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Among other crises, the past two years were undoubtedly the most difficult for the European Union’s financial and economic system and its member states. The Covid-19 pandemic isn’t going away, so it’ll be interesting to see how the EU combats it in the following year. This article includes brief analyses and perspectives on the evolution of the European economy in 2022 from the European Commission and independent economic companies.

The European Commission believes that EU economy is recovering faster than projected from the pandemic recession. As vaccination campaigns progressed and limitations were gradually relaxed, growth began in the spring and continued unabated throughout the summer, fuelled by the economy’s reopening. Despite rising headwinds, the EU economy is expected to continue to develop over the forecast period, with growth rates of 5%, 4.3 percent, and 2.5 percent in 2021, 2022, and 2023, respectively. In 2021 and 2022, the euro area’s growth rates are expected to be the same as the EU’s, and 2.4 percent in 2023. This prediction is largely dependent on two factors: the progression of the COVID-19 epidemic and the rate at which supply adjusts to the sudden turnaround in demand following the economy’s reopening.

Improved growth projections suggest that deficits in 2021 will be lower than predicted in the spring. On the back of the still strong fiscal assistance at the start of the year, the EU’s aggregate deficit should fall marginally to 6.6 percent of GDP in 2021, after hitting 6.9% of GDP in 2020. The EU’s aggregate deficit is expected to half to about 3.6 percent of GDP in 2022, and to further decline to 2.3 percent in 2023, as support measures and the functioning of automatic stabilisers are likely to unravel as the economic expansion continues. The aggregate debt-to-GDP ratio is expected to generally stabilize this year, then begin dropping in 2022, hitting 89 percent of GDP in 2023, after reaching roughly 92 percent in the EU (99 percent in the euro area) (97 percent in the euro area).

Figure 1 EU GDP: Autumn 2021 Forecast and the pre-pandemic trend and forecast

In 2021, advanced European economies are expected to grow by 5.2 percent, while developing European economies are expected to grow by 6%, respectively, up 0.3 and 1.1 percentage points from the July 2021 World Economic Outlook Update. According to the IMF, the recovery will stabilize in 2022, with growth of 4.4 percent in advanced European economies and 3.6 percent in emerging European economies, while risks are skewed to the downside due to potential virus mutations, prolonged supply disruptions, and high energy prices, among other things. While continuing to shore up the recovery, the extraordinarily strong fiscal support deployed in 2020–21 can be redirected toward building forward better and dialled back to rebuild flexibility for fiscal policy manoeuvring.

Following a 2.9 percent decline in 2020, the global economy (excluding the EU) is expected to rebound by 5.8% in 2021, thanks to a resurgence in goods trade and the reopening of domestic services. As the cyclical rebound fades and supportive macroeconomic policies are scaled back in many countries, global real GDP growth is expected to decline to 4.5 percent and 3.7 percent in 2022 and 2023, respectively. This overall image, however, hides a more nuanced picture that differs across and across advanced and developing market nations, as well as variances in vaccine coverage. Economic activity in China is expected to stagnate due to an overly indebted business sector, lower infrastructure investments, and regulatory tightening.

According to the European Commission, the current heightened pricing pressures are projected to be primarily transitory because to a great extent linked to the post-pandemic re-opening and ensuing economic adjustment. After peaking at 2.4 percent in 2021, inflation in the euro zone is expected to fall to 2.2 percent in 2022 and 1.4 percent in 2023, as energy prices begin to level out in the second half of next year and supply-demand mismatches are resolved. Inflation in the EU is forecast to rise to 2.6 percent in 2021, 2.5 percent in 2022, and 1.6 percent in 2023.

Written by: Nenad Stekić

Submitted on: 11.12.2021.