“Europeans are living through challenging times. We remain in the painful grip of the pandemic, its social and economic consequences all too evident. Yet there is, at last, light at the end of the tunnel. As increasing numbers are vaccinated over the coming months, an easing of containment measures should allow for a strengthening rebound over the spring and summer. The EU economy should return to pre-pandemic GDP levels in 2022, earlier than previously expected – though the output lost in 2020 will not be recouped so quickly, or at the same pace across our Union”. This is what Mr. Paolo Gentiloni, EU Commissioner for Economy stated several weeks ago while commenting the prospects for the EU economic developments.

On February 11th, the EU Commission issued the EU Economic Forecast report for winter 2021. The report states that the dichotomy between the performance of industry and services appears to have continued in early 2021, as highlighted by January readings of the Commission’s surveys and Markit’s PMIs. Furthermore, the Commission’s latest quarterly survey (11) estimated that capacity utilisation in the services sector declined to 85.7% in 2021-Q1 (from 86.5% in 2020-Q4), while recovering in industry to 77.7% (from 76.5%).

This increase occurred amid rising shortages of materials and/or equipment reported by managers as hindrances to higher output. Furthermore, the report claims that looking beyond the first quarter, as vaccination campaigns gain momentum and containment measures are gradually relaxed, activity in the EU and the euro area is expected to start picking up, though only moderately in the second quarter.

In line with the assumption of a significant lifting of restrictions in the second half of 2021, growth is expected to accelerate to 3.0% in the third quarter and remain solid in the fourth quarter (1.0% q-o-q) in both the EU and the euro area, benefitting also from stronger external demand. The seasonal drop in infections as well as a significant relaxation of containment measures should also allow countries with large tourism sectors to benefit from recovering intra-EU (domestic and foreign) tourism traffic over the summer. Thereafter, growth is expected to moderate.

The EU Commission is quite optimistic about what might occurr in terms of the economic growth over the next several months. After contracting by an estimated 6.3% and 6.8% in 2020 (in the EU and the euro area, respectively), growth is forecast to rebound to 3.7% and 3.8% in 2021 (in the EU and the euro area, respectively). As the recovery takes hold and boosted by a high carry over, the 2022 annual EU GDP growth rate is forecast at 3.9% (3.8% in the euro area). Marking a notable improvement compared to the Autumn Forecast, GDP is now expected to reach pre-crisis levels by mid-2022 on average in both the EU and the euro area.

Taking into account these factors, the Commission forecasts that the inflation outlook for the euro area and the EU has improved slightly in 2021 and remains unchanged in 2022 compared to the autumn. In the euro area, inflation is forecast to increase from 0.3% in 2020 to 1.4% in 2021 (see Graph 1.14). In 2021, weak underlying price pressures are expected to be temporarily neutralised by strong positive base effects in energy inflation in line with the current oil price assumptions. Moreover, in the second half of this year, strong pent-up consumer demand following the relaxation of lockdown measures is likely to meet some supply side constraints as production capacity adjusts. Most of the upward revision for 2021 since the autumn comes from Germany, which saw a strong increase in inflation in January due to the reversal of VAT tax cuts and the introduction of new energy taxes. In 2022, as supply adjusts and base effects taper out, euro area inflation is expected to moderate again towards 1.3%.

Besides, the Commission identified some risks that might impede the whole process of the EU recovery. As compared to the autumn, risks have become more balanced as some downside risks have diminished and some upside risks have materalised. This relates first and foremost to the multiple approval of COVID-19 vaccines, but also the Trade and Cooperation Agreement between the EU and the UK reducing the cost of the UK leaving the Single Marekt and Customs Union, as well as the diminishing risk of a further intensification of trade disputes.

Positive risks are mainly related to the possibility that the vaccination process leads to a faster easing of containment measures and therefore an earlier and stronger recovery. In the short term, upside risks stem from protracted supply and shipping capacity constraints. In addition, an increase in firm bankruptcies in some sectors may strengthen the pricing power of incumbent firms. The annual statistical update in the weights of the categories in the consumption basket, published in February, may artificially affect inflation in 2021.