Euro zone set for deeper recession, less steep rebound

[BRUSSELS] The euro zone economy will drop deeper into recession this year and rebound less steeply in 2021 than previously thought, the European Commission forecast on Tuesday, with France, Italy and Spain struggling the most due to the Covid-19 pandemic.

The EU executive said the 19 nation single currency area would contract by a record 8.7 per cent this year before rising by 6.1 per cent in 2021. In early May, the Commission had forecast a downturn this year of 7.7 per cent and a rebound in 2021 of 6.3 per cent.

The Commission said it had to revise its previous forecasts because the lifting of Covid-19 lockdown measures in euro zone countries was proceeding less swiftly than it had initially predicted.

The EU executive significantly cut its earlier forecasts for France, Italy and Spain, three of the countries hardest hit by the pandemic, and now expects downturns in excess of 10 per cent this year in each nation.

Conversely, for the euro zone's largest economy, Germany, where widespread testing has helped limit fatalities, the 2020 downturn would be 6.3 per cent, less pronounced than May forecast of 6.5 per cent. The rebound in Germany in 2021 is however expected to be less pronounced than previously estimated.

The new figures indicate an economic recovery gathering momentum in June, although it is based on a number of "critical" assumptions.

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The forecasts assume no second wave of infections triggering renewed restrictions, although social distancing measures would persist, while monetary and fiscal policy measures are expected to support the recovery.

The main risks include a potential wave of new infections, more permanent scars from the crisis, including unemployment and corporate insolvencies, and the absence of a EU-UK future relationship deal.

"At the global level, the still rising rate of infections, particularly in the US and emerging markets, has deteriorated the global outlook and is expected to act as a drag on the European economy," the report said.

The Commission said its inflation forecasts were little changed, at 0.3 per cent this year and 1.1 per cent in 2021.

REUTERS