European Commission forecasts historic recession for 2020

BRUSSELS - The European Commission said in an economic forecast that despite a policy response at both the European Union (EU) and national level, the EU economy will experience a recession of historic proportions this year due to the coronavirus pandemic.

It projects that the euro area economy will contract by a record 7.75 percent in 2020 and grow by 6.25 percent in 2021. The EU economy is forecast to contract by 7.5 percent in 2020 and grow by around 6 percent in 2021.

As the pandemic has hit all EU member states, the economic shock will be symmetric, but on different levels. The sharpest decline in economic output is 9.75 percent in Greece, and Poland is expected to fare the best -- contract by only 4.25 percent, according to the forecast.

The unemployment rate in the euro area is forecast to rise from 7.5 percent in 2019 to 9.5 percent in 2020 before declining again to 8.5 percent in 2021. In the EU, the unemployment rate is forecast to rise from 6.7 percent in 2019 to 9 percent in 2020 and then fall to around 8 percent in 2021.

Consumer prices are expected to fall significantly due to the drop in demand and the steep fall in oil prices, which together should more than offset isolated price increases caused by pandemic-related supply disruption, according to the forecast.

Inflation in the euro area is now forecast at 0.2 percent in 2020 and 1.1 percent in 2021. For the EU, inflation is forecast at 0.6 percent in 2020 and 1.3 percent in 2021.

"Europe is experiencing an economic shock without precedent since the Great Depression," European Commissioner for the Economy Paolo Gentiloni said.

The coronavirus pandemic has severely affected consumer spending, industrial output, investment, trade, capital flows and supply chains. The expected progressive easing of containment measures should set the stage for a recovery. However, the EU economy is not expected to have fully made up for this year's losses by the end of 2021. Investment will remain subdued and the labor market will not have completely recovered.

The EU and member states have spent heavily to support the economy, and as a result, the aggregate government deficit of the euro area and the EU is expected to surge from just 0.6 percent of GDP in 2019 to around 8.5 percent in 2020, before falling back to around 3.5 percent in 2021.

After having been on a declining trend since 2014, the public debt-to-GDP ratio is also set to rise. In the euro area, it is forecast to increase from 86 percent in 2019 to 102.75 percent in 2020 and to decrease to 98.75 percent in 2021. In the EU, it is forecast to rise from 79.4 percent in 2019 to around 95 percent this year before decreasing to 92 percent next year.

The EU's executive arm also underlined that the forecast, where the baseline assumes that lockdowns will be gradually lifted from May onwards, is clouded by a higher than usual degree of uncertainty. The risks surrounding this forecast are also exceptionally large and concentrated on the downside. For example, a more severe and longer lasting pandemic than currently envisaged could cause a far larger fall in the economy.