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EU to experience 'even deeper recession' than anticipated, as new forecast predicts 8.7% contraction

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A passenger sits at Barcelona airport in Barcelona, Spain, Tuesday, June 30, 2020.
A passenger sits at Barcelona airport in Barcelona, Spain, Tuesday, June 30, 2020.   -   Copyright  Emilio Morenatti/AP2020
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Brussels says the economic fallout from the coronavirus pandemic is worse than they previously predicted.

The Euro area economy will contract by 8.7% this year, according to forecasts released by the European Commission on Tuesday.

Earlier this year, the commission had envisioned a 7.7% fall.

It's a similar story for the wider EU economy: it is now predicting an 8.3% drop in GDP this year, against the 7.4% fall it forecast in April.

“Coronavirus has now claimed the lives of more than half a million people worldwide, a number still rising by the day - in some parts of the world at an alarming rate," said Paolo Gentiloni, European Commissioner for Economy. "And this forecast shows the devastating economic effects of that pandemic.

"The policy response across Europe has helped to cushion the blow for our citizens, yet this remains a story of increasing divergence, inequality and insecurity.

"This is why it is so important to reach a swift agreement on the recovery plan proposed by the Commission – to inject both new confidence and new financing into our economies at this critical time.”

Later this month, European leaders will meet to try and thrash out a deal for the EU's €750 billion coronavirus rescue package.

The plan on the table envisages raising the money on the financial markets, using shared debt for the first time.

But some northern European countries oppose having common debt with more indebted southern EU countries, such as Greece and Italy.

"The economic impact of the lockdown is more severe than we initially expected," said Valdis Dombrovskis, Executive Vice President of the EC.

"We continue to navigate in stormy waters and face many risks, including another major wave of infections. If anything, this forecast is a powerful illustration of why we need a deal on our ambitious recovery package, NextGenerationEU, to help the economy.

"Looking forward to this year and next, we can expect a rebound but we will need to be vigilant about the differing pace of the recovery.

"We need to continue protecting workers and companies and coordinate our policies closely at EU level to ensure we emerge stronger and united.”

Cause for optimism?

The European Commission said the lockdown had endured longer than initially expected, so hence the more pessimistic figures.

But, it added, there were signs of recovery since restrictions were eased.

It predicts the economy will begin to bounce back towards the end of 2020. Growth will return in 2021, although not as strong as Brussels forecast earlier this year.

However, two things could blow these predictions out of the water. A second wave that requires further lockdowns and the failure to agree on a post-Brexit trade deal with the UK.

"The scale and duration of the pandemic, and of possibly necessary future lockdown measures, remain essentially unknown," said the European Commission in a press release.

"The forecast assumes that lockdown measures will continue to ease and there will not be a ‘second wave' of infections. There are considerable risks that the labour market could suffer more long-term scars than expected and that liquidity difficulties could turn into solvency problems for many companies. There are risks to the stability of financial markets and a danger that Member States may fail to sufficiently coordinate 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, particularly for the UK.

"More broadly, protectionist policies and an excessive turning away from global production chains could also negatively affect trade and the global economy."

Watch Gentiloni's press conference in full