Euro zone set for record recession, inflation to vanish: Commission

By Reuters On May 6, 2020

FILE PHOTO: European Union flags fly outside the European Commission headquarters in Brussels, Belgium, February 19, 2020. Picture taken February 19, 2020 REUTERS/Yves Herman

By Jan Strupczewski

BRUSSELS (Reuters) – The euro zone economy will contract by a record 7.7% this year because of the COVID-19 pandemic and inflation will almost disappear while public debt and budget deficits will balloon, the European Commission forecast on Wednesday.

“Europe is experiencing an economic shock without precedent since the Great Depression,” European Commissioner for Economic and Financial Affairs Paolo Gentiloni said.

“Both the depth of the recession and the strength of recovery will be uneven, conditioned by the speed at which lockdowns can be lifted, the importance of services like tourism in each economy and by each country’s financial resources,” he said.

The Commission forecast that, as the economy contracts this year, consumer prices will almost stagnate. The inflation rate will slow to 0.2% in 2020, before accelerating to 1.1% next year, when the euro zone is to return to growth of 6.3%. Investment will plunge 13.3% this year, it said.

The effort to keep economies alive will boost budget deficits in the euro zone to an aggregate 8.5% of GDP this year from 0.6% last year, before the aggregate gap shrinks again to 3.5% in 2021.

A surge in public debt, however, will take longer to undo, the Commission said, forecasting that euro zone debt will jump to 102.7% of GDP this year from 86% last year, and receding only to 98.8% in 2021.

Italy, Greece, Spain and Portugal will be among the hardest hit by the economic effects of the pandemic, while Luxembourg, Malta and Austria are to weather the shock better.

Greek GDP is to contract the most, by 9.7%, with Italy recording the second deepest recession of 9.5% and Spain 9.4%.

The budget deficit of Italy, the EU country hardest hit by the coronavirus, will surge the most to 11.1% of GDP this year from 1.6% last year, but will fall back to 5.6% in 2021, the Commission forecast.

Spain’s deficit will just exceed 10% this year, up from 2.8% in 2019 and France will be close behind with a budget gap of 9.9% this year. The Commission expects it to fall to 4.0% next year.

Italy’s public debt will also record the biggest increase this year to 158.9% of GDP from 134.8% in 2019. It is seen falling to 153.6% in 2021, he Commission said.