The coronavirus pandemic is leaving us with major economic consequences in the European Union.
A big impact on growth
The coronavirus pandemic has severely affected consumer spending, industrial production, investment, trade, capital flows and supply chains. The expected gradual reduction in containment measures is expected to lay the foundation for recovery. However, the EU economy is not expected to fully recover this year’s losses before the end of 2021. Investment will remain low and the labour market will not have fully recovered.
In responding to the crisis, it will be crucial to maintain the effectiveness of both national and European measures in order to limit the economic damage and facilitate a rapid and strong recovery, putting the economies on a sustainable and inclusive growth path.
Unemployment is expected to rise
While working time reduction schemes, wage subsidies and business support may help to limit job losses, the coronavirus pandemic will have serious repercussions on the labour market.
The unemployment rate in the euro area is expected to rise from 7.5% in 2019 to 9½% in 2020, before falling back to 8½% in 2021. In the EU, the unemployment rate is expected to rise from 6.7% in 2019 to 9% in 2020, before falling to around 8% in 2021. In some Member States, the increase in unemployment will be more significant than in others.
A sharp drop in inflation
Consumer prices are expected to fall significantly this year due to the fall in demand and the sharp decline in oil prices, factors which together will more than offset the one-off price increases due to supply disruptions caused by the pandemic.
Currently, inflation in the euro area, as measured by the Harmonised Index of Consumer Prices (HICP), is projected at 0.2% in 2020 and 1.1% in 2021. In the EU, inflation is forecast at 0.6% in 2020 and 1.3% in 2021.
Increase in public deficits and debt
Member States have reacted with determination, implementing budgetary measures to limit the economic damage caused by the pandemic. Automatic stabilisers’ such as social security benefit payments, coupled with discretionary budgetary measures taken, will lead to increased spending. As a result, the aggregate government deficit in the euro area and the EU is expected to increase from 0.6% of GDP in 2019 to around 8½% in 2020, before falling back to around 3½% in 2021.
Having followed a downward trend since 2014, the government debt-to-GDP ratio will also increase. In the euro area, the unemployment rate is expected to rise from 86% in 2019 to 102¾% in 2020, before falling back to around 8% in 2021. In the EU, it is expected to rise from 79.4% in 2019 to around 95% this year, before falling to 92% next year.