EUROFRAME forecast: economic recovery expected soon in the euro zone
The economic recovery in the euro area is currently still a long time coming, but is expected to be strong from the second quarter onward. Thanks to numerous short-time work programs in the Member States, the conventional unemployment rate rose only moderately in 2020, but including short-time workers unemployment shot up to as much as 35 percent in France and 17 percent in Germany. Public debt in the euro area will now exceed 100 percent of gross domestic product.
Gross domestic product in the euro area is expected to rise by 4.9 percent this year and by 3.1 percent in 2021, according to the EUROFRAME Group of economic research institutes, to which the Kiel Institute belongs (Euroframe report: Economic Assessment of the Euro Area: Winter 2020/2021/https://www.ifw-kiel.de/publications/euroframe-forecast/economic-assessment-of-the-euro-area-winter-20202021-15912/). The economy will still suffer from the consequences of the second Covid-19 wave throughout the first quarter. However, a significant recovery is likely to start when substantial parts of the population will have been vaccinated and the number of new infections declines significantly, which the experts assume to be the case from the second quarter.
„In the areas of personal services and private consumption, there is a lot of catch-up potential, just think of vacation trips or visits to restaurants. Economic activity in these areas is likely to rebound abruptly as soon as the pandemic situation allows. The recovery in the euro zone thus depends on the progress of vaccination and successful containment of Covid-19. The EU’s 750 billion support package will have a substantial impact not before 2022, both for the economy and in the EU budget,“ said Kiel Institute economic researcher Klaus-Jürgen Gern.
Public debt at over 100 percent of GDP, labor markets severely affected
The various aid programs of the member states against the pandemic have been driving up the budget deficit significantly, to an estimated 8.8 percent for the euro area as a whole in 2020. As a result, government debt in the euro area will rise to over 100 percent of GDP.
The Covid 19 crisis has had a major impact on the labor market in all member countries, leading to a significant decline in hours worked in the euro zone of over 20 percent at its peak. Despite this, the conventionally measured unemployment rate is expected to rise only moderately from 7.3 percent before the crisis to 8.8 percent in 2021, thanks to numerous short-time work programs. It is expected to fall gradually to 8.2 percent in 2022.
Including short-time work, however, unemployment is significantly higher in all member countries. According to this wider definition, the unemployment rate peaked at 35 percent in France and 17 percent in Germany.
„Although the unemployment rate, including short-time work, fell significantly over the summer, it remained substantially elevated in the fall and rose again during the second wave of the pandemic,“ Gern said.
EUROFRAME (https://www.euroframe.org/homepage.html) (European Forecasting Association for the Macroeconomy) is an association of 10 prominent economic research institutes from 9 countries, including the Kiel Institute.
Euroframe report: Economic Assessment of the Euro Area: Winter 2020/2021 (https://www.ifw-kiel.de/publications/euroframe-forecast/economic-assessment-of-the-euro-area-winter-20202021-15912/)
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Dr. Klaus-Jürgen Gern
Business Cycles and Growth
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