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Economic Forecast: Rebound interrupted as resurgence of pandemic deepens uncertainty

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The coronavirus pandemic represents a very large shock for the global and EU economies, with very severe economic and social consequences. Economic activity in Europe suffered a severe shock in the first half of the year and rebounded strongly in the third quarter as containment measures were gradually lifted. However, the resurgence of the pandemic in recent weeks is resulting in disruptions as national authorities introduce new public health measures to limit its spread. The epidemiological situation means that growth projections over the forecast horizon are subject to an extremely high degree of uncertainty and risks.

An interrupted and incomplete recovery

The Autumn 2020 Economic Forecast projects that the euro area economy will contract by 7.8% in 2020 before growing 4.2% in 2021 and 3% in 2022. The forecast projects that the EU economy will contract by 7.4% in 2020 before recovering with growth of 4.1% in 2021 and 3% in 2022. Compared to the Summer 2020 Economic Forecast, growth projections for both the euro area and the EU are slightly higher for 2020 and lower for 2021. Output in both the euro area and the EU is not expected to recover its pre-pandemic level in 2022.

The economic impact of the pandemic has differed widely across the EU and the same is true of recovery prospects. This reflects the spread of the virus, the stringency of public health measures taken to contain it, the sectoral composition of national economies and the strength of national policy responses.

Rise in unemployment contained compared to drop in economic activity

Job losses and the rise in unemployment have put severe strains on the livelihoods of many Europeans. Policy measures taken by Member States, together with initiatives at EU level have helped to cushion the impact of the pandemic on labour markets. The unprecedented scope of measures taken, particularly through short-time work schemes, have allowed the rise in the unemployment rate to remain muted compared to the drop in economic activity. Unemployment is set to continue rising in 2021 as Member States phase out emergency support measures and new people enter the labour market, but should improve in 2022 as the economy continues to recover.

The forecast projects the unemployment rate in the euro area to rise from 7.5% in 2019 to 8.3% in 2020 and 9.4% in 2021, before declining to 8.9% in 2022. The unemployment rate in the EU is forecast to rise from 6.7% in 2019 to 7.7% in 2020 and 8.6% in 2021, before declining to 8.0% in 2022.

Deficits and public debt set to rise

The increase in government deficits is expected to be very significant across the EU this year as social spending rises and tax revenues fall, both as a result of the exceptional policy actions designed to support the economy and the effect of automatic stabilisers.

The forecast projects the aggregate government deficit of the euro area to increase from 0.6% of GDP in 2019 to around 8.8% in 2020, before decreasing to 6.4% in 2021 and 4.7% in 2022. This reflects the expected phasing out of emergency support measures in the course of 2021 as the economic situation improves.

Mirroring the spike in deficits, the forecast projects the aggregate euro area debt-to-GDP ratio will increase from 85.9% of GDP in 2019 to 101.7% in 2020, 102.3% in 2021 and 102.6% in 2022.

Inflation remains subdued

A steep fall in energy prices pushed headline inflation into negative territory in August and September. Core inflation, which includes all items except energy and unprocessed food, also fell substantially over the summer due to lower demand for services, especially tourism-related services and industrial goods. Weak demand, labour market slack and a strong euro exchange rate will exert downward pressure on prices.

Inflation in the euro area, as measured by the Harmonised Index of Consumer Prices (HICP), is forecast to average 0.3% in 2020, before rising to 1.1% in 2021 and 1.3% in 2022, as oil prices stabilise. For the EU, inflation is forecast at 0.7% in 2020, 1.3% in 2021 and 1.5% in 2022.

Members of the College said:

Valdis Dombrovskis, Executive Vice-President for an Economy that Works for People, said: “This forecast comes as a second wave of the pandemic is unleashing yet more uncertainty and dashing our hopes for a quick rebound. EU economic output will not return to pre-pandemic levels by 2022. But through this turbulence, we have shown resolve and solidarity. We have agreed unprecedented measures to help people and companies. We will work together to chart the course to recovery, using every tool at our disposal. We agreed a landmark recovery package, NextGenerationEU – with the Recovery and Resilience Facility at its heart – to provide massive support to worst-hit regions and sectors. I now call again on the European Parliament and Council to wrap up negotiations quickly for money to start flowing in 2021 so that we can invest, reform and rebuild together.”

Paolo Gentiloni, Commissioner for Economy, said: “After the deepest recession in EU history in the first half of this year and a very strong upswing in the summer, Europe’s rebound has been interrupted due to the resurgence in COVID-19 cases. Growth will return in 2021 but it will be two years until the European economy comes close to regaining its pre-pandemic level. In the current context of very high uncertainty, national economic and fiscal policies must remain supportive, while NextGenerationEU must be finalised this year and effectively rolled out in the first half of 2021.”

A high degree of uncertainty with downside risks to the outlook

Uncertainties and risks surrounding the Autumn 2020 Economic Forecast remain exceptionally large. The principal risk stems from a worsening of the pandemic, requiring more stringent public health measures and leading to a more severe and longer lasting impact on the economy. This has motivated a scenario analysis for two alternative paths of the pandemic evolution – a more benign one and a downside one – and its economic impact. There is also a risk that the scars left by the pandemic on the economy – such as bankruptcies, long-term unemployment and supply disruptions – could be deeper and farther reaching. The European economy could also be impacted negatively if the global economy and world trade improved less than forecast or if trade tensions were to increase. The possibility of financial market stress is another downside risk.

On the upside, NextGenerationEU, the EU’s economic recovery programme, including the Recovery and Resilience Facility, is likely to provide a stronger boost to the EU economy than projected. This is because the forecast could only partially incorporate the likely benefits of these initiatives, as the information available at this stage on national plans is still limited. A trade agreement between the EU and the UK would also have a positive impact on the EU economy from 2021 compared to the forecast baseline of the UK and EU trading based on WTO Most Favoured Nation (MFN) rules.

Background

The forecast was prepared in a context of severe uncertainty, with Member States announcing major new public health measures in the second half of October 2020 to limit the spread of the virus.

The forecast is based on the usual set of technical assumptions concerning exchange rates, interest rates and commodity prices, with a cut-off date of 22 October 2020. For all other incoming data, including information on government policies, this forecast takes into consideration information up until and including 22 October. Unless policies are credibly announced and specified in adequate detail, the projections assume no policy changes.

The forecast hinges upon two important technical assumptions. First, public health measures are assumed to remain in force to some degree throughout the forecast horizon. However, after their significant tightening in the fourth quarter of 2020, the stringency of the measures is expected to gradually ease in 2021. It is also assumed that the economic impact of a given level of restrictions will diminish over time as the health system and economic agents adapt to the coronavirus environment. Second, given that the future relations between the EU and the UK are not yet clear, projections for 2021 and 2022 are based on a technical assumption that the EU and the UK will trade on WTO Most Favoured Nation (MFN) rules from 1 January 2021 onwards. This is for forecasting purposes only and reflects no anticipation nor prediction as regards the outcome of the negotiations between the EU and the UK on their future relationship.

The European Commission’s next forecast will be an update of GDP and inflation projections in the Winter 2021 Economic Forecast, which is expected to be presented in February 2021.

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Smarter Food Policy Could Boost Health and Economic Recovery of Asian Cities

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Across the world, the COVID-19 pandemic has highlighted the critical importance of reliable food systems that provide healthy and affordable diets to all. That is true also in Asia where cities, large and small, contend with a wide range of food-related issues on a daily basis but often lack a dedicated or coherent set of food policies.

Arguing that food systems are central to the topmost priorities of Asian cities, from nurturing jobs and businesses that are core to a city’s identity to managing waste and congestion, a new World Bank book calls for cities to “get smart to get RICH”—that is, to pursue policies that foster reliable, inclusive, competitive, and healthy (“RICH”) food systems that are better aligned with cities’ contemporary challenges and aspirations.

RICH Food, Smart City seeks to put food on the menu of urban decision-makers in Asia to generate positive feedback loops between healthy people, a healthy planet, and healthy economies,” said Martien van Nieuwkoop, Global Director of Agriculture and Food, World Bank. 

Based on the first systematic survey of urban food policies in 170 Asian cities in 21 countries, undertaken in partnership with the UN Food and Agriculture Organization, the study finds that only 8% of surveyed cities are “food-smart”—intervening in the food system in ways that are forward-looking, holistic, and inclusive. Nearly three-fourths are either at an early stage of effective engagement or fully in reactive mode, responding to problems as they emerge. A reactive approach could prove very costly, both in terms of realized risks and missed opportunities.

The COVID-19 pandemic has served to highlight the essential functions of urban food supply chains and businesses and the vulnerability of urban populations to food insecurity. Even before lockdowns and other responses to the pandemic impacted people’s purchasing power and disrupted supply chains, many residents of cities, especially low-income ones, faced challenges accessing safe, affordable, and nutritious food. In 2016, some 23 percent of urban residents in emerging Asia surveyed by the FAO reported being food insecure. Chronic malnutrition is similarly widespread. More than one-quarter of children under five are stunted in urban Bangladesh, Bhutan, India, Lao PDR, Nepal, and Pakistan, indicating that shortcomings in urban food systems could curtail the economic prospects of many Asian cities and their youngest generation.

Moving from a reactive approach to a more proactive management of food systems holds considerable promise for urban policy makers wishing to make progress on issues that matter to citizens, from food safety and affordability to good health, job opportunities, freedom from pollution and congestion, prosperity, and livability. Asia’s growing middle class and its demand for higher quality, more diverse, and convenient foods also provides enormous business, employment and revenue-raising opportunities for cities.

However, risks associated with urban food systems and changing demand patterns will need to be managed carefully. These include risks related to disease, biosafety, and environmental degradation. In 2017, the proportion of deaths attributed to dietary risks reached 30 percent in East Asia, 22 percent in Southeast Asia, and 19 percent in South Asia, according to the Global Burden of Disease. Overweight and obesity levels are growing nationally, and obesity prevalence tends to be three or four times higher in urban areas than in rural ones.

Many cities in emerging Asia are national if not international ‘hotspots’ for biosecurity and food safety risks, food waste, and the accumulation of plastic packaging waste. The rapid encroachment of cities into natural ecosystems and peri-urban cropland also raises risks to cities’ fresh food supply. Well-informed urban leadership is much needed to turn these urban, national, and even broader food system challenges around.

RICH Food, Smart City argues that city leaders and planners have a key role to play in molding the future trajectory of food systems and offers many examples of how they might do so. The study addresses cities of different sizes and resource levels, presents a menu of potential solutions, and provides concrete illustrations of the many policies and programs that Asia’s cities can learn from and implement to improve food system outcomes. For example,

  • Measures to protect peri-urban cropland and develop short supply chain marketing channels can sustain a critical source of fresh produce to cities, contributing to urban productivity, resilience, and circular economies.
  • Investments in upgrading community markets that provide fresh food can help ensure more equitable access to nutrition and reduce the incidence of foodborne and chronic illness.
  • Neighborhood food loss and waste partnerships and initiatives can support waste prevention, secondary food use, composting, and the bioeconomy.
  • Institutional food procurement and marketing standards, paired with technical support to food businesses, can exert significant influence over food markets and dietary patterns in ways that support public health and welfare, the environment, and local economies.

With their power to influence the uses of space and the built environment, to regulate and stimulate private enterprise, and to shape public service delivery, cities’ embrace of food policy can be game-changing, according to the book.

“Municipal leaders are uniquely placed to develop and pursue integrated food policies that respond to citizens’ needs and boost cities’ overall resilience” said Gayatri Acharya, study co-author and Lead Economist, World Bank. “We hope this study will inspire them to seek ambitious solutions for sustainable and healthy food systems that improve the welfare of urban populations.”

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Sustainable infrastructure can drive development and COVID-19 recovery

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Zimbabwe has long struggled with crippling power outages, some of which can last up to 18 hours a day. The cuts have been especially hard on the country’s hospitals and clinics, forcing nurses to deliver babies by candlelight and doctors to postpone emergency surgeries.

But that is starting to change. Since 2017, Zimbabwe has installed solar panels atop more than 400 healthcare facilities, steadying power supplies and replacing expensive and polluting diesel-fired generators. The “Solar for Health” initiative is a prime example of the type of sustainable infrastructure development that will be vital to combating climate change, improving public services and driving the economic recovery from COVID-19.

So says a new report from the United Nations Environment Programme (UNEP). It urges planners and policymakers to take a more systematic approach to sustainable infrastructure, incorporating it into their long-term development plans and ensuring human-made systems work with natural ones.

“We can no longer use the business-as-usual approach to infrastructure, which is leading to ecological destruction and massive carbon dioxide emissions. Investments in sustainable infrastructure are not only environmentally sound but also bring economic and social benefits. Low-carbon, nature-positive infrastructure projects can help minimize the sector’s environmental footprint and offer a more sustainable, cost-effective path to closing the infrastructure gap,” said Inger Andersen, Executive Director of UNEP.   

A source of emissions

Built infrastructure, which includes everything from office blocks to highways to power plants, is responsible for 70 per cent of all greenhouse gas emissions, mentions the report, the International Good Practice Principles for Sustainable Infrastructure. Poorly designed, infrastructure can also displace communities, endanger wildlife and weigh, often for decades, on public finances.

“There is an urgent need to include sustainable and climate resilient infrastructure as an integral part of green growth to deliver energy, water, and transportation solutions that will facilitate opportunity, connection, and sustainable growth,” said Ban Ki-moon, former United Nations Secretary-General and the President of the Global Green Growth Institute, a UNEP partner.”

Ban said the new report is a “very useful guiding framework for governments to lay the groundwork for a future where sustainable infrastructure is the only kind of infrastructure we know.”

To help countries reach that goal, the new UNEP report offers guiding principles for governments to integrate sustainability into their decision making on infrastructure.  Among other things, it recommends that states align their infrastructure planning with the United Nations Sustainable Development Goals, humanity’s blueprint for a better future. It also urges them to minimize the environmental footprint of construction projects and meaningfully engage local communities in infrastructure decision making.

Return on investment

The report also highlighted the economic return on sustainable infrastructure, which includes renewable energy plants, eco-friendly public buildings and low-carbon transport. Investing in renewables and energy efficiency, it said, creates five times more jobs than investments in fossil fuels. Similarly, investing in resilient infrastructure in developing countries can create a return of US$4 for every US$1 invested, according to the World Bank.

Trend setters

Alongside the report, UNEP released a series of case studies that showed how many countries are finding innovative ways to develop sustainable infrastructure.

In Ecuador, the government has turned to nature-based solutions to bolster water supplies to several major cities. By replanting trees, fencing off rivers and purchasing land for conservation, one region has revived watersheds that support more than 400,000 people.

In Singapore, which is aiming to have 80 per cent of its buildings certified as green by 2030, builders have used recycled materials to construct everything from schools to corporate offices. (The country was the first to unveil a building constructed entirely of recycled concrete aggregate and demolition waste.)

With COVID-19 sparking a global wave of stimulus spending, Ambroise Fayolle, Vice President of the European Investment Bank said the publication of the principles “is timely, reminding us all of the importance of building back better by tackling the long-term challenges we face.”  

UN Environment

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COVID-19 is reversing the important gains made over the last decade for women

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Progress for women in work could be back at 2017 levels by the end of 2021 as a result of the COVID-19 pandemic, according to analysis conducted for PwC’s annual Women in Work Index, which measures female economic empowerment across 33 Organisation for Economic Cooperation and Development (OECD) countries*.  The evidence emerging globally is that the damage from COVID-19 and government response and recovery policies, is disproportionately being felt by women.

For nine years, countries across the OECD* made consistent gains towards women’s economic empowerment. However, due to COVID-19 this trend will now be reversed, with the Index estimated to fall 2.1 points between 2019 and 2021, according to analysis undertaken for PwC’s annual Women in Work Index. The Index will not begin to recover until 2022, where it should gain back 0.8 points. 

In order to undo the damage caused by COVID-19 to women in work – even by 2030, progress towards gender equality needs to be twice as fast as its historical rate.

Bhushan Sethi, Joint Global Leader, People and Organization at PwC, said:

“The setbacks that we are experiencing with COVID-19 in terms of the workforce tell a worrisome story. While the impacts are being felt by everyone across the globe, we are seeing women exiting the workforce at a faster rate than men. Women carry a heavier burden than men of unpaid care and domestic work. This has increased during the pandemic, and it is limiting women’s time and options to contribute to the economy. In the labour market, more women work in hard-hit human contact-intensive service sectors  – such as accomodation and food services, and retail trade. With social distancing and lockdowns, these sectors have seen unprecedented job losses.”   

Between 2019 and 2020, the annual OECD unemployment rate increased by 1.7 percentage points for women (from 5.7% in 2019 to 7.4% in 2020). In the US, the female unemployment rate increased sharply from 4% in March 2020 to 16% in April 2020. The female unemployment rate stayed high for the remainder of 2020, ending the year in December 2020 at 6.7%, 3 percentage points higher than in December 2019.  In the UK, the full impact of job losses from COVID-19 is yet to be realised due to job retention schemes, but furlough data shows that women are at greater risk of losing their jobs when these schemes come to an end. Between July and October 2020, a total of 15.3 million jobs were furloughed in the UK. For furloughed jobs for which gender was known, 52% of these were women’s jobs, despite women only making up 48% of the workforce.*** 

The disproportionate burden of unpaid childcare falls on women

Before COVID-19 hit, women on average spent six more hours than men on unpaid childcare every week (according to research by UN Women). During COVID-19, women have taken on an even greater share and now spend 7.7 more hours per week on unpaid childcare than men**  – this ‘second shift’ equates to 31.5 hours per week; almost as much an extra full-time job. 

This increase in unpaid labour has already reduced women’s contribution to the economy. If this extra burden lasts, it will cause more women to leave the labour market permanently, reversing progress towards gender equality and reducing productivity in the economy. 

While some women may choose to leave the workforce temporarily due to COVID-19 with the intention to return post-pandemic, research shows that career breaks have long-term impacts on women’s labour market prospects, and women will return to lower paid and lower skilled positions. 

PwC Women in Work 2021 Index (performance prior to COVID-19 pandemic)

Iceland continues to hold the top spot on the Index out of OECD countries. It is a consistent strong performer in female labour force participation (84%), has a small participation rate gap (5%), and even smaller female unemployment rate (3%).  

Greece saw the largest increase in terms of Index score between 2018 and 2019, driven by improvement in all labour market indicators except for the share of full-time female employees. On the contrary, Portugal experienced the largest decline in Index score between 2018 and 2019 due to a widening of its gender pay gap by 5 percentage points.

New Zealand and Slovenia both increased their rankings on the Index by one position. New Zealand saw an upward trend across all five indicators and has risen by 5 spots on the Index over the course of nine years. Government policy and a history of female representation in political institutions have helped to drive these gains. Slovenia’s improvement was driven by a fall in the participation rate gap and in female unemployment, as well as an increase in the share of full-time female employment. 

If OECD countries increased their rates of female employment to match Sweden’s (consistently the top performer), the gain to GDP would be over US$6 trillion per annum. The US, with one of the highest female unemployment rates, is expected to gain the most – as much as US$1.7 trillion per annum. 

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