The Eurozone Economy is Rebounding from the Pandemic Recession faster than Expected

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The eurozone economy is rebounding from the pandemic recession faster than expected, the European Union said Thursday as it revised growth expectations upward for 2021.

It has been reported that the Growth momentum is however facing new headwinds, as global supply-chain disruptions and high energy prices are set to take their toll on activity next year, the European Commission said.

Gross domestic product in the 19-member eurozone will grow by 5.0% in 2021, the EU said in its quarterly report, upgrading its 4.8% forecast from July.

The expansion rate will be 4.3% next year, down from 4.5% previously expected. In 2023, the European Commission expects the eurozone economy to grow by 2.4%.

“Our measures to cushion the blow of the pandemic and to ramp up vaccinations across the EU have clearly contributed to this success,” said Valdis Dombrovskis, executive vice-president for an economy that works for people. But he said this is no time for complacency, the company said.

Integrated Manufacturing Sector

Bottlenecks and disruptions in global supply are weighing on activity, in particular in the highly integrated manufacturing sector, the European Commission warned. Moreover, after having fallen sharply in 2020, energy prices, particularly for natural gas, have increased at a tumultuous pace over the last month and are now well above pre-pandemic levels, the company said.

“We need to address bottlenecks in supply chains, as well as surging energy prices which will affect many households and companies across Europe,” Mr. Dombrovskis said.

Mr. Dombrovskis added that inflation should be closely monitored and policies adjusted if needed.

The European Commission has revised its inflation forecasts to 2.4% in 2021, from 1.9% in the Summer forecasts and to 2.2% in 2022 from 1.4% previously. For 2023, the European Commission forecasts 1.4% inflation in the eurozone.

European Commission

Inflation may turn out higher than forecast if supply constraints are more persistent and above-productivity wage increases are passed on to consumer prices, the European Commission, the company said.

In 2022, the propelling forces of the reopening are set to fade out, while supply bottlenecks loosen and energy prices abate, the European Commission said.

Growth is expected to be supported by an improving labor market, still high savings, favorable financing conditions and the full deployment of the Recovery and Resilience Facility.

As the economy expands, the labor market is forecast to recover to pre-pandemic levels next year. The EU expects unemployment to decline to 7.9% in 2021. The unemployment rate is seen dropping to 7.5% next year and 7.3% in 2023.

Economic Activity

An estimated 3.4 million jobs are projected to be created in 2022 and 2023, according to the European Commission’s estimates.

Improved growth prospects point to lower deficits in 2021 than expected in spring. The aggregate deficit in the eurozone should narrow to 7.1% in 2021 on the back of the still high fiscal support in the beginning of the year. The eurozone deficit is forecast to be around 3.9% in 2022 and to decrease further to 2.4% in 2023.

Although the impact of the pandemic on economic activity has weakened considerably, the virus hasn’t yet been defeated and the recovery is heavily dependent on its evolution, both within and outside the EU, the company said.

“We must remain vigilant and act as needed to ensure these headwinds do not blow the recovery off course,” said Paolo Gentiloni, the EU’s commissioner for the economy.

In light of the recent surge of cases in many countries, the reintroduction of restrictions impacting on economic activity can’t be ruled out, the company said. (livemint)