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Remarks by Commissioner Gentiloni at the press conference on the Summer 2020 Economic Forecast

Met dank overgenomen van Europese Commissie (EC), gepubliceerd op dinsdag 7 juli 2020.

Good morning everybody. Let me start with the main messages of this forecast. The summer forecast shows that the road to recovery is still paved with uncertainty.

First, the pandemic has hit the European economy harder than previously expected, even if a cautious rebound is now beginning. In the euro area, gross domestic product is forecast to shrink by 8.7% this year and to increase by 6.1% in 2021. For the EU as a whole, the economy is forecast to contract by 8.3% in 2020 and grow by 5.8% in 2021. The contraction in 2020 is thus set to be around one percentage point worse than projected in the Spring Forecast. Growth in 2021 will also be slightly less robust than projected in the spring.

Second, quick and decisive policy measures have so far prevented a larger slump in European labour markets. Jobs have been preserved by various measures, in particular short-time work schemes that have helped keep employees attached to their jobs. But going forward, the success of these measures will depend on the pace of the recovery.

Third, we see widening divergences across countries. Although we are all hit by a common shock, it has impacted Member States differently. The risk of an increasing divergence was the rationale for proposing our common recovery plan. This risk appears to be materialising. This is the argument for Next Generation EU and it is now stronger than ever.

Fourth, inflation is expected to remain relatively low this year and to move slightly higher towards the end of the forecast horizon.

And fifth, uncertainty remains high and risks continue to be tilted to the downside. Let me now give you more details.

In the first quarter of 2020 the European economy was hit by the pandemic - and although in most countries, confinement measures were only implemented in the second half of March, the decline from the preceding quarter was already the largest ever seen in the euro area.

The pandemic and the measures taken to contain the spread mainly impacted economic activity in the second quarter, which is expected to have been the worst drop in GDP since the Second World War.

The hit to economic activity was so strong that a partial rebound in the second half of the year will not be able to lift the annual growth rate in a significant way. The chart shows how far we will have moved away from the growth path that we had expected before the pandemic occurred. In terms of annual output, real GDP in 2021 will remain below the level that had been recorded in 2019 and further below the level we had expected before the pandemic.

Real global output outside the EU is estimated to have contracted by more than 3% in the first quarter (quarter-on-quarter).

The decline in the first quarter mostly reflects measures to contain the virus taken in China. Most other countries implemented containment measures only late in the first quarter and in the second quarter, as the epidemic became global. Therefore, the output collapse in the second quarter of 2020 is likely to be much deeper at a global level.

Business activity is likely to have reached a trough in April reflected by the global composite Purchasing Managers Index reaching an all-time low of 26.2, far below the threshold of 50 which separates expansion from contraction. The downturn in the services sector was particularly strong, especially in tourism, transport and recreation. However, data released in late June and early July already point to a moderate improvement.

The still rising daily infections at the global level do not bode well for the world economy. We consider that the outlook for global growth outside the EU has weakened further since the spring. Prospects have sharply deteriorated in a number of emerging markets, where rising infections are leading to stricter and longer lockdowns.

Overall, real global GDP (excluding the EU) is forecast to contract by around 4% in 2020 before a recovery of 5% in 2021. This implies that by the end of next year, global GDP would recover above the 2019 level, but remain substantially below the pre-pandemic global growth trajectory

The European economy is slowly moving from a state of ‘hibernation' to a ‘new normal'.

As easing progresses, mobility has bounced back. On average, euro area mobility in the second quarter is estimated to have been about 30% below normal. Yet by the end of June, mobility had already recovered to about -10%.

However, compulsory or voluntary social distancing will continue for some time, and is necessary, and some habits may have changed for good. In other words, the European economy is approaching a “new normality”, which is reflected in the assumptions underpinning this forecast.

The euro area is thought to have experienced a cumulative hit to GDP of around 17% of GDP in the first half of the year. The GDP decline is expected to have been particularly pronounced in the second quarter (-13½% q-o-q).

In the first half of 2020, the euro area labour market underwent a massive deterioration, which translated essentially into a sharp decline in the number of hours worked.

What is clear is that the recent increases in unemployment have been small compared to the decline in economic activity. This marks a substantial difference from developments outside Europe, such as in the US, where lay-offs have occurred immediately and in large numbers.

The extended short-time work schemes have played an important role in keeping employees attached to their jobs. However, these schemes are not identical in all Member States, which contributes to marked differences. And in the future, the EU's new instrument for temporary Support to mitigate Unemployment Risk in an Emergency (this is the famous acronym SURE) should limit such differences by helping countries to cover the costs of national short-time work schemes.

Forward-looking indicators of the labour market send positive signals, but caution is needed. A number of factors are expected to slow the labour market's return to its pre-pandemic situation. Many short-time work subsidy schemes are limited in time and despite recent extensions, the schemes will not indefinitely preserve the employment relationship and support incomes.

Inflation in the euro area has fallen to annual rates of below 0.5 percent, driven by the fall in energy prices.

The inflation outlook has not changed substantially since spring but there are four new factors, overall balancing one another.

The higher oil price assumptions limit the dampening impact of the energy component on inflation.

Food prices increased more than expected in the second quarter.

Temporary VAT cuts and other fiscal measures will lower inflation in 2020, with reversed and positive base effects in the second half of 2021.

The weaker economic outlook will continue to exert a downward drag on price pressures.

Overall, euro area headline inflation is forecast to average 0.3% in 2020 and to increase to 1.1% in 2021.

Now let's look at the GDP outlook for this year and next. The economy of each EU Member State is expected to contract in 2020 and to bounce back 2021. So contraction and bouncing back in all Member States. Divergences across countries in terms of both the recession and the rebound are related to different timing and stringency of lockdowns and containment, as well as different economic structures, namely exposure to tourism and services reliant on person-to-person contact. As we have revised our assumptions about containment measures, the expected differences across Member States have also become larger.

In 2020, relatively strong GDP contractions are projected for France, Italy and Spain, whereas milder contractions are expected for Germany, the Netherlands and Poland.

Growth in 2021 is expected for all economies, but without substantially narrowing the differences. So, 2021, the rebound, but not narrowing the differences - I would say without a strong policy intervention.

In Germany, annual GDP in 2020 is now projected to fall by 6.3%. The large fiscal stimulus is expected to avert severe income and job losses, limit insolvencies, and boost consumption and investment. This should help sustain the recovery in the second half of 2020. So we project growth of around 5.3% in 2021.

In France, GDP is expected to fall by 10.6% in 2020, which mainly reflects the fall of GDP by almost 17% (quarter-on-quarter) in the second quarter. A rebound in activity has already been observed over the second half of May and June, as a result of the lifting of lockdown measures. Following the gradual recovery starting in mid-2020, GDP is set to expand by 7.6% in 2021.

In Italy, the pandemic pushed the economy into a deep contraction in the first two quarters of 2020. Meanwhile, high-frequency indicators suggest that economic activity began to recover in May and in June. The Italian economy is set to start bouncing back in the third quarter of this year, helped by substantial policy support. Annual GDP is set to fall by 11.2% in 2020, before picking up to 6.1% in 2021.

In Spain the impact of the confinement in the first half of 2020 looks likely to turn out worse than expected in the spring forecast. Although all indicators show that activity is recovering fast, as restrictions are being lifted, the rebound will only partially offset the larger contraction in the first half of the year. Annual GDP in 2020 is now forecast to contract by 10.9%. The outlook for 2021 remains broadly unchanged compared to spring, at about 7.1%.

In the Netherlands, real GDP is forecast to decline by about 6.8% this year with all demand components except public consumption contracting sharply, before seeing a partial recovery of 4.6% in 2021.

In Poland, the economy proved resilient in the first quarter of 2020, but in the second quarter, real GDP is expected to plunge, before gradually recovering. Overall, this is projected to result in a contraction of 4.6% in 2020 and a rebound of about 4.3% in 2021.

In conclusion I want to repeat that uncertainty is still surrounding this summer forecast - despite the fact that the work done by DG ECFIN is very solid - as the scale and duration of the pandemic remain essentially unknown. Risks are mostly but not all on the downside, as already in spring.

First, assumptions about the pandemic could be too optimistic. In the absence of a vaccine and treatment options for COVID-19, any sustained increase in the number of infections or further major outbreaks would worsen the economic outlook.

Second, the labour market could be affected worse than expected. In the absence of a rapid recovery in demand, firms may proceed with more widespread lay-offs when the temporary short-time work schemes come to an end.

Third, solvency problems could affect more companies than currently expected. A rise in corporate defaults could prevent companies from restructuring and end up in liquidations with further knock-on effects on employment and on the financial sector.

Fourth, despite the stability attained through central bank initiatives, episodes of turbulence in financial markets cannot be completely excluded, particularly given the recent decoupling of developments in financial markets and in the real economy.

Finally, if the transition period with the UK ends with no agreement, that would falsify the purely technical assumption of an unchanged trading relationship. This would be a negative outcome for both sides, though particularly for the UK.

We have also risks on the upside. First of all a swifter-than-expected rebound cannot be excluded, particularly if the epidemiological situation allows a faster lifting of remaining restrictions than assumed. And this will also bring a reduction in the level of uncertainty that is surrounding our economies.

And the rapid implementation of the Commission's proposed recovery plan, built around ‘Next Generation EU', which is not calculated in its effect in our forecast, would help to brighten the economic outlook, including by quickly delivering a boost to confidence.

Let me conclude by recalling that there is a human story behind these numbers, which would have been unthinkable at the start of this year. This economic upheaval is the result of a pandemic that has claimed the lives of 530,000 people worldwide, a number still rising by the day - in some parts of the world at an alarming rate.

And of course, while the policy response across Europe has helped to cushion the blow for our citizens, this remains a story of increasing inequality, poverty and insecurity. And we should never forget this dimension of the crisis. This is why it is so important that an agreement is reached swiftly on the recovery plan and the new Multiannual Financial Framework, to inject both new confidence and new financing into our economy at this so critical time.

And now, I am ready to take your questions.

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