The eurozone economy has recovered faster than expected from the first wave of COVID-19 but the next stage of the recovery could be more challenging, said S&P Global Ratings economists in a report published on Thursday called “The Eurozone Is Healing From COVID-19“.
“We now forecast GDP will fall only by 7.4% this year and rebound by 6.1% next year,” said S&P Global Ratings Senior Economist Marion Amiot.
“We are also lowering slightly our expectations for unemployment, which we forecast will peak at 9.1% in 2021.”
Amiot added: “However, the reopening of economies was the easiest part of the recovery.
“The eurozone is now entering a tricky transition period from gradual withdrawal of government support toward implementation of the EU’s economic reform program.
“Liquidity, households’ behavior, and demand will be crucial in enabling the European economy to weather this transition, and much could go wrong along the way.”
S&P Global Ratings said that as low inflationary pressures will persist, it doesn’t expect the European Central Bank to tighten monetary policy any time soon, either in terms of interest rates or balance sheet.
“While we are now less pessimistic on the economic outlook, short-term risks remain on the downside,” said S&P.
“Renewed lockdowns in Europe or abroad would quickly dent confidence and growth by prompting consumers and businesses to hold on to their savings.
“Business losses caused by a hypothetical second lockdown would likely take longer to reverse than in the first lockdown.
“A hard Brexit leading to new import and export tariffs, as well as non-tariff trade barriers, would add another layer of challenge for European companies, and be especially detrimental for the U.K. economy and small open economies that trade a lot with the U.K.
“Moreover, cliff-edge effects from the withdrawal of governments’ support might materialize, the EU recovery plan might not be implemented in time or in full, and U.K.-EU talks might fail.
“Nevertheless, a quicker finalization and distribution of a vaccine, becoming widely available by mid-2021, would be a reasonable upside risk to our forecasts and could lead us to revise our projections for 2022-2023 GDP upward.”