Covid-19: EU summer forecast predicts deeper recession, recovery ‘gaining traction’

Written by on July 7, 2020 in Business - Comments Off on Covid-19: EU summer forecast predicts deeper recession, recovery ‘gaining traction’

The European Commission lowered further its economic growth expectations for 2020 in the summer forecast released on July 7, but said early data suggested “the worst may have passed” and that recovery was expected to gain traction in the second half of the year.

In this latest report, the Commission said it expected the euro zone economy to shrink by 8.7 per cent this year and the EU economy as a whole by 8.3 per cent, compared to 7.7 per cent and 7.4 per cent, respectively, in the spring forecast.

The projection for the economic rebound in 2021 has also been reduced compared to the spring forecast – from 6.3 per cent to 6.1 per cent for the euro area and from 6.1 per cent to 5.8 per cent for the EU economy as a whole.

In the case of Bulgaria, the Commission’s forecast was for a slightly smaller economic contraction this year – 7.1 per cent compared to 7.2 per cent in the spring forecast – but it also lowered its expectations regarding the economic rebound in 2021, from six per cent to 5.3 per cent.

“Domestic demand declined on the back of lower private consumption and shrinking investment. The deterioration in business sentiment and short-term indicators, which began in April, point to a sharp drop in economic activity in the second quarter,” the report said.

The European Commission projected a quarterly decline of 11.7 per cent for Bulgaria’s economy in Q2, compared to a drop of 13.1 per cent for the EU economy as a whole. Bulgaria is due to report Q2 gross domestic product data on September 4, but initial figures are expected in a flash estimate on August 14.

With regards to inflation, the Commission estimated one per cent in 2020 and 2021, owing in part to the expected contraction of seasonal demand for tourist services and the temporary reduction of value-added tax rates for the sector.

“The economic impact of the lockdown is more severe than we initially expected. We continue to navigate in stormy waters and face many risks, including another major wave of infections,” said Valdis Dombrovskis, European economy commissioner.

“If anything, this forecast is a powerful illustration of why we need a deal on our ambitious recovery package, Next Generation EU, to help the economy. Looking forward to this year and next, we can expect a rebound but we will need to be vigilant about the differing pace of the recovery,” he said in a statement.

The report noted that the risks to the forecast were “exceptionally high and mainly to the downside”, especially given that the scale and duration of the pandemic, as well as future lockdown measures that may be necessary, were “essentially unknown.”

Those risks included a second wave of infections, a lasting impact on the labour market and “a danger that member states may fail to sufficiently coordinate national policy responses.” A “hard Brexit” scenario with no agreement on the future trading relationship with the UK could also result in lower growth, the Commission said.

The main possible upside to the scenario was an early availability of a vaccine against the novel coronavirus, but also that the Next Generation EU package, not included in the current baseline because it is yet to be adopted, “could give a sizable impulse to the EU economy, particularly in 2021,” the report said.

(Photo: Pedro Moura Pinheiro/flickr.com)

For the rest of The Sofia Globe’s continuing coverage of the Covid-19 situation in Bulgaria, please click here.

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