Europe faces deep recession and UK will shrink by 10%, says EC | Business

Europe faces deep recession and UK will shrink by 10%, says EC | Business

Europe is facing a deeper-than expected recession in 2020, while the UK economy is forecast to shrink by almost 10% this year, the European commission has said.

Brussels is forecasting an 8.3% drop in GDP for the 27 economies of the European Union in 2020 followed by a 5.8% rebound in 2021. The eurozone is forecast to contract by 8.7% this year, with 6.1% growth in 2021. Both are worse declines and weaker rebounds than the historic downturn that the commission had forecast in May.

The UK economy will shrink by 9.75% in 2020, putting it among the worst-hit economies in Europe, although France, Spain and Italy are facing even steeper falls in output (10.6%, 10.9% and 11.2% respectively). Germany, facing a 6.3% fall in GDP in 2020, and the Netherlands (-6.8%) confront less severe downturns, while Poland is forecast to escape with the shallowest recession (-4.6%).

Recession chart

“The road to recovery is still paved with uncertainty,” said Paolo Gentiloni, the EU commissioner for the economy. “Risks are mostly, but not all, on the downside,” he said adding that forecasters’ assumptions about the pandemic could prove optimistic. “In the absence of a vaccine and treatment options for Covid-19, any sustained increase in the number of infections or further major economic outbreaks would worsen the economic outlook.”

The gloomy figures were published 10 days before EU leaders meet in Brussels to search for agreement on a €750bn (£678bn) recovery plan, following a landmark Franco-German proposal for grants to help the hardest-hit countries.

While all players say they want a deal in the summer, the plan continues to face fierce resistance from the self-styled “frugal four”, Austria, Denmark, Sweden and the Netherlands, which oppose grants, favouring loans.

Germany’s chancellor, Angela Merkel – seen as a key bridge builder in talks – was due to meet Spain’s prime minister, Pedro Sánchez, on Tuesday, as shuttle diplomacy intensifies ahead of next week’s two-day summit. “Spain’s future is at stake in the coming days,” said government spokeswoman Maria Jesus Montero ahead of the talks.

Germany argues that over reliance on loans will add to national debt burdens, while the European commission fears an uneven economic recovery could leave some countries stuck in the economic slow lane for years to come.

“The risk of an increasing divergence was the rationale for proposing our common recovery plan and this risk appears to be materialising,” said Gentiloni. “This is why it is so important to reach a swift agreement on the recovery plan proposed by the commission – to inject both new confidence and new financing into our economies at this critical time.”

Risks to the UK economy were “predominantly to the downside”, the commission said, because its forecast is based on the current UK-EU trading relationship, which ends on 31 December 2020. Once the UK leaves the EU single market and customs union, trade with the bloc, the UK’s largest export market, will become more difficult, even if the two sides reach a deal. The commission said failure to reach a deal is “an important risk” that would be “particularly negative for the UK”.

Officials expect the UK economy to rebound in the second half of 2020, but business investment is forecast to lag behind private consumption amid lingering uncertainty about the UK-EU trading relationship. The British economy is expected to grow by 6% in 2021.

So far, the impact of the coronavirus downturn on employment has been less bad than some feared, which the commission attributes to short-time work schemes that have kept people in their jobs on reduced hours, a policy stance it contrasted with the US, where unemployment claims have surged.

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