European economic outlook upgraded on fiscal fund, vaccines

Brussels

THE euro-area economy will grow more quickly this year than previously forecast as the region's vaccination campaign gathers speed, fiscal support is rolled out and a strong global rebound helps exports.

The European Commission upgraded its growth outlook for the currency bloc this year to 4.3 per cent from 3.8 per cent after taking account of the European Union's (EU) 800 billion-euro (S$1.3 trillion) joint recovery fund for the first time. Total output by the EU's 27 member states is now expected to reach its pre-pandemic size by the end of this year, earlier than initially thought.

The currency bloc is also expected to grow more quickly in 2022, when more money from the joint stimulus will flow into projects to build a greener and more-digital future. The recovery will still be uneven though, with economies in France, Spain and Italy not reaching their pre-pandemic levels until next year.

The recovery fund will have a cumulative impact of 1.2 per cent of 2019's gross domestic product (GDP) this year and next, the commission said. The plan will drive public investment to the highest level in more than a decade next year.

"Today, for the first time since the pandemic hit, we see optimism prevailing over uncertainty," Paolo Gentiloni, EU Commissioner for the economy, said at a press conference. "The quality, strength and duration of the recovery could still be influenced by the pandemic, but our economic fate is primarily in our own hands."

The upgrade brings the commission's forecast for this year roughly in line that of the International Monetary Fund, which raised its outlook for the euro area to 4.4 per cent last month. The European Central Bank presents new forecasts in June.

The commission said the unprecedented support from national governments to prop up businesses and households during the pandemic pushed euro-area public debt to 100 per cent of GDP last year, the first time that level has been reached. It is expected to peak at 102 per cent before falling slightly to 101 per cent in 2022. Italy's debt is seen reaching 160 per cent of GDP this year.

Mr Gentiloni said that the current suspension of EU fiscal rules, which in normal times aim to rein in excessive debt, is expected to remain in place until the end of next year.

About 29 per cent of the EU's population have now received at least one shot of a vaccine. Investor confidence in the German economy, the region's largest, jumped to the highest level in more than 21 years this month and European manufacturing is booming.

The sharp upturn this year has seen companies run into shortages of parts and raw materials. That has fuelled a debate about a jump in prices after years of subdued pressure, despite ECB officials saying they expect any elevated inflation to be temporary.

The commission's forecast supported that view, with inflation seen reaching 1.7 per cent this year before falling back to 1.3 per cent in 2022. Still, it said price growth could turn out higher if the rebound is stronger than expected or if current supply constraints turn out more persistent.

The commission noted that risks to its outlook will remain high as long as Covid-19 isn't under control everywhere. The situation in large developing nations presents a global threat as new virus mutations could make a comeback.

It also addressed the debate over how much savings will contribute to the rebound, concluding that surveys suggest they won't give consumer spending much of a boost. Much of the saving has been by groups least affected financially by the pandemic, such as the elderly and those on higher incomes, and is likely to contribute to "growing wealth inequality and an increasing generational wealth gap", it said. BLOOMBERG