On 6 May, the European Commission presented its Spring 2020 Economic Forecast. The Commission’s economists predict that, in the current quarter, the economic output in the EU is set to be almost 16% lower than in the last quarter of 2019. Although activity is expected to pick up again with the gradual easing of containment measures, the contraction in EU GDP this year is expected to be 7,5%, far deeper than during the financial crisis in 2009, and to rebound by only 6% in 2021.
The record-high uncertainty about jobs, incomes and sales, are set to hold back demand for some time. Private consumption, which for several years has been the backbone of economic growth in Europe, is expected to contract by about 9% in both the EU and the Euro Area this year.
The Euro Area unemployment rate is expected to increase from 7.5% last year, its lowest level in more than a decade, to about 9,5% this year. While it will decrease next year, it is predicted to remain well above its pre-pandemic level in 2021. The aggregate general government deficit is expected to surge from 0.6% of GDP in 2019 to 8,5% of GDP in both the euro area and the EU this year.
All of this is according to the baseline scenario that assumes a single wave of the epidemic and a continued gradual lifting of restrictions. Should the pandemic become more severe or last much longer than expected, this would result in worse outcomes. The document includes a scenario analysis that foresees a drop in GDP by 15,5% in the worst case.
As some of the Member States that are hit the hardest by the virus are also those with the least policy space to respond, divergences across countries could become deepened, distorting the internal market and ultimately threatening the stability of the euro area.