Historic Hit for the Euro Area Economies

The Summer 2020 European Commission Economic Forecast was made public yesterday, and it reveals a historic hit for the Euro area economies. Moreover, most of the economic data were revised to the downside, pointing to the significant challenges that lie ahead.  

The Euro area economies are expected to contract by 8.7% in 2020, followed by a 6.1% rebound in 2021. Compared with the Spring 2020 forecast, the European Commission (EC) lowered its estimate for the Real GDP, both for the current year and the next one.

Deepest Output Contraction Since World War II

To counter the COVID-19 pandemic, the European economies took extreme measures. The economic shock sent the Real GDP tumbling, with a bleak outlook for the period ahead. Also, inflation is barely positive, albeit the expectations are for a move back above 1% in the year ahead.

What is more important is that the EU views the balance of risks still tilted to the downside. Effectively, it means that we should not be surprised to see further downward revisions as we entered the second half of the year.

As the health crisis hits emerging markets, the European Union exports are also affected. The worse the global outlook, the worse the projections for a quick economic turnaround in the EU are. Therefore, the slump in global trade as noted by the World Trade Organization (WTO) is likely to be a factor contributing to the slow economic recovery in the developed and developing world.

One notable improvement seen is the oil price that recovered from the negative territory in April and now sits comfortably at around $40/bbl. Another positive aspect noted by the EU is the positive trend in global financial markets as they recovered on the back of extraordinary measures taken by central banks.

However, no sector was spared by the economic contraction in the first quarter, and the second quarter has all the chances to turn out even lower, the more we find out the final figures. Retail spending, production in construction, industrial production – all fell. But the rise in mobility, as the European economies open up, points to a gradual turnaround taking place.

All in all, the report emphasizes the bumpy road ahead, with no V-shape recovery anytime soon. What is more likely is that the economies will adapt to the new reality, albeit with continuous help from policymakers.

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