The European economy is forecast to rebound faster than previously expected, as activity in the first quarter of the year exceeded expectations and the improved health situation prompted a swifter easing of pandemic control restrictions in the second quarter. 

According to the Summer 2021 interim Economic Forecast, the economy in the EU and the euro area is set to expand by 4.8% this year and 4.5% in 2022. Compared to the Spring forecast, the growth rate for 2021 is significantly higher in the EU (+0.6 pps.) and the euro area (+0.5 pps.), while for 2022 it is slightly higher in both areas (+0.1 pp.). Real GDP is projected to return to its pre‑crisis level in the last quarter of 2021 in both the EU and the euro area.

Growth is expected to strengthen due to several factors. First, activity in the first quarter of the year exceeded expectations. Second, an effective virus containment strategy and progress with vaccinations, which in turn allowed EU Member States to reopen their economies. This reopening benefited service sector businesses in particular. Upbeat survey results among consumers and businesses as well as data tracking mobility suggest that a strong rebound in private consumption is already underway. In addition, there is evidence of a revival in intra-EU tourist activity, which should further benefit from the entry into application of the new EU Digital COVID Certificate. Together, these factors are expected to outweigh the adverse impact of the temporary input shortages and rising costs hitting parts of the manufacturing sector.

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. Strong growth in the EU's main trading partners should benefit EU goods exports, whereas service exports are set to suffer from remaining constraints to international tourism.

The Recovery and Resilience Facility (RRF) is expected to make a significant growth contribution. The total wealth generated by the RRF over the forecast horizon is expected to be approximately 1.2% of the EU's 2019 real GDP.

The forecast for inflation for 2021 and 2022 has also been revised higher. Rising energy and commodity prices, production bottlenecks due to capacity constraints and the shortage of some input components and raw materials, as well as strong demand both at home and abroad are expected to put upward pressure on consumer prices this year. In 2022, these pressures should moderate gradually as production constraints are resolved and supply and demand converge.

Accordingly, inflation in the EU is now forecast to average 2.2% this year (+0.3 pps. compared to the Spring Forecast) and 1.6% in 2022 (+0.1 pps). In the euro area, inflation is forecast to average 1.9% in 2021 (+ 0.2 pps.) and 1.4% in 2022 (+0.1 pps.). 

Uncertainty and risks surrounding the growth outlook are high, but remain overall balanced. The risks posed by the emergence and spread of COVID-19 virus variants underscore the importance of further picking up the pace up of vaccination campaigns. Economic risks relate in particular to the response of households and firms to changes in restrictions. Inflation may turn out higher than forecast, if supply constraints are more persistent and price pressures are passed on to consumer prices more strongly.

Image © European Commission, 2021