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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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Zimbabwe’s Economy is Set for Recovery, but Key Risks Remain

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Gross Domestic Product (GDP) growth in Zimbabwe is projected to reach 3.9 percent in 2021, a significant improvement after a two-year recession, according to the World Bank Zimbabwe Economic Update (ZEU) launched today.

Economic growth this year will be led by recovery of agriculture as rains normalize, businesses adjust to limitations caused by the COVID-19 (coronavirus) pandemic, and inflation slows down. However, disruptions caused by the pandemic will continue to weigh on economic activity in Zimbabwe, limiting employment growth and improvements in living standards.

The ZEU, Overcoming Economic challenges, Natural Disasters, and the Pandemic: Social and Economic Impacts, provides the World Bank perspective on macroeconomic and poverty developments and discusses ways to strengthen public service delivery in key sectors. This is the third economic update for Zimbabwe produced by the World Bank.  Economic Updates are a standard World Bank tool for macroeconomic and fiscal monitoring.

The ZEU notes that economic recovery is expected to strengthen further in 2022 with GDP growing at 5.1 percent as the deployment of vaccines intensifies and implementation of National Development Strategy 1 (2021-2025) bears fruits. Overall, the COVID-19 global contagion continues to pose significant downside risks, and thus the global and local outlook remains uncertain. A prolonged pandemic, weaker global demand, and heightened macroeconomic instability could choke economic growth, increase poverty, and worsen human capital development outcomes.

Mitigating these risks requires domestic policies to strengthen and sustain macroeconomic stability – which is critical for consolidating economic recovery. Recent efforts to stabilize prices through rule-based monetary and exchange rate policies have been effective and must be continued and expanded. Fiscal policies supportive of these efforts have thus focused on avoiding monetary financing and quasi-fiscal activities, reducing distortive subsidies, and improving fiscal and debt transparency.

“Improving the country’s growth prospects will require further attention to policies that strengthen the quality of service delivery in the social sectors. Preserving lives during an unprecedented that protects livelihoods, strengthens social protection, improves food security, and ensures better education outcomes,” said Mukami Kariuki, World Bank Country Manager.  

Facing tight public finances and limited recourse to external financing, Zimbabwe will need to rely mostly on reallocating domestic resources to optimal public uses and leveraging private financing and humanitarian support where possible. Addressing underlying challenges in health, education, social protection, and food security will require sustained financing, strengthened accountability frameworks and investments in appropriate management information systems.

The ZEU reviews developments in 2019 and 2020; and emerging trends in 2021. Part One of the ZEU provides an overview of the macroeconomic and poverty context. Part Two assesses the impact of COVID-19 and other exogenous shocks on delivery of basic services to the poor and proposes mitigating actions for discussion. It also summarizes key policy options needed to stabilize Zimbabwe’s economy, minimize the social costs of the transition, and prepare for an economic recovery.

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Slow jobs recovery and increased inequality risk long-term COVID-19 scarring

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The labour market crisis created by the COVID-19 pandemic is far from over, and employment growth will be insufficient to make up for the losses suffered until at least 2023, according to a new assessment by the International Labour Organization (ILO).

The ILO’s World Employment and Social Outlook: Trends 2021  (WESO Trends) projects the global crisis-induced ‘jobs gap’ will reach 75 million in 2021, before falling to 23 million in 2022. The related gap in working-hours, which includes the jobs gap and those on reduced hours, amounts to the equivalent of 100 million full-time jobs in 2021 and 26 million full-time jobs in 2022. This shortfall in employment and working hours comes on top of persistently high pre-crisis levels of unemployment, labour underutilization and poor working conditions.

In consequence, global unemployment is expected to stand at 205 million people in 2022, greatly surpassing the level of 187 million in 2019. This corresponds to an unemployment rate of 5.7 per cent. Excluding the COVID-19 crisis period, such a rate was last seen in 2013.

The worst affected regions in the first half of 2021 have been Latin America and the Caribbean, and Europe and Central Asia. In both, estimated working-hour losses exceeded eight per cent in the first quarter and six per cent in the second quarter, compared to global working-hour losses of 4.8 and 4.4 per cent in the first and second quarter, respectively.

Global employment recovery is projected to accelerate in the second half of 2021, provided that there is no worsening in the overall pandemic situation. However this will be uneven, due to unequal vaccine access and the limited capacity of most developing and emerging economies to support strong fiscal stimulus measures. Furthermore, the quality of newly created jobs is likely to deteriorate in those countries.

The fall in employment and hours worked has translated into a sharp drop in labour income and a corresponding rise in poverty. Compared to 2019, an additional 108 million workers worldwide are now categorized as poor or extremely poor (meaning they and their families live on the equivalent of less than US$3.20 per person per day). “Five years of progress towards the eradication of working poverty have been undone,” the report says, adding that this renders the achievement of the UN Sustainable Development Goal of eradicating poverty by 2030 even more elusive.

The COVID-19 crisis has also made pre-existing inequalities worse by hitting vulnerable workers harder, the report finds. The widespread lack of social protection – for example among the world’s two billion informal sector workers – means that pandemic-related work disruptions have had catastrophic consequences for family incomes and livelihoods.

The crisis has also hit women disproportionately. Their employment declined by 5 per cent in 2020 compared to 3.9 per cent for men. A greater proportion of women also fell out of the labour market, becoming inactive. Additional domestic responsibilities resulting from crisis lockdowns have also created the risk of a “re-traditionalization” of gender roles.

Globally, youth employment fell 8.7 per cent in 2020, compared with 3.7 per cent for adults, with the most pronounced fall seen in middle-income countries. The consequences of this delay and disruption to the early labour market experience of young people could last for years.

The pandemic’s impact on young people’s labour market prospects is laid out in greater detail in an ILO brief published alongside the WESO Trends. The Update on the youth labour market impact of the COVID-19 crisis  also finds that gender gaps in youth labour markets became more pronounced.

“Recovery from COVID-19 is not just a health issue. The serious damage to economies and societies needs to be overcome too. Without a deliberate effort to accelerate the creation of decent jobs, and support the most vulnerable members of society and the recovery of the hardest-hit economic sectors, the lingering effects of the pandemic could be with us for years in the form of lost human and economic potential and higher poverty and inequality,” said ILO Director-General, Guy Ryder. “We need a comprehensive and co-ordinated strategy, based on human-centred policies, and backed by action and funding. There can be no real recovery without a recovery of decent jobs.”

As well as looking at working hour and direct employment losses, and foregone job growth, the WESO outlines a recovery strategy structured around four principles: promoting broad-based economic growth and the creation of productive employment; supporting household incomes and labour market transitions; strengthening the institutional foundations needed for inclusive, sustainable and resilient economic growth and development; and using social dialogue to develop human-centred recovery strategies.

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Universal Access to Sustainable Energy Will Remain Elusive Without Addressing Inequalities

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During the last decade, a greater share of the global population gained access to electricity than ever before, but the number of people without electricity in Sub-Saharan Africa actually increased. Unless efforts are scaled up significantly in countries with the largest deficits the world will still fall short of ensuring universal access to affordable, reliable, sustainable, and modern energy by 2030, according to Tracking SDG 7: The Energy Progress Report released today by the International Energy Agency (IEA) the International Renewable Energy Agency (IRENA), the UN Department of Economic and Social Affairs (UN DESA), the World Bank, and the World Health Organization (WHO).

According to the report, significant progress has been made since 2010 on various aspects of the Sustainable Development Goal (SDG) 7, but progress has been unequal across regions. While more than one billion people gained access to electricity globally over the last decade, COVID’s financial impact has made basic electricity services unaffordable for 30 million more people, the majority located in Africa. Nigeria, the Democratic Republic of Congo and Ethiopia had the biggest electricity access deficits, with Ethiopia replacing India in the Top 3.

Globally, the number of people without access to electricity declined from 1.2 billion in 2010 to 759 million in 2019. Electrification through decentralized renewable-based solutions in particular gained momentum. The number of people connected to mini grids has more than doubled between 2010 and 2019, growing from 5 to 11 million people. However, under current and planned policies and further affected by the COVID-19 crisis, an estimated 660 million people would still lack access in 2030, most of them in Sub-Saharan Africa.

At the same time, some 2.6 billion people remained without access to clean cooking in 2019, one third of the global population. Largely stagnant progress since 2010 leads to millions of deaths each year from breathing cooking smoke, and without rapid action to scale up clean cooking the world will fall short of its target by 30 percent come 2030. The state of access in the Sub-Saharan African region is characterized by population growth outpacing gains in the number of people with access, so that 910 million in the region lack access to clean cooking. The top 20 access-deficit countries account for 81 percent of the global population without access to clean fuels and technologies. Of these, the Democratic Republic of the Congo, Ethiopia, Madagascar, Mozambique, Niger, Uganda and Tanzania had less or equal to 5 percent of their populations with access to clean cooking. On a positive note, Indonesia, Cambodia and Myanmar have made gains each year over the report period.

The report examines various ways to bridge the gaps to reach SDG7, chief among them the goal of significantly scaling up renewables – which have proven more resilient than other parts of the energy sector during the COVID-19 crisis. While renewable energy has seen unprecedented growth over the last decade, its share of total final energy consumption remained steady as global energy consumption grew at a similar rate. Renewables are most dynamic in the electricity sector, reaching around 25 percent in 2018, while progress in the heat and transport sectors have been much slower.

More than one third of the increase in renewable energy generation in 2018 can be attributed to East Asia – driven by large uptakes of solar and wind energy in China. The largest country-level advances in renewable energy in 2018 were observed in Spain, owing to higher hydropower generation, followed by Indonesia where a rapid uptake of bioenergy for power generation played a substantial role. To significantly increase the share of renewable energy in line with the SDG 7 target, current efforts need to accelerate in all end-use sectors to scale uptake of renewables while containing total energy demand.

Energy intensity improvements (a proxy for energy efficiency) are moving further away from the target set under SDG7 for 2030. The rate of global primary energy intensity improvement in 2018 was 1.1 percent compared to 2017, the lowest average annual rate of improvement since 2010. The annual improvement until 2030 will now need to average 3 percent if we are to meet the goal.

Accelerating the pace of progress across all regions and indicators will require stronger political commitment, long-term energy planning, and adequate policy and scale incentives to spur faster uptake of sustainable energy solutions. Although clean energy investments continue to be sourced primarily from the private sector, the public sector remains a major source of financing and is central in leveraging private capital, particularly in developing countries and in a post-COVID context. One of the newest indicators in the report, international public financial flows to developing countries, shows that international financial support continue to be concentrated in a few countries and failing to reach many of those most in need. Flows to developing countries in support of clean and renewable energy reached $14 billion in 2018, with a mere 20 percent going to the least-developed countries, which are the furthest from achieving the various SDG7 targets. An increased emphasis on “leaving no one behind” is required in the years ahead. 

This is the seventh edition of this report, formerly known as the Global Tracking Framework (GTF). This year’s edition was chaired by the United Nations Statistics Division. 

The report this year comes at a crucial time as Governments and stakeholders are gearing up for the UN High-level Dialogue on Energy, a summit-level meeting in September 2021 that will examine steps needed to achieve SDG7 by 2030 and mobilize voluntary commitments and actions in the form of Energy Compacts.

Funding for the report was provided by the World Bank’s Energy Sector Management Assistance Program (ESMAP).

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