The European economy will recover more slowly this year, with the coronavirus keeping a tight grip on the region, with the outlook largely resting on avaccination campaignwho has so far stumbled.
The European Commission lowered its growth forecast for the euro area this year to 3.8% from 4.2%, and said its forecast was “crucially” based on containment measures for the virus starting to be relaxed around the end of the second trimester. They should be largely phased out by the end of the year.
If these assumptions hold true as more citizens are vaccinated, the economy is expected to reach its pre-crisis level in mid-2022, sooner than expected. Still, the recovery will be uneven and Spain and Italy will not cross this watershed by the end of next year, he said.
The euro zone started the year on a weak basis as governments extended lockdown measures to tackle the spread of new variants of the coronavirus. Progress has been hampered by a slow deployment vaccinations compared to the UK and US, and the committee said it expects the EU and eurozone economies to contract this quarter.
Germany, the largest economy, said Wednesday it was extending most of its restrictions until March 7 while allowing schools and nurseries to reopen. The EU plans morevaccine deliveriesin the second quarter and still plans to have 70% of its population vaccinated by the summer.
“The question now is how quickly the vaccine can be deployed and how much the restrictions can be relaxed,” the commission said. EU targets are based on expected deliveries from manufacturers and assume injections are given without delay.
“As more and more people are vaccinated over the next few months, easing containment measures should allow a stronger rebound in spring and summer,” said Paolo Gentiloni, European Commissioner for the Economy.
The deployment of the bloc’s 750 billion euros ($ 909 billion) stimulus fund could provide another boost – most of these were not factored into the latest forecast. Countries are currently developing their national expenditure plans by identifying the projects in which they intend to invest.
Much of the cash will go to Spain and Italy, includingtourism-dependent economieswere ravaged by restrictions on international travel and the closure of hospitality services.
The recovery will be supported by a stronger global outlook and could be further boosted by “a burst of post-crisis optimism, which could trigger pent-up demand and stronger investment plans,” the commission said. This could be explained by historically high household savings, low financing costs and support policies.
A protracted crisis, on the other hand, could leave “deeper scars on the fabric of the European economy” through increased bankruptcies and higher unemployment. It would also lead to a surge in NPLs and could cause strains in the banking sector.
Inflation is expected to remain low this year and next, with peaks – as seen in January – due to temporary effects such as the end of tax breaks in the event of a pandemic.
Price growth is expected to average 1.3% in 2022, well below the European Central Bank’s target. The ECB supports the economy through asset purchases and cheap loans to banks and is committed to keeping borrowing costs low throughout the duration of the crisis, while urging governments to ensure not to withdraw budgetary aid too soon.
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