EU27 economic forecast revised upwards

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According to the EU’s Spring 2021 Economic Forecast published on 12 May, following a 6.1% decline in 2020, the EU economy will expand by 4.2% in 2021 and by 4.4% in 2022. This represents a significant upgrade of the growth outlook compared to the Winter 2021 Economic Forecast which the Commission presented in February.

Growth rates will continue to vary across the EU, but all Member States should see their economies return to precrisis levels by the end of 2022. The Forecast notes that the rebound in Europe's economy that began last summer stalled in the fourth quarter of 2020 and in the first quarter of 2021, as fresh public health measures were introduced to contain the rise in the number of COVID-19 cases. However, the rise in vaccination rates and easing of lockdown restrictions is expected to drive a strong rebound in private consumption and investment.

Growth is expected to be bolstered by rising demand for EU exports from a strengthening global economy. Public investment, as a proportion of GDP, is also set to reach its highest level in more than a decade in 2022 driven by the Recovery and Resilience Facility (RRF), the key instrument at the heart of NextGenerationEU.

While the outlook is more positive, the Forecast emphasises that the risks are high and will remain so as long as the shadow of the COVID-19 pandemic hangs over the economy. Developments in the epidemiological situation and the efficiency and effectiveness of vaccination programmes could turn out better or worse than assumed in the central scenario of this forecast. The forecast may underestimate the propensity of households to spend or it may underestimate consumers' desire to maintain high levels of precautionary savings. The impact of corporate distress on the labour market and the financial sector could yet prove worse than anticipated. Forward looking indicators show that economic momentum in the EU27 has picked up since the start of the year, although business and consumer confidence is still quite fragile, particularly in the construction sector, a key driver of timber demand in the region.

The EU’s consumer confidence indicator reached its highest level in one year in March, pushing the quarterly average up to -14.8, 1.9 points above the previous quarter.

The EU’s Economic Sentiment Indicator (ESI) continued to recover, edging up to 109.7 in April 2021, markedly above its long-term average and higher than its prepandemic level for the first time since the outbreak of COVID-19 on the continent.

Similarly, Markit’s Flash Purchasing Managers’ Composite Output Index for the euro area stayed above its no change mark of 50 for a second month in a row in April, after four months of decline. It was up by 0.5 points to 53.7.

The IHS Markit Eurozone Construction Total Activity Index was unchanged at 50.1 in April, signalling only a fractional expansion in euro area construction activity for the second successive month. Construction firms often linked the slight expansion to a resumption of work on paused projects and were increasingly concerned about the impact that renewed COVID-19 restrictions have had on overall demand in the construction sector.

According to IHS Markit, work undertaken on housing by euro area construction firms increased for a second successive month in April. The rate of growth quickened from March and was the strongest recorded since February 2020.

A renewed contraction in home building activity in Germany was offset by a survey record expansion among Italian housebuilders. French firms, meanwhile, reported stable conditions in housebuilding for the second month in a row.

Commercial construction activity contracted again in the latest HIS Markit survey period, extending the current sequence of decline to 14 months. That said, the pace of the reduction eased from March and was the softest in the sequence.

A softer fall in commercial activity in France and a stronger rise in Italy contributed to the easing in the rate of decline. However, firms in Germany signalled a further, marked decline in commercial building. The downturn in euro area civil engineering activity continued in April, as work undertaken on infrastructure projects contracted at a modest pace.

The IHS Markit survey shows that the degree of optimism regarding the outlook for construction activity over the coming 12 months eased in April and was the softest recorded for three months. German constructors signalled renewed pessimism regarding the year ahead outlook, with projections at their weakest since December 2020. French firms indicated a lower level of positive sentiment, though Italian firms signalled the strongest projections since August 2001.

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