European Economy – From Recovery to Expansion

The European Commission has raised growth forecast to 5% from 4.8%, in its Autumn 2021 Economic Forecast. According to the forecast the bounce in the EU economy is faster than expected. Growth picked the momentum due to re-opening of economy caused by increased vaccination and lifting of restrictions.

Comparing the output with the pandemic level, EU economy recovered in the third quarter of 2021   The EU economy regained the pre-pandemic output level in the third quarter of 2021 and moved from recovery phase to phase of expansion. Expansion in EU economy will be driven by the domestic demand. Demand is expected from sustained consumer spending led by improvement in labour market as well as decline in savings.

It is expected that growth will also gain momentum from private and public investment arising from implementation of Recovery and Resilience Facility (RRF).

RRF constitutes significant chunk of the overall Next Generation EU funding. The fund size is €806.9 billion and will be used for pandemic recovery, transforming economies trough investment in environment friendly technologies, creating green spaces, protecting environment etc.

Fund was created as a part of legislation passed by European Parliament, after political deal between the European Parliament and the EU Council and passed. RRF comprise of €723.8 billion under the overall umbrella of Next Gen EU Funding and will be allocated as grants as loan. In current prices RRF consist of loans of €385.8 billion and grants of €338 billion for supporting Member countries.

To be eligible for funding member states need to prepare a plan showing that they are transitioning towards greener economy. Member states are taking initiative to make Europe digital which includes connecting 5G. investing in public identity, investing in Artificial Intelligence (AI), making cities smarter and efficient, modernising healthcare, investing in science and education etc.

Spain has become the first country to apply for payment request under Next Generation EU funding for a sum of €10 bn, for development and investment of energy efficient project, clean mobility solutions etc. EU economy created approx 1.5 million new jobs during the second quarter and employment is set to grow @.8% during the current year. Inflation remains a key concern. From -0.3% in fourth quarter of 2020, inflation has reached to 2.8% in the third quarter of 2021.

Though the EU economy has entered into expansionary phase, forecast highlights that supply chain bottlenecks and rising gas price remains a major concern. Price of natural gas are above preacademic level and impacts the consumption and risk inflation. European manufacturing sector is highly integrated. Challenges in the supply chain will hurt manufacturing and impact supply.

Bureau Galactik Views

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