Euro Outlook Published- 24/07/2020

The uncertainty surrounding this summer interim forecast is very high, as the scale and duration of the pandemic remain essentially unknown. There is also uncertainty regarding the duration and scope of the social distancing measures that may be needed after the relaxation of stricter containment measures in recent weeks.

Risks surrounding the growth projections are severe and most of them are on the downside. Major risks concern the total economic impact of COVID-19 on the EU economy, which will depend upon the scale and duration of the pandemic. The summer interim forecast is based on the assumption that the pandemic has exerted its biggest impact in the second quarter of 2020. We assume that containment measures will be gradually eased over the coming months and that there will be no new deterioration that requires strict containment measures to be reintroduced. Such a risk exists though, as the already implemented or announced relaxations of containment measures could prove premature and spark another outbreak (‘second wave’) before any treatment or vaccine is available.

The global economic outlook is subject to exceptionally high uncertainty and risks given the spread of new infections in many countries. It is still impossible to predict the future path of the pandemic and the structural changes it may have on social behavior, international trade and global value chains. In advanced economies outside the EU, similar risks as in the EU apply, notably insufficient policy response to prevent more permanent layoffs and corporate bankruptcies and a sharp reassessment of financial risks, market volatility and negative feedback effects, further weakening the recovery.

Finally, after the UK’s exit from the EU at the end of January, the UK entered a transition period, which lasts until the end of 2020. It is possible that the transition period ends without any agreement on the future trading relationship. Even if a trade agreement between the EU and the UK is concluded, the future EU-UK trading relationship will be less beneficial than assumed in the purely technical assumption of an Summer 2020 (Interim) forecast 15 unchanged trading relationship, and will therefore lead to more negative outcomes for both sides, in particular for the UK for which trade with the EU is more important than trade with the UK for the EU.

On a broader scale, the return of protectionist policies in the global economy could negatively affect trade and economic growth. The same could be said about a too strong re-nationalization of cross-border production links (“de-globalization”). On the upside, a faster than expected availability of a vaccine against COVID-19 would allow social distancing measures to be removed earlier than currently assumed and improve economic conditions.

On the policy side, the Commission’s proposal Next Generation EU, if agreed upon, would give a positive impulse to the EU economy, particularly in 2021. As regards risks surrounding the inflation outlook, in the near term, the downside risks to the growth outlook remain the most relevant downside risks. A deeper recession and a slower rebound would negatively influence inflation expectations and limit price pressures. On the upside, a faster-than expected rebound or a more favorable-than assumed development in the external environment could push commodity prices up and lift external price pressures but also strengthen the price-setting power of euro area firms.