HomeEU Downgrades 2021 Euro Area GDP

EU Downgrades 2021 Euro Area GDP

The much-awaited EU Economic Forecasts report for the last quarter was finally released yesterday. This is a comprehensive report offering a detailed view of the Euro area economies as it considers hundreds of economic variables and indicators to project future economic growth. 

As a side note, the report used to be semi-annually, then the EU changed its frequency to three times a year and now to four times a year. Perhaps it is part of the way the EU increases transparency, but anyway a welcomed development.

Euro Area Economic Growth Outlook Deteriorating Short-Term

The core of the report is the outlook for the European Union and the Euro area. The EU uses inputs from the national banks spread around the EU to build a comprehensive outlook that rarely misses the target.

Yesterday’s report begins with the EU taking into account the subdued start of the new year. The RRF (Recovery and Resilience Facility) was not fully incorporated in the forecast, but nevertheless, the resurging pandemic derailed the economic recovery in 2021.

While confidence is expected to return toward the second part of the year, the EU sees uneven recovery in various parts of Europe. As the price of oil recovered, inflation recovered as well, to the delight of the EU as it was close to zero or even below during the summer and fall of last year. The central bank sees the risks to the inflation outlook as broadly balanced, despite the fact that near to short term, we may still see declines in demand and wage growth.

Moving to economic output, the decline in services was somehow compensated with strong industrial output. The EU welcomes private sector funding and expects that the highly elevated household saving rate will come down over the course of 2021.

The main outcome of this report is that the Euro area GDP growth was cut to 3.8% from 4.2% in 2021 and that the economies in the Euro area are expected to contract further in the first quarter of the year. However, despite the gloomy short-term picture, the report also indicates that the Euro economies will reach pre-crisis levels sooner than initially expected.

The Euro pairs were unchanged on the news, with the EURUSD and EURJPY trading close to their daily highs on the release.

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