Coronavirus Second Wave Interrupts Eurozone’s Rebound

An employee works at the Neolaser factory that produces methacrylate protection screens, in Arganda del Rey, on May 8, 2020.

A second wave of the coronavirus pandemic is dashing hopes for a quick rebound of the eurozone economy following the deepest recession in the history of the currency area in the first half of this year, the European Union said Thursday.

Gross domestic product in the 19-member eurozone will contract 7.8% this year, the EU said in its quarterly report, less than the 8.7% contraction forecast in July. In 2021, the economy is projected to grow 4.2%, down from the 6.1% previously expected. Eurozone gross domestic product is forecast to grow 3.0% in 2022.

“After a very strong upswing in the summer, Europe’s rebound has been interrupted due to the resurgence in Covid-19 cases,” said Paolo Gentiloni, the EU’s commissioner for economy.

The European Commission’s forecasts follow last week’s data showing that the eurozone economy grew at a record pace in the third quarter. However, that rebound has already been stalling this fall in the face of a resurgence of coronavirus infections and new lockdowns in several European countries. Economists expect the eurozone economy to shrink again in the last quarter of the year.

While all EU economies are expected to contract this year, Thursday’s forecasts underline the divergent impact the pandemic could have across the region, with Spain, France and Italy projected to suffer declines of more than 9% in 2020, while Germany’s economy is projected to contract 5.6%.

The economic impact of the pandemic has differed widely across the EU and the same is true of recovery prospects, the report said. This reflects the spread of the virus, the stringency of public health measures taken to contain it, the sectoral composition of national economies and the strength of national policy responses.

“We will work together to chart the course to recovery, using every tool at our disposal,” said Valdis Dombrovskis, executive vice-president for an economy that works for people. The NextGenerationEU recovery package aims to provide significant support to the worst-hit regions and sectors.

Mr. Dombrovskis called on the European Parliament and Council to wrap up negotiations quickly “for money to start flowing in 2021 so that we can invest, reform and rebuild together.”

Eurozone inflation is expected to remain subdued. The EU forecasts annual consumer-price increases to average 0.3% for 2020 and said that the inflation rate would rise to 1.1% next year. It will inch up to 1.3% in 2022, the EU said.

Despite the cushioning effect of short-time work programs, the EU expects unemployment to continue rising to 8.3% by year end, compared to a May forecast of 9.6%. The unemployment rate is seen further increasing to 9.4% next year and then falling back to 8.9% in 2022.

Government borrowing in the eurozone surged this spring to its highest levels since the creation of the currency union as countries spent hundreds of billions of euros to cushion against the devastating economic impact of the pandemic.

As a result, the eurozone deficit will be at 8.8% of GDP at the end of the year, the EU said, compared to its earlier forecast of 8.5%. The monetary union’s deficit is expected to fall to 6.4% next year and to 4.7% in 2022, according to EU officials.

The commission forecasts that by this year’s end, seven eurozone economies will have debts exceeding 100% of their gross domestic product, with Greece’s ratio at 207.1% and Italy’s rising to 159.6%. That of the eurozone as a whole is expected to increase to 101.7%, reversing six years of progress in reducing borrowing from the previous peak of 94% of annual economic output.

“In the current context of very high uncertainty, national economic and fiscal policies must remain supportive, while NextGenerationEU must be finalized this year and effectively rolled out in the first half of 2021,” said Mr. Gentiloni.

The epidemiological situation means that growth projections over the forecast horizon are subject to an extremely high degree of uncertainty and risks are tilted to the downside, the EU said.

Write to Maria Martinez at