even two years from now.

‘Dashing our hopes’

“This forecast comes as a second wave of the pandemic is unleashing yet more uncertainty and dashing our hopes for a quick rebound,” said Valdis Dombrovskis, the Commission’s economy chief, in a statement.

Economy Commissioner Paolo Gentiloni added that “it will be two years until the European economy comes close to regaining its pre-pandemic level.”

“We agreed [on] a landmark recovery package…to provide massive support to worst-hit regions and sectors,” said Dombrovskis. “I now call again on the European Parliament and Council to wrap up negotiations quickly for money to start flowing in 2021 so that we can invest, reform, and rebuild together.”

There is still a risk that pandemic-linked bankruptcies, supply disruptions, and long-term unemployment could “be deeper and farther reaching,” the Commission warned, as it pointed out that many countries will be phasing out emergency support measures in 2021.

Uneven recovery

The other big factor worth considering is that Europe’s contraction and recovery will probably be highly uneven. For example, the Commission expects German real GDP to fall by 5.6% this year before growing by 3.5% in 2021 and 2.6% in 2022. But Spain is looking at a 12.4% drop this year, followed by 5.4% and 4.8% growth in 2021 and 2022, respectively.

“The economic impact of the pandemic has differed widely across the EU, and the same is true of recovery prospects,” the Commission said. “This reflects the spread of the virus, the stringency of public health measures taken to contain it, the sectoral composition of national economies, and the strength of national policy responses.”

By way of global comparison, the Commission set out likely contraction and recovery stats for other major countries. It reckons the U.S., for example, is looking at a 4.6% contraction this year, followed by 3.7% growth in 2021 and 2.5% growth in 2022. The U.K. is not looking good—shrinkage of 10.3% in 2020, followed by growth of just 3.3% and 2.1% in 2021 and 2022, respectively.

The Commission’s EU and U.K. figures assume that there will be no post-Brexit trade deal between the two sides, implying “a much less beneficial trade relationship, with economic costs for the U.K. and, to a lesser extent, the EU.”