EU hikes recovery forecast as downside risks emerge – Metro US

EU hikes recovery forecast as downside risks emerge

FILE PHOTO: Museums to reopen in Rome and Vatican City
FILE PHOTO: Museums to reopen in Rome and Vatican City after easing of COVID-19 restrictions

BRUSSELS/BERLIN (Reuters) – The European Commission upgraded its euro zone growth forecasts on Wednesday, shrugging off growing worries about new COVID-19 variants and the impact of supply bottlenecks on factory production in Germany, the region’s top economy.

German industrial output fell in May, data showed, while the country’s main auto association downgraded its 2021 car sales forecast. Persistent global semiconductor shortages were cited as a factor in both.

The European Union’s executive Commission nonetheless predicted the euro zone will grow by 4.8% this year, after the reopening of economies in the second quarter and on hopes of a better tourist season. That is much faster than the 4.3% expansion it had forecast in May.

The rebound from the economic crisis caused by the pandemic is projected to continue next year, when the euro zone is forecast to grow by 4.5%, more than the 4.4% estimated in May.

But the Commission warned its estimates were based on the assumption there will be a further easing of pandemic-induced restrictions in the second half of 2021. Risks about the outlook therefore remained high, although they were seen as balanced.

“The spread of the Delta variant is a stark reminder that we have not yet emerged from the shadow of the pandemic,” EU economics commissioner Paolo Gentiloni told a news conference.

But he added: “I am not seeing now at the horizon new restrictions substantially coming all around Europe.”

Coronavirus cases in Germany rose again on Wednesday after more than two months of decline. The Robert Koch Institute (RKI) reported 985 new infections, a rise of 177 cases compared to the daily increase a week ago and taking the country’s tally since the pandemic began to 3.73 million,

Health Minister Jens Spahn dampened hopes for the lifting of all remaining coronavirus restrictions, saying that would depend on the pace of vaccinations.

While a vaccination rate of 90% will soon be reached among the over-60s, it will take a big advertising drive to reach a rate of 85% among the younger population, Spahn said.

The EU Commission urged further stepping up of vaccination campaigns to contain threats posed by the spread and emergence of variants of the coronavirus, and in particular by the more transmissible Delta variant.

Delta is expected to become dominant in Europe this summer, it said, citing estimates from the EU disease prevention agency.


Some economists are already raising warning flags about the longer-term impact of the Delta variant, which could cause recurring waves of infections due to its high transmissibility.

George Saravelos of Deutsche Bank argued that it “now puts herd immunity out of reach”.

“Even if hospitalization is lower these waves could have a more persistent impact on spending patterns, especially in those economies where vaccination rates are too low or are stalling,” he said in a note.

Gentiloni said the way forward was to fully vaccinate more people. More than 62% of the adult population in the EU has received at least one vaccine dose and 45% are fully vaccinated.

The Commission acknowledged the vaccination drive “may start hitting acceptance constraints”, however, and Gentiloni warned the slow pace of vaccinations in less developed countries could affect European growth.

The Association of German Automobile Manufacturers (VDA) on Wednesday cut its growth forecast for 2021 car sales in Germany to 3% from 8% citing production hurdles posed by semiconductor shortages.

The VDA, which slashed its production forecast on Tuesday, now expects to sell 3.15 million units domestically this year.

Separately, the Economics Ministry said semiconductor bottlenecks in the auto sector were the main reason for a 0.3% fall in industrial output in May.

It said the outlook for the economy remained positive due to strong demand and optimistic export expectations.

But some were more downbeat.

“Economists who started the year with an overly optimistic growth forecast will have to apply the red pen,” said Thomas Gitzel, an economist at VP bank.

Despite all the concerns, Brussels revised upwards its growth forecasts for this year for the three largest of the 19 euro zone economies, with France seen expanding by 6.0%, Italy by 5.0% and Germany by 3.6%.

Next year, growth will accelerate to 4.6% in Germany and is expected to remain strong at 4.2% in both France and Italy.

The euro zone economy is projected to return to its pre-crisis level in the last quarter of this year, although it will remain below the level expected before the pandemic hit.

The EU’s executive arm also saw higher inflation this year than previously forecast, but estimated consumer prices growth would slow next year.

Euro zone inflation is projected to reach 1.9% this year due to “transitory factors”, up from the 1.7% the Commission estimated in May. Next year, it is expected to slow to 1.4%.

(Additional reporting by Marine Strauss and Emma Thomasson; writing by Mark John; Editing by Catherine Evans)