EU Warns 2020 Recession Will Be Deeper, 2021 Recovery Less Robust, Than Previously Thought

The European Commission warned on Tuesday that the European Union will suffer a deeper recession than previously expected due to the ongoing effects of the coronavirus pandemic.

In addition, the anticipated economic rebound of 2021 will likely be more muted than originally thought.

The Commission, the executive branch of the EU, now expects the economy of the 19-member eurozone to shrink by a record 8.7% in 2020, then recover by growing 6.1% next year.

For the 27-member EU, gross domestic product is expected to contract by 8.3% this year, then rebound by 5.8% in 2021. (In May, the Commission predicted the EU economy would shrink by 7.7% in 2020, then grow by 6.3% next year.)

"The economic impact of the lockdown is more severe than we initially expected," said Commission Vice President Valdis Dombrovskis.

The EU's Economy Commissioner Paolo Gentiloni stated: “The summer forecast shows, first of all, that the road to recovery is still paved with uncertainty. The expected differences among member states have also become larger."

Growth expectations for individual countries in the EU are projected to vary widely.

The economies of France, Italy, and Spain are each expected to be hit the hardest -- shrinking by more than 10% this year, then accomplishing a partial recovery in 2021.

Europe's largest economy, Germany, is projected to contract by 6.3% this year then rebound by 5.3% in 2021.

"The policy response across Europe has helped to cushion the blow for our citizens, yet this remains a story of increasing divergence, inequality and insecurity," Gentiloni added. "This is why it is so important to reach a swift agreement on the recovery plan proposed by the Commission -- to inject both new confidence and new financing into our economies at this critical time.”

The Commission cautioned that the revised forecasts assumed that no second wave of coronavirus infections emerge later this year. In that event, renewed lockdown measures would likely worsen the economic numbers.

“We continue to navigate in stormy waters and face many risks, including another major wave of infections.,” said Dombrovskis. “Looking forward to this year and next, we can expect a rebound but we will need to be vigilant about the differing pace of the recovery. We need to continue protecting workers and companies and coordinate our policies closely at EU level to ensure we emerge stronger and united.”

Other risks to the revised forecasts include rising unemployment and corporate bankruptcies, as well as the lack of a future trade deal between the EU and Britain.

"At the global level, the still rising rate of infections, particularly in the U.S. and emerging markets, has deteriorated the global outlook and is expected to act as a drag on the European economy," the Commission said.

Gentiloni also told a news conference that in order to avert risks of another recession the economic bloc’s fiscal rules may remain inactive even if the economies rebound next year.

Among other things, the bloc has suspended such requirements that member nations must maintain fiscal deficits below 3% of GDP during the pandemic.

Gentiloni proposed that such rules might not be imposed again until EU economic output returns to 2019 (pre-pandemic) levels.

As for the uncertainties surrounding the U.K. and Brexit, Bloomberg reported that some big banks are scaling back their operations in London – but not necessarily just due to the pandemic.

For example, Barclays Plc (BCS) may leave its investment bank’s headquarters in the city; Credit Suisse Group (CS) is eliminating nine floors of office space; and Morgan Stanley (MS) is reviewing all of its London operations.

“Larger banks are clearly a higher risk for landlords,” said Rogier Quirijns, head of European real estate at Cohen & Steers Inc. “For London, there are the threats of recession and a possible no-deal Brexit to deal with, and I expect Covid-19 will most likely accelerate those risks.”

Banks are also downsizing due to layoffs and impending job losses, particularly at European-based banks.

Amrit Shahani, head of research at Coalition Development Ltd., a financial service research firm, predicted that European banks may have 20% fewer employees than they did at the beginning of 2019.