EU recovery expected to continue but significant downside risks are emerging

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Longer term market prospects in the EU27 look reasonable as the economic expansion in the region is expected to continue, although there are significant downside risks emerging, according to the EU Autumn 2021 Economic Forecast published on 11 November.

According to the Forecast, the EU economy is set to grow by 5% this year and to keep a solid pace of growth of 4.3% next year before easing to 2.5% in 2023. A strong rebound in the second and third quarters of this year lifted the EU economy back to around its level of the last quarter of 2019. This happened one quarter earlier than the EU expected in the Spring Forecast issued in May.

Disruptions in global logistics and shortages of several raw and intermediate inputs have been increasingly weighing on activity in the EU this year. Manufacturing, in particular, is being held back by production input shortages, delays in input delivery and increased strains on available production capacity. Surging energy prices, most notably for natural gas and electricity, are also expected to dampen the growth momentum in the short term.

Still, strong domestic demand is expected to continue fuelling the economic expansion in the EU. The Commission's October business surveys indicate that economic sentiment increased slightly in all main sectors except construction.

An improving labour market, falling household saving rates, favourable financing conditions and full deployment of the "Recovery and Resilience Facility" (RFF), are expected to drive the economic expansion and fuel domestic consumption. Foreign demand is also expected to be supportive of growth.

The global economy is expected to strongly rebound this year and to continue expanding in the next two years, albeit at a more moderate pace and with quite divergent paths.

The RFF is the EU €723.8 billion stimulus package - comprising €385.8 billion in loans and €338 billion in grants – in support of Member State Covid recovery measures which extends until 2026, with two thirds of the money expected to be allocated before the end of 2023. Model simulations conducted by the Commission indicate the package could increase EU GDP by up to 1.5% during its years of active operation. RFF support measures are particularly targeted at southern and eastern Member States and at green investments to help achieve the EU 2050 net zero carbon commitment.

According to the EU Forecast, while the RFF is being rolled out to support the most indebted Member States, many governments have started to phase out emergency support measures at national level and budget deficits are being reduced. Employment levels are also expected to increase above pre-pandemic levels and the unemployment rate should decrease to 6.5% in 2023.

The Forecast suggests that strong demand following the re-opening of economies, combined with supply bottlenecks and higher energy prices, have contributed to higher levels of inflation. This situation is expected to be largely transitory. Inflation in the EU is expected to peak at 2.6% this year before easing slightly to 2.5% next year and 1.6% in 2023.

However, the Forecast also notes that uncertainty remains substantial, and the risks to the outlook are tilted to the downside. The recovery continues to be heavily dependent on the evolution of the pandemic, both within and outside the EU.

The improving health situation, which allowed the economy to bounce back, is now being challenged by rising infections across the EU. Since the beginning of October, the 14-day average incidence of infections in the EU has recorded the highest level since mid-May.

The strongest increases are reported in countries with below EU-average vaccination rates. For now, hospitalisations and deaths associated with COVID-19 infections remain low compared to previous waves. But they are slowly rising, posing a risk to economic prospects.

Economic conditions vary widely between Member States, according to the EU Forecast. Germany's GDP rebounded in the second and third quarters as the easing of containment measures spurred spending on services.

However, supply bottlenecks are slowing down manufacturing and putting a lid on the rebound of exports and investment. So growth is projected at a modest 2.7% this year and is set to reach 4.6% in 2022 before moderating to 1.7% in 2023.

In France, economic activity is forecast to rebound by 6.5% in 2021, reaching its pre-crisis level by the end of this year. The third quarter growth rate was particularly strong thanks to largely eased restrictions. Growth is expected to remain solid in 2022 and 2023 at 3.8% and 2.3% respectively.

For Italy, real GDP is projected to increase by 6.2% this year. The economy rebounded strongly in the second and third quarters thanks mainly to consumer services. Growth is set to continue at a robust pace of 4.3% in 2022 thanks to easing supply shortages and RRF-supported investments and reforms. GDP is set to expand by 2.3% in 2023, a growth rate still sizeably above the long-term average.

In Spain, growth is projected at 4.6% this year, below the EU's Summer expectations. However, Spain's GDP is expected to remain on a very strong growth path over the next two years, also thanks to the implementation of the RRF. Growth is projected at 5.5% in 2022 and at 4.4% in 2023.

In Poland the economy is expected to embark on a solid expansion after a mild recession last year. GDP growth is expected at 4.9% in 2021, 5.2% in 2022 and 4.4% in 2023.

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