Europe economy to return to pre-COVID levels faster than thought, with inflation clouds on the horizon

July 7, 2021, 9:44 AM UTC

Europe’s economy should return to pre-pandemic levels in the final three months of this year, one quarter earlier than predicted, according to the European Commission’s summer forecast.   

Thanks to an increase in vaccine supply that has seen the European Union all but catch up to the U.S. in its inoculation rate, Brussels expects a rebound in activity strong enough to shrug off shortages in raw materials.

In a statement, European Commission executive vice president Valdis Dombrovskis praised the robust outlook in which “all the right pieces falling into place” thanks to progress in the fight against the Coronavirus.

“Our economies have been able to reopen faster than expected thanks to an effective containment strategy and progress with vaccinations,” he said, adding the €723.8 billion ($854 billion) Recovery and Resilience Facility would support growth going forward.

Output in both the euro area and the broader EU is forecast to expand at a rate of 4.8% this year, a revision of 50 basis points and 60 bps, respectively, over the spring economic forecast. The Commission also hiked its estimates for next year’s increase in gross domestic product by 10 bps to 4.5% in both cases. 

Evidence of a revival in intra-EU tourism provided further optimism, which should benefit from the new EU Digital COVID Certificate.

Rising costs for manufacturers means inflation will also come in hotter than expected, putting pressure on the European Central Bank. Hawks like Bundesbank President Jens Weidmann have called for an end to emergency asset purchases once the economy has fully recovered to 2019 levels.

Consumer price gains in the euro area are now expected to average 1.9% this year instead of the 1.7% previously seen. The Commission also marginally increased its forecast for 2022 by 10 bps to 1.4%.  

“We will have to keep a close eye on rising inflation, which is due not least to stronger domestic and foreign demand,” Dombrovskis said. 

Uncertainty and risks surrounding the growth outlook are high but remain overall balanced, according to the Commission. It added that consumer price hikes may turn out higher than forecast if supply constraints are more persistent and upward pressures are passed on to customers more strongly. 

The next economic forecast is scheduled to be published in November. 

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