The European Union (EU) economy will expand by 4.2% in 2021 and by 4.4% in 2022, according to the Spring 2021 Economic Forecast, which noted that the euro area economy is forecast to grow by 4.3% this year and 4.4% next year.

This represents a significant upgrade of the growth outlook compared to the Winter 2021 Economic Forecast which the Commission presented in February. Growth rates will continue to vary across the EU, but all Member States should see their economies return to pre-crisis levels by the end of 2022.

The coronavirus pandemic represents a shock of historic proportions for Europe's economies. The EU economy contracted by 6.1% and the euro area economy by 6.6% in 2020. Although in general, businesses and consumers have adapted to cope better with containment measures, some sectors - such as tourism and in-person services - continue to suffer.

The rebound in Europe's economy that began last summer stalled in the fourth quarter of 2020 and in the first quarter of 2021, as fresh public health measures were introduced to contain the rise in the number of Covid-19 cases. However, the EU and euro area economies are expected to rebound strongly as vaccination rates increase and restrictions are eased. This growth will be driven by private consumption, investment, and a rising demand for EU exports from a strengthening global economy.

Public investment, as a proportion of GDP, is set to reach its highest level in more than a decade in 2022. This will be driven by the Recovery and Resilience Facility (RRF), the key instrument at the heart of NextGenerationEU.

Labour markets improve slowly

Labour market conditions are slowly improving after the initial impact of the pandemic. Employment rose in the second half of 2020 and unemployment rates have decreased from their peaks in most Member States.

Public support schemes, including those supported by the EU through the SURE instrument, have prevented unemployment rates from rising dramatically. However, labour markets will need time to fully recover as there is scope for working hours to increase before companies need to hire more workers.

The unemployment rate in the EU is forecast at 7.6% in 2021 and 7% in 2022. In the euro area, the unemployment rate is forecast at 8.4% in 2021 and 7.8% in 2022. These rates remain higher than pre-crisis levels.   

Inflation

Inflation rose sharply early this year, due to the rise in energy prices and a number of temporary, technical factors, such as the annual adjustment to the weightings given to goods and services in the consumption basket used to calculate inflation. The reversal of a VAT cut and the introduction of a carbon tax in Germany also had a noticeable effect.

Inflation will vary significantly over the course of this year as the assumed energy prices and changes in the VAT rates generate noticeable fluctuations in the level of prices compared to the same period last year.

Inflation in the EU is now forecast at 1.9% in 2021 and 1.5% in 2022. For the euro area, inflation is forecast at 1.7% in 2021 and 1.3% in 2022. – TradeArabia News Service