EU’s economic forecast: additional confidence and financing needed

The European Commission publishes each year two comprehensive forecasts in spring and autumn, and two interim forecasts in winter and summer. Interim forecasts cover for all EU-27 annual and quarterly GDP, as well as inflation for the current and the following year.

  The EU summer-2020 interim economic forecast projects that the EU-27 economy will contract by 8.3 per cent in 2020 and grow by 5.8% in 2021; in the euro area the economy in 19 countries will contract by 8.7 per cent in 2020 and grow by 6.1per cent in 2021.

  Thus, the contraction in 2020 is, therefore, projected to be significantly greater than the 7.7% projected for the 19-euro area and 7.4% for the EU-27 in the spring forecast. Growth in 2021 will also be slightly less robust than projected in the spring. Main reason is a much longer period of ‘lockdown’ compared with the first quarter and easing containment measures in early May.

 

The euro-zone situation

  The attention to euro-zone states is important as the three Baltic States are the members of the 19-states’ zone. 

  The euro area economy has operated within 25-30 per cent below its capacity during the period of the strictest confinement. Overall, the euro area economy is forecast to contract by about 8,5 per cent in 2020 before recovering at an annual growth rate of 6% next year.

  These projections are somewhat lower than in the spring forecast and point to an incomplete recovery as output at the end of 2021 is expected to be about 2% lower than before the crisis and about 4,5 per cent below the GDP level forecast in winter.

  Inflation prospects are little changed since the spring forecast with 0.3% expected for this year and 1.1% in 2021.

Source: Summer 2020 Economic Forecast/Overview section in: https://ec.europa.eu/info/sites/info/files/economy-finance/summer_2020_economic_forecast_-_overview.pdf.

 

  The Commission’s proposal concerning the “Next Generation EU” fund cannot be taken into consideration as it is still not adopted by the EU’s co-legislators (European Parliament and the Council); however when adopted, it could give a sizable impulse to the EU economy in general, particularly in 2021.

On the Next Generation EU program of €750 billion in:

https://ec.europa.eu/commission/presscorner/detail/en/ip_20_940

 

Main risks

  The main problems in combating the post-pandemic situation are both long-standing and recently appeared. Below is a random calculation of the most important ones, according to the Commission, to overcome:

  • The labour market could suffer more long-term scars than expected and that liquidity difficulties could turn into solvency problems for many companies.
  • The stability of financial markets in the states may fail to be sufficiently coordinated by the national policy responses.
  • A failure to secure an agreement on the future trading relationship between the UK and the EU could also result in lower growth.  
  • More broadly, protectionist policies and an excessive turning away from global production chains could also negatively affect trade and the global economy.

  Bottom line: As soon as the scale and duration of the post-pandemic period, as well as the possible effect of additional necessary lockdown measures in future, remain essentially unknown, the EU and the states’ contra-measures become unpredictable. The forecast assumes, however, that lockdown measures will continue to ease and there will not be a ‘second wave’ of infections; the latter, to our opinion is too premature…  

General reference: https://ec.europa.eu/commission/presscorner/detail/en/IP_20_1269

 

The Baltic States’ situation

  For Latvia: Public consumption and investment will get a boost from the government stimulus package. Overall, GDP is forecast to decline by about 13 per cent in the first half of 2020 compared to the last quarter of 2019. It is expected to recover rather quickly receiving a particular boost at the end of the year when work begins on the Rail Baltica project, which will integrate the rail systems of the three Baltic States with the rest of the EU.

  Overall, GDP is projected to contract in 2020 by 7 per cent, whereas in 2021, the GDP growth is forecast to exceed 6 per cent.

 

  For Estonia: The economic crisis is expected to bottom out in the second quarter. Some rebound has already been suggested by short-term indicators in May, including a pick-up in retail trade. Pessimism in the manufacturing sector, however, remains entrenched due to high uncertainty surrounding foreign markets and the high reliance of the Estonian economy on exports.

  The tourism sector will likely have to rely this summer season mostly on tourists from some neighbouring countries, who typically account for fewer than half of foreign tourists in Estonia. At the end of June the registered unemployment was almost 8%, compared to 4.7% a year ago.

  Given the weaker first quarter and the extended uncertainty for the exporting sectors, GDP is now forecast to contract by over 7,5 per cent in 2020. In 2021, GDP is expected to rebound by over 6%, reflecting the base effects and the already taken stimulus measures boosting investment and overall confidence.

 

  For Lithuania: Businesses and households are expected to face a high degree of uncertainty for some time: for companies this means getting shorter-duration contracts compared to the situation before the pandemic and a lower propensity to invest.

  At the same time, an increase in unemployment and savings and lower labour incomes are expected to have a negative impact on private consumption. Overall, real GDP in Lithuania is forecast to decrease by about 7 per cent in 2020 and then bounce back partially by about 6,5 per cent in 2021.

General references to: https://ec.europa.eu/economy_finance/forecasts/2020/summer/ecfin_forecast_summer_2020_lv_en.pdf

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