Euro Area Economic Forecast

Economic Snapshot for the Euro Area

November 25, 2020

The economy logged the strongest quarterly GDP expansion on record in Q3

The economy logged the strongest quarterly GDP expansion on record in Q3, as the easing of containment measures allowed households and businesses to resume activity. Moreover, countercyclical fiscal measures and an ultra-loose monetary policy supported the rebound. Moving to Q4, momentum seems to have waned due to the reintroduction of restrictions in several countries to counter the second wave of Covid-19. A sharper contraction in the services sector in October, coupled with worsening consumer sentiment, points to cooling activity in the tertiary sector. On the other hand, business sentiment in the industrial sector and manufacturing activity improved in the month. Meanwhile, in mid-November, Hungary and Poland blocked the 2021–2027 EU budget and recovery fund, opening the door to further negotiations, while the EU’s Single Resolution Board urged banks to prepare for soaring levels of non-performing loans.

Activity should bounce back robustly in 2021, thanks to sustained EU funding, supportive monetary and fiscal policies and the gradual reopening of the global economy. However, lingering global trade disputes, a possible no-deal Brexit and rising stocks of public debt in the region cloud the outlook. That said, the fast delivery of a vaccine could sustain growth.

The economy is seen expanding 4.8% in 2021, which is down 0.5 percentage points from last month’s forecast. In 2022, GDP is seen increasing 3.1%.


 

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