Eurozone Economy Set to Rebound Faster Than Previously Expected

By Maria Martinez

The European economy is forecast to rebound faster than previously expected, the European Union said Wednesday, revising growth expectations for 2021 and 2022 upward.

The two main reasons for the revision are that activity in the first quarter of the year exceeded expectations and the improved health situation prompted a swifter easing of pandemic restrictions in the second quarter.

"Our economies have been able to reopen faster than expected thanks to an effective containment strategy and progress with vaccinations," Valdis Dombrovskis, executive vice-president for an economy that works for people, said.

Gross domestic product in the 19-member eurozone will grow by 4.8% in 2021, the EU said in its quarterly report, upgrading its 4.3% forecast from May.

"That is the highest upward revision we have made in more than 10 years and is in line with firms' confidence reaching a record high in recent months," said Paolo Gentiloni, the EU's commissioner for economy.

Economic activity in the eurozone is forecast to grow by 1.3% in the second quarter, before accelerating to 2.9% in the third, on the back of continued easing of containment measures and the resumption of social activities. Growth momentum in the fourth quarter is forecast to ease but to remain solid at 1.3%.

In 2022, the eurozone economy is expected to expand by 4.5%, up from 4.4% previously expected.

Eurozone real GDP is projected to return to its pre-crisis level in the last quarter of 2021, one quarter earlier than expected in the European Commission Spring 2021 Economic Forecast.

"Some member states will see their economic output return to their pre-crisis levels already by the third quarter of 2021, but others will have to wait longer," Mr. Dombrovskis said.

Among the largest member states, Poland is expected to have returned to pre-crisis levels of output in the second quarter of 2021 and Germany and the Netherlands in the third quarter, while Spain and Italy will do so one year after, in the third quarter of 2023.

Private consumption and investment are expected to be the main drivers of growth, supported by employment that is expected to move in tandem with economic activity, the European Commission said.

"The swift reopening underway in the EU member states is bringing back spending opportunities earlier than previously expected," the European Commission said.

Strong growth in the European Union's main trading partners should also benefit goods exports.

Upbeat survey results among consumers and businesses as well as data tracking mobility suggest that a strong rebound in private consumption is already underway, the EU said. Furthermore, despite remaining constraints to international tourism, there is evidence of a revival in intra-EU tourist activity, which should further benefit from the new EU Digital COVID Certificate.

Rising energy and commodity prices, production bottlenecks, as well as strong demand at home and abroad are expected to put upward pressure on consumer prices in 2021. The European Commission has revised its inflation forecasts to 1.9% in 2021, from 1.7% in the Spring forecasts and to 1.4% in 2022 from 1.3%.

Mr. Dombrovskis said a close eye should be kept on rising inflation. Although prices pressures in 2022 should moderate gradually as production constraints are resolved and supply and demand converge, the EU said.

Uncertainty and risks surrounding the growth outlook are high, but remain balanced overall, the European Commission said. The risks posed by the spread of Covid-19 variants underscore the importance of further increasing the pace of vaccinations.

"The spread of the Delta variant is a stark reminder that we have not yet emerged from the shadow of the pandemic," Mr. Gentiloni said.

Write to Maria Martinez at [e-mail]

(END) Dow Jones Newswires

07-07-21 0514ET