Econostrum | Economic News in the Mediterranean

EU economy moves from recovery to expansion

Written by Eric Apim on Tuesday, November 16th 2021 à 16:40 | Read 289 times

Beware of bottlenecks in supply chains (photo: ArcelorMittal)
Beware of bottlenecks in supply chains (photo: ArcelorMittal)
EU. As vaccination campaigns progress and restrictions are gradually lifted, "the EU economy is recovering faster than expected from the pandemic-induced recession", says the European Commission in its latest autumn 2021 forecast. It is expected to record a GDP growth rate of 5% in 2021, 4.3% in 2022 and 2.5% in 2023.

The recovery began in the spring of 2021 and continued throughout the following summer. GDP growth reached almost 14% in annual terms in the second quarter of 2021, setting a record (compared to the negative growth in the same period in 2020 with the arrival of the first wave of Covid-19), while the third quarter of 2021 saw output return to pre-pandemic levels. "The EU economy is moving from a recovery phase to an expansion phase," comments Paolo Gentiloni, EU Commissioner for Economic Affairs. "Domestic demand is expected to remain a driver of this expansion. The improved labour market situation and the expected decline in savings should contribute to a sustained pace of growth in consumer spending. The implementation of the Recovery and Resilience Facility is also beginning to provide a significant boost to private and public investment," the study says.

The forecasts for the euro area follow those of the European Union for the years 2021 and 2022. Only those for the year 2023 are slightly lower, at 2.4% growth.

1.5 million new jobs created

The European Commission warns that "pockets of labour shortages are emerging, particularly in sectors where activity is strongest". If prolonged, they could "dampen activity and fuel inflation by creating wage pressures".  
While the EU added around 1.5 million jobs in the second quarter of 2021, total employment was still 1% below its pre-pandemic level. Unemployment nevertheless continued to fall in the following months, reaching a rate of 6.8% in August 2021, a ratio only slightly higher than at the end of 2019.
Employment is expected to grow by 0.8% in 2021, 1% in 2022 and 0.6% in 2025. The unemployment rate would thus fall from 7.1% in 2021 to 6.7% in 2022 and 6.5% in 2023 in the European Union and 7.9%, 7.5% and 7.3% respectively in the euro area.

An improving trend in the aggregate EU deficit suggests a figure of 6.6% of GDP in 2021 (compared to 6.9% in 2020). Only after the fiscal stimulus measures have been digested will it fall to 3.6% in 2022 and 2.3% in 2023. "After reaching around 92% in the EU (99% in the euro area), the aggregate debt ratio is expected to stabilise overall this year and to start declining in 2022, reaching 89% of GDP in 2023 (97% in the euro area)," the study reveals.

​Boosting economic potential

However, everything will depend on the evolution of the pandemic and "the pace at which supply adapts to the rapid recovery of demand after the economy reopens", says the European Commission. "We should not be complacent: there is still uncertainty about the virus and certain risks need to be addressed," warns Valdis Dombrovskis. To keep the economy on track, we must now focus on implementing the investments and reforms planned under the Recovery and Resilience Facility to boost our economic potential," says the European Commission's executive vice-president for a people-centred economy.

Bottlenecks in supply chains are beginning to disrupt the development of the manufacturing sector in the EU. Consumption and investment are also expected to suffer from higher energy prices, particularly natural gas, which is at a higher rate than before the pandemic. The next winter economic forecast, due in February 2022, will refine the GDP and inflation projections.

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