Europe remains in the grip of the coronavirus pandemic. The resurgence in the number of cases, together with the appearance of new, more contagious strains of the coronavirus, have forced many Member States to reintroduce or tighten containment measures. At the same time, the start of vaccination programmes throughout the EU provides grounds for cautious optimism.
Economic growth poised to recover as containment measures ease
The Winter 2021 Economic Forecast projects that the euro area economy will grow by 3.8% in both 2021 and 2022. The forecast projects that the EU economy will grow by 3.7% in 2021 and 3.9% in 2022.
The euro area and EU economies are expected to reach their pre-crisis levels of output earlier than anticipated in the Autumn 2020 Economic Forecast, largely because of the stronger than expected growth momentum projected in the second half of 2021 and in 2022.
After strong growth in the third quarter of 2020, economic activity contracted again in the fourth quarter as a second wave of the pandemic triggered renewed containment measures. With those measures still in place, the EU and euro area economies are expected to contract in the first quarter of 2021. Economic growth is set to resume in the spring and gather momentum in the summer as vaccination programmes progress and containment measures gradually ease. An improved outlook for the global economy is also set to support the recovery.
The economic impact of the pandemic remains uneven across Member States and the speed of the recovery is also projected to vary significantly.
Inflation outlook to remain subdued
The forecast projects that inflation in the euro area is set to increase from 0.3% in 2020 to 1.4% in 2021, before moderating slightly to 1.3% in 2022. The inflation forecast for the euro area and the EU has increased slightly for 2021 compared to the autumn but is, overall, expected to remain subdued. The delayed recovery is set to continue dampening aggregate demand pressures on prices. In 2021, it will be temporarily pushed up by positive base effects in energy inflation, tax adjustments – especially in Germany – and the impact of pent-up demand hitting some remaining supply constraints. In 2022, as supply adjusts and base effects taper out, inflation is expected to moderate again.
High uncertainty and significant risks remain
Risks surrounding the forecast are more balanced since the autumn, though they remain high. They are mainly related to the evolution of the pandemic and the success of vaccination campaigns.
Positive risks are linked to the possibility that the vaccination process leads to a faster-than-expected easing of containment measures and therefore an earlier and stronger recovery. Also, NextGenerationEU, the EU’s recovery instrument of which the centrepiece is the Recovery and Resilience Facility (RRF), could fuel stronger growth than projected, since the envisaged funding has – for the most part – not yet been incorporated into this forecast.
In terms of negative risks, the pandemic could prove more persistent or severe in the near-term than assumed in this forecast, or there could be delays in the roll-out of vaccination programmes. This could delay the easing of containment measures, which would in turn affect the timing and strength of the expected recovery. There is also a risk that the crisis could leave deeper scars in the EU’s economic and social fabric, notably through widespread bankruptcies and job losses. This would also hurt the financial sector, increase long-term unemployment and worsen inequalities.
Members of the College said:
Valdis Dombrovskis, Executive Vice-President for an Economy that Works for People said: “Today’s forecast provides real hope at a time of great uncertainty for us all. The solid expected pick-up of growth in the second half of this year shows very clearly that we are turning the corner in overcoming this crisis. A strong European response will be crucial to tackle issues such as job losses, a weakened corporate sector and rising inequalities. We will still have a great deal to do to contain the wider socio-economic fallout. Our recovery package will go a long way to supporting the recovery, backed up by vaccination roll-out and a likely upswing in global demand.”
Paolo Gentiloni, Commissioner for Economy said: “Europeans are living through challenging times. We remain in the painful grip of the pandemic, its social and economic consequences all too evident. Yet there is, at last, light at the end of the tunnel. As increasing numbers are vaccinated over the coming months, an easing of containment measures should allow for a strengthening rebound over the spring and summer. The EU economy should return to pre-pandemic GDP levels in 2022, earlier than previously expected – though the output lost in 2020 will not be recouped so quickly, or at the same pace across our Union. This forecast is subject to multiple risks, related for instance to new variants of COVID-19 and to the global epidemiological situation. On the other hand, the impact of Next Generation EU should provide a strong boost to the hardest-hit economies over the coming years, which is not yet integrated into today’s projections.”
The Winter 2021 Economic Forecast provides an update of the Autumn 2020 Economic Forecast which was presented in November 2020, focusing on GDP and inflation developments in all EU Member States.
This forecast is based on a set of technical assumptions concerning exchange rates, interest rates and commodity prices, with a cut-off date of 28 January 2021. For all other incoming data, including assumptions about government policies, this forecast takes into consideration information up until and including 2 February. Unless policies are credibly announced and specified in adequate detail, the projections assume no policy changes.
Crucially, the forecast hinges upon two important technical assumptions concerning the pandemic. First, it assumes that after a significant tightening in the fourth quarter of 2020, containment measures remain strict in the first quarter of 2021. The forecast assumes that containment measures will then begin to ease towards the end of the second quarter, and then more markedly in the second half of the year when the most vulnerable and an increasing share of the adult population should have been vaccinated. Second, it assumes that containment measures will remain marginal towards the end of 2021 with only targeted sectoral measures still present in 2022.
The incorporation of NextGenerationEU, including the RRF, in the forecast remains in line with the usual no-policy-change assumption and is unchanged from the Autumn Forecast. The forecast only incorporates those measures that have either been adopted or credibly announced and specified in sufficient detail, notably in national budgets. In practice, this means that the economic projections of only a few Member States take account of some measures expected to be financed under RRF.
This forecast takes into account that the EU and the United Kingdom agreed on a Trade and Cooperation Agreement, which is provisionally in application since 1 January 2021 and which includes a Free Trade Agreement (FTA).
The European Commission’s next forecast will be the Spring 2021 Economic Forecast in May 2021.
Post-COVID-19, regaining citizen’s trust should be a priority for governments
The COVID-19 crisis has demonstrated governments’ ability to respond to a major global crisis with extraordinary flexibility, innovation and determination. However, emerging evidence suggests that much more could have been done in advance to bolster resilience and many actions may have undermined trust and transparency between governments and their citizens, according to a new OECD report.
Government at a Glance 2021 says that one of the biggest lessons of the pandemic is that governments will need to respond to future crises at speed and scale while safeguarding trust and transparency. “Looking forward, we must focus simultaneously on promoting the economic recovery and avoiding democratic decline” said OECD Director of Public Governance Elsa Pilichowski. “Reinforcing democracy should be one of our highest priorities.”
Countries have introduced thousands of emergency regulations, often on a fast track. Some alleviation of standards is inevitable in an emergency, but must be limited in scope and time to avoid damaging citizen perceptions of the competence, openness, transparency, and fairness of government.
Governments should step up their efforts in three areas to boost trust and transparency and reinforce democracy:
Tackling misinformation is key. Even with a boost in trust in government sparked by the pandemic in 2020, on average only 51% of people in OECD countries for which data is available trusted their government. There is a risk that some people and groups may be dissociating themselves from traditional democratic processes.
It is crucial to enhance representation and participation in a fair and transparent manner. Governments must seek to promote inclusion and diversity, support the representation of young people, women and other under-represented groups in public life and policy consultation. Fine-tuning consultation and engagement practices could improve transparency and trust in public institutions, says the report. Governments must also level the playing field in lobbying. Less than half of countries have transparency requirements covering most of the actors that regularly engage in lobbying.
Strengthening governance must be prioritised to tackle global challenges while harnessing the potential of new technologies. In 2018, only half of OECD countries had a specific government institution tasked with identifying novel, unforeseen or complex crises. To be fit for the future, and secure the foundations of democracy, governments must be ready to act at speed and scale while safeguarding trust and transparency.
Governments must also learn to spend better, according to Government at a Glance 2021. OECD countries are providing large amounts of support to citizens and businesses during this crisis: measures ongoing or announced as of March 2021 represented, roughly, 16.4% of GDP in additional spending or foregone revenues, and up to 10.5% of GDP via other means. Governments will need to review public spending to increase efficiency, ensure that spending priorities match people’s needs, and improve the quality of public services.
Sweden: Invest in skills and the digital economy to bolster the recovery from COVID-19
Sweden’s economy is on the road to recovery from the shock of the COVID-19 crisis, yet risks remain. Moving ahead with a labour reform to facilitate adaptation in a fast-changing economic environment, and investing in digital skills and infrastructure, will be crucial to revive employment and build a sustainable recovery, according to the latest OECD Economic Survey of Sweden.
The pandemic triggered a severe recession in Sweden, despite mild distancing measures and swift government action to protect people and businesses. GDP fell by less than in many other European economies in 2020, thanks to reinforced short-time work, compensation to firms for lost revenue and measures to prop up the financial system, but unemployment still rose sharply. Solid public finances provided room for further stimulus in 2021 to buttress the recovery.
The Survey recommends maintaining targeted support to people and firms until the pandemic subsides, then focusing on strengthening vocational training and skills and increasing investment in areas like high-speed internet and low-carbon transport. Addressing regional inequality, which is low but rising, should also be a priority as the recovery takes hold.
The Survey shows that Sweden has been among the most resilient OECD countries in the face of a historic shock. Yet, like other economies, it faces challenges from demographic changes and the shift to green, digital economies. Investments in education and training, and labour reforms along the lines negotiated by the social partners, will support job creation and strengthen economic resilience. Building on Sweden’s leadership in digital innovation and diffusion will also be key for driving productivity.
After a 3% contraction in 2020, interrupting several years of growth, the Survey projects a rebound in activity with 3.9% growth in 2021 and 3.4% in 2022 as industrial production resumes and exports recover. The recovery in world trade is bolstering the Swedish economy, however the country remains vulnerable to potential disruptions in global value chains.
|The pandemic has aggravated a mismatch in Sweden’s job market, with unfilled vacancies for highly qualified workers coinciding with high unemployment for low-skilled workers and immigrants. The public employment service needs strengthening to provide better support to jobseekers, including immigrants and women, and labour policies should strike the right balance between supporting businesses and workers and supporting transitions away from declining businesses towards growing sectors.|
A rising share of youths and older people in the population, especially in remote areas, is affecting the finances of local governments, which provide the bulk of welfare services. Strengthening local government budgets and ensuring equal welfare provision across the country will require providing tax income to poorer regions more efficiently and raising the economic growth potential across regions through investments in innovation. Improving coordination between government entities and reinforcing the role of universities in local economic networks would help achieve that aim.
Fewer women than men will regain work during COVID-19 recovery
Fewer women will regain jobs lost to the COVID-19 pandemic during the recovery period, than men, according to a new study released on Monday by the UN’s labour agency.
In Building Forward Fairer: Women’s rights to work and at work at the core of the COVID-19 recovery, the International Labour Organization (ILO) highlights that between 2019 and 2020, women’s employment declined by 4.2 per cent globally, representing 54 million jobs, while men suffered a three per cent decline, or 60 million jobs.
This means that there will be 13 million fewer women in employment this year compared to 2019, but the number of men in work will likely recover to levels seen two years ago.
This means that only 43 per cent of the world’s working-age women will be employed in 2021, compared to 69 per cent of their male counterparts.
The ILO paper suggests that women have seen disproportionate job and income losses because they are over-represented in the sectors hit hardest by lockdowns, such as accommodation, food services and manufacturing.
Not all regions have been affected in the same way. For example, the study revealed that women’s employment was hit hardest in the Americas, falling by more than nine per cent.
This was followed by the Arab States at just over four per cent, then Asia-Pacific at 3.8 per cent, Europe at 2.5 per cent and Central Asia at 1.9 per cent.
In Africa, men’s employment dropped by just 0.1 per cent between 2019 and 2020, while women’s employment decreased by 1.9 per cent.
Throughout the pandemic, women faired considerably better in countries that took measures to prevent them from losing their jobs and allowed them to get back into the workforce as early as possible.
In Chile and Colombia, for example, wage subsidies were applied to new hires, with higher subsidy rates for women.
And Colombia and Senegal were among those nations which created or strengthened support for women entrepreneurs.
Meanwhile, in Mexico and Kenya quotas were established to guarantee that women benefited from public employment programmes.
To address these imbalances, gender-responsive strategies must be at the core of recovery efforts, says the agency.
It is essential to invest in the care economy because the health, social work and education sectors are important job generators, especially for women, according to ILO.
Moreover, care leave policies and flexible working arrangements can also encourage a more even division of work at home between women and men.
The current gender gap can also be tackled by working towards universal access to comprehensive, adequate and sustainable social protection.
Promoting equal pay for work of equal value is also a potentially decisive and important step.
Domestic violence and work-related gender-based violence and harassment has worsened during the pandemic – further undermining women’s ability to be in the workforce – and the report highlights the need to eliminate the scourge immediately.
Promoting women’s participation in decision-making bodies, and more effective social dialogue, would also make a major difference, said ILO.
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