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Euro Area GDP in the Context of the 2020 COVID-19 Pandemic

Posted: Tuesday, November 17th, 2020

Estimated Reading Time: 2 minutes

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The Euro area GDP is taking a hit on the back of the COVID-19 pandemic. Despite the positive vaccine news from Pfizer and Moderna, the months ahead look challenging, to say the least.

Global output and trade suffered tremendously from the COVID-19 outbreak. As a direct consequence, both the demand and the output sides declined significantly. On the one hand, private consumption and investment fell dramatically, affecting demand. On the other hand, services fell as well, affecting supply. Therefore, the Euro area GDP forecast for the period ahead remains gloomy.

Euro Area GDP

Euro Area GDP Forecast Depending on the Assumptions About the Pandemic

Last week the European Central Bank (ECB) made it clear that it will ease the monetary policy further in December. In fact, it confirmed its pre-commitment.

Also, it did specify one important thing. Namely, the Euro area GDP assumptions include a possible vaccine in 2021. However, even with this assumption in mind, it will take several years to reach the pre-pandemic output level. More precisely, the risks are still tilted to the downside.

An interesting fact is that if a vaccine is on the horizon, it should make a case for even more fiscal and monetary policy stimulus. The argument in favor is that now that a vaccine is within reach, governments and monetary policy-makers have an easier time to forecast future costs. Hence, tougher restrictions but for a limited period may be accepted by the population, knowing that it all comes to an end soon.

Most European economies imposed regional or general lockdowns again. The failure to control the virus’s spread will likely take its toll on the Q4 2020 economic output as well. Having said that, it becomes clear that any failure to control future outbreaks would pose a risk to any potential economic recovery.

Let’s Not Forget About Brexit

While the pandemic holds the headlines, Brexit and the future of the EU and UK relation weighs on the Euro Area GDP too. The end of 2020 also marks the end of the transition period, and with it, some consequences the Euro area GDP forecasters must assume.

For example, assuming that no agreement will be reached, the EU and UK trade will kick off 2021 under WTF MFN (Most Favored Nation) terms.

All in all, the fall in the Euro area GDP growth in 2020 is truly unprecedented. Moreover, despite the positive COVID-19 vaccine news, the outlook for the rebound has deteriorated. At the same time, financial conditions do not improve, while the EURUSD exchange rate remains elevated.

All these will drag on the future economic growth in the Euro area.  An uneven recovery creates rising household inequalities and higher unemployment for a long time even after a vaccine becomes available. As such, any forecast for the Euro area GDP for 2021 and beyond should be taken with a grain of salt.

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