In 2020, the COVID-19 pandemic caused an unprecedented economic downturn, with real GDP in the EU plummeting by 6.1 percent, more than during the global financial crisis. At all levels, the EU’s response to the crisis was swift, powerful, and well-coordinated. EU Member States, aided by the EU SURE mechanism (Figure 1), gave major support to businesses and people, especially through short-term work programs, as well as significant liquidity assistance to businesses.
The ECB backed up the budgetary reaction with a slew of monetary policy actions. The economic impact of the crisis on employees and businesses has been significantly less severe than originally anticipated as a result of this unified and coordinated governmental response.
COVID-19 vaccinations were also developed, procured quickly, and distributed in a coordinated manner thanks to decisive EU-level action. In the future, the newly established EU Recovery and Resilience Facility (RRF) will support an investment-rich recovery and growth-enhancing reforms by providing up to 386 billion in non-repayable support and up to 338 billion in loans (at current prices) between now and 2026. In 2021, the influence will be noticeable (Figure 2).
Figure 1: Unemployment rate increase in SURE recipient Member States by 2020 (percentage points)
The predicted rise in the unemployment rate is based on the historical link between changes in that rate and (negative) GDP growth.
It’s official now. The German economy fell in the fourth quarter of 2021, raising the likelihood of a full-fledged recession by the year’s end. German GDP fell by 0.7 percent quarter-on-quarter, down from 1.7 percent in the third quarter, according to the first official estimate. The economy rose by 1.4 percent year over year. GDP growth for the first half of 2021 was revised upwards, resulting in GDP growth of 2.8 percent for the entire year, rather than the previously predicted 2.7 percent. The German economy slowed in the last three months of the year, according to the statistical agency and available monthly data, owing primarily to sluggish private consumption.
Is the UK currently experiencing a downturn?
The UK’s economic recovery from the COVID-19 epidemic has been swift but uneven, with sectoral and regional imbalances still causing havoc. We foresee a further fading of growth momentum this winter due to a mix of ongoing public health worries, income losses, and supply disruptions. A sustained and complete recovery, in our opinion, is still a long way off. The labor market will determine a lot. In this chapter, we examine the UK economy’s prospects and the (many) obstacles that lie ahead.
A significant economic shift is now on the horizon. Many of the changes in household consumption habits that occurred during the pandemic appear to be enduring, and many businesses now appear to be anticipating and preparing for a new economy in the years ahead. This problem is exacerbated by Brexit, which appears to be ushering in a period of severe structural change in UK trade.
Inflation is expected to spike in the second half of 2021, with the annual CPI hitting 4.6 percent in April 2022. However, increasing inflation is now being driven by a small number of mostly imported products, with services inflation remaining relatively stable. For the time being, the risks of a more sustained domestically driven price increase appear to be limited – but inflation expectations are a source of concern. Overall, we believe that inflationary pressures should ease, and that monetary and fiscal policy should continue to support the recovery for the time being.
Key findings
- The British economy is undergoing a rapid but incomplete and unbalanced rebound. Better public health, loosening limitations, and the continuation of fiscal support have all contributed to a speedier economic reopening in recent months than had been predicted at the start of the year. The UK economy, on the other hand, is still one severe recession short of its pre-COVID track. The recovery is still still limited in composition, distorted by sectoral and regional imbalances: demand is outpacing supply in some (well-publicized) segments of the economy while it lags in others.
- From here, we anticipate that accumulating household savings will only provide a modest boost to growth. For the first time, enterprises and people will face the income implications of the overall activity gap as government support is reduced. We foresee a further fading of growth momentum over the winter due to a mix of ongoing public health worries, income losses, and supply disruptions. A durable and thorough economic recovery, in our opinion, is still a long way off.
- A major economic shift is on the horizon. During the epidemic, there were staggering inequalities in economic activity. While some of these effects have subsided as the economy has recovered, others appear to be becoming more enduring. In social categories, for example, household consumption is still 10% lower. Sales are expected to be roughly 5% higher in the long run as a result of the pandemic for transportation and storage companies, but 4 percent lower for hotel companies. Many businesses currently appear to be anticipating and planning for a changed economy in the coming years, implying a lengthy period of transformation.
- The problem will be exacerbated by Brexit. As a result of continued EU market access and Sterling depreciation, adjustment before 2020 appears to have been postponed. In recent months, supply disruption has been exacerbated by newer frictions. Early indications also point to the start of a period of severe structural change in UK trade. We expect the shift away from EU suppliers and clients to accelerate in the products sector. Services continue to be a major source of concern. Professional services exports to the EU have trailed in recent years: in 2021Q1, professional services exports to the EU accounted for roughly 30% of total exports, compared to 44% in 2016Q1. We predict these effects to worsen in the coming years, implying a net decrease in UK services exports.
- The recovery’s lynchpin is the labor market. While demand has already changed dramatically as a result of the epidemic, budgetary support has prevented equivalent changes in the labor market. Sales have migrated across sectors at a considerably faster rate than employment, with total surplus job reallocation since 2020Q2 being 24 percent lower than sales. As a result, the recovery has become increasingly ‘constrained.’ We expect some of these pressures to start to dissipate from here. As the employment related with the economic reopening is finished, vacancies should decrease. With the conclusion of the furlough and less uncertainty, adjustment should pick up speed, allowing for a greater recovery in labor mobility. According to our projections, unemployment will rise to 5.5 percent in 2022Q1 as furloughs end and more people return to work. With matching challenges, a capital-intensive recovery, and an increase in the effective tax burden on labor beginning in April, the labor market is expected to trail rather than lead the recovery in the coming years.
- Recent salary increases have been driven mostly by sector-specific labor shortages rather than broader wage pressures. Sectoral wage settlements have climbed into the double digits due to high demand in areas including transportation and food processing. Overall pay settlements, however, are broadly in line with pre-pandemic levels. For the time being, we believe that when supply increases, some of these pockets of upward pressure will subside, but a relative revaluation of skills is now more plausible. With output projected to lag the pre-pandemic growth path on a long-term basis, greater labor market slack and lower wages may emerge in the years ahead. As living costs rise, we predict real household discretionary income to fall by 0.1 percent in 202223.
- Inflation is expected to spike in the second half of 2021, with the annual CPI hitting 4.6 percent in April 2022. For the time being, the drivers in this area appear to be temporary. Energy and base impacts, as well as trade interruptions and imported inflation, are all likely to raise inflation. These effects may be persistent at first, but they should eventually fade away. The greater danger is a price increase that is driven primarily by domestic factors. For the time being, the dangers are contained in this area. Only a few predominantly imported products are currently driving rising inflation, with services inflation in particular remaining moderate. We also don’t expect the labor market to be sufficiently tight in the aggregate to drive costs higher on a more sustained basis. Instead of salary pressures, higher unit labor costs appear to be more likely to lead to job losses.
- Inflation expectations, on the other hand, are a bigger worry. Firms may be willing to take greater wages and offer higher prices if these begin to shift up, generating the possibility of a genuine wage price spiral. In contrast to both the US and the Eurozone, inflation expectations were at rather than below goal levels prior to the epidemic. Firms, households, and financial markets are all experiencing upward pressures, and acute labor shortages may exacerbate the dangers. However, because temporary inflation is projected to give way to disinflation in the next months, upside risks may move to the negative in the medium term. It’s possible that the latter will be even more difficult to combat.
- With the economy likely to restructure during the next 18 months, the relationship between recovery pace and final scale is stronger than usual. COVID-related scarring (i.e., the pandemic’s long-term economic harm) could be confined to just 11.5 percent of GDP, compared to 3 percent in the OBR’s March 2021 scenario. A delayed recovery could result in increased hysteresis effects and long-term losses. Brexit will, in our opinion, continue to put a strain on the UK’s capacity. When combined with our assessment of COVID-19 effects, we estimate that the economy will be 21/2 percent smaller in 2024-25 than the OBR’s pre-pandemic forecast (March 2020).
- To ensure a comprehensive economic recovery, policy help may be required in the future. A recovery in both supply and demand at the same time offers a foundation for policy to ‘lean loose.’ In this climate, supply is expected to be more responsive to demand conditions than usual, implying that capacity is likely to be higher than official statistics suggests. Given the stronger link between scarring and recovery pace, halting the recovery’s momentum could result in a larger permanent output loss. Higher inflation expectations constitute a danger in the short term that may require immediate action to mitigate. However, we believe that policymakers should err on the side of giving more rather than less support for the time being.
- Given the limited scope of monetary policy, policymakers must now plan for fiscal capacity to play a larger role in macroeconomic stabilization. This is going to be critical if policymakers are to be able to respond successfully in future crises.
What is the cause of the EU’s crisis?
Since the end of 2009, the European debt crisis, often known as the eurozone crisis or the European sovereign debt crisis, has been a multi-year debt crisis in the European Union (EU). Several eurozone member states (Greece, Portugal, Ireland, Spain, and Cyprus) have been unable to repay or refinance their government debt or bail out over-indebted banks under national supervision without the help of third parties such as other eurozone countries, the European Central Bank (ECB), or the International Monetary Fund (IMF) (IMF).
A balance-of-payments crisis, or a sudden stoppage of foreign money into nations with large deficits and reliance on foreign credit, triggered the eurozone crisis. The inability of states to devalue their currencies exacerbated the situation (reductions in the value of the national currency). Prior to the adoption of the euro, macroeconomic variations among eurozone member states contributed to debt building in some eurozone members. The European Central Bank set an interest rate that encouraged Northern eurozone investors to lend to the South while encouraging the South to borrow since interest rates were so low. As a result, the South’s deficits grew over time, owing mostly to private economic actors. Unbalanced capital flows in the eurozone were exacerbated by a lack of fiscal policy coordination among eurozone member states, while a lack of financial regulatory centralization or harmonization among eurozone states, combined with a lack of credible commitments to provide bailouts to banks, encouraged risky financial transactions by banks. The specific causes of the crisis differed from one country to the next. As a result of banking system bailouts and government reactions to slowing economies post-bubble, private debts stemming from a property bubble were transferred to national debt in various countries. Concerns about the soundness of banking systems or sovereigns are adversely reinforcing because European banks possess a considerable amount of sovereign debt.
The crisis began in late 2009, when the Greek government revealed that its budget deficits were far greater than previously estimated. Greece requested foreign assistance in early 2010, and in May 2010 received an EUIMF bailout package. In early 2010, European nations implemented a series of financial support measures, including the European Financial Stability Facility (EFSF) and the European Stability Mechanism (ESM). In late 2010, European nations implemented a series of financial support measures, including the European Financial Stability Facility (EFSF) and the European Stability Mechanism (ESM). The ECB also aided in the resolution of the crisis by cutting interest rates and offering low-cost loans totaling over one trillion euros to keep money flowing across European banks. The ECB calmed financial markets on September 6, 2012, when it announced that all eurozone nations engaging in a sovereign state bailout/precautionary programme from the EFSF/ESM will get free unlimited support from the EFSF/ESM through certain yield-lowering Outright Monetary Transactions (OMT). Ireland and Portugal were given bailouts from the European Union and the International Monetary Fund (IMF). November 2010 and May 2011 were the dates, respectively. Greece received its second bailout in March 2012. In June 2012, both Spain and Cyprus received bailout deals.
In July 2014, Ireland and Portugal were allowed to exit their bailout programs due to improving economic growth and structural deficits. In 2014, both Greece and Cyprus were able to reclaim some market access. Spain was never formally part of a bailout program. The ESM’s bailout package was intended for a bank recapitalization fund and did not contain financial assistance for the government. The crisis has had severe negative economic and labor market consequences, with unemployment rates in Greece and Spain reaching 27%, and has been blamed for slowing economic growth not only in the eurozone but also across the European Union. It influenced ruling governments in ten of the eurozone’s 19 countries, influencing power transitions in Greece, Ireland, France, Italy, Portugal, Spain, Slovenia, Slovakia, Belgium, and the Netherlands, as well as beyond the eurozone in the United Kingdom.
What is the state of the EU economy in 2021?
According to preliminary figures released Monday by the EU statistics agency, the eurozone economy grew by 0.3 percent between October and December 2021, despite the rapid spread of Omicron, which slowed activity.
Although growth dropped from 2.3 percent in the previous quarter, full-year eurozone output is expected to grow at 5.2 percent in 2020.
That’s a significant improvement over 2020, when the eurozone economy shrank by 6.4 percent, the deepest recession since the single currency’s foundation and the founding of the European Union.
Is Europe wealthier than the United States?
In nominal terms, the United States and the European Union are the world’s two largest economies. In nominal and PPP terms, they account for 42.4 percent and 30.7 percent of world GDP, respectively, as of 2021.
According to IMF forecasts for 2021, the United States will be ahead by $5,548 billion, or 1.32 times, on an exchange rate basis. The gap is narrower on a purchasing power parity basis, with the United States leading by Int. $ 1,757 or 1.08 times. According to World Bank estimations, the US has had a greater gdp for 41 years while the European Union has had a higher gdp for 12 years from 1966 to 2019. The last time the European Union had a larger GDP than the United States was in 2011. In 1985, the ratio between these two was at its maximum, 1.62x, in favor of the United States. In 1980, the EU had the largest ratio in favor of the US, with 1.16x of the US gdp. Since 1994, the EU has been closely following the US in terms of ppp.
In nominal and PPP terms, the United States’ per capita income is 1.86 and 1.44 times more than that of the European Union in 2021. For statistics accessible since 1966, the US had a higher GDP per capita than the EU.
The European Union’s GDP growth rate reaches a high of 6.03 percent in 1973 and a low of -4.33 percent in 2009. Only once between 1966 and 2019 did the European Union grow by more than 5%. In 1984, the US hit an all-time high of 7.24 percent, while in 2009, it hit a new low of -2.54 percent. Over the course of nine years, the United States increased by more than 5%. For the first time in eight years, the United States’ GDP growth rate was negative. In the last five years, the European Union has experienced negative growth.
Is the European economy expanding?
As the continent recovers from the Coronavirus (COVID-19) in 2020 and 2021, the European Union’s GDP is anticipated to expand by 4% in 2022. Malta’s GDP is expected to rise by 5.9% this year compared to the previous year, the fastest rate among the countries surveyed.
What is the state of the German economy?
Germany’s economy is a well-developed social market economy. It possesses Europe’s largest economy, as well as the world’s fourth-largest nominal GDP and fifth-largest GDP (PPP). According to the International Monetary Fund, the country accounted for 28% of the euro area economy in 2017. (IMF). Germany is a member of the European Union and the Eurozone since their inception.
Germany has the greatest trade surplus in the world in 2016, totaling $310 billion. As a result of this economic success, it has become the world’s largest capital exporter. Germany is one of the world’s major exporters, with goods and services valued $1810.93 billion in 2019. The service sector accounts for over 70% of total GDP, industry for 29.1%, and agriculture for 0.9 percent. Exports accounted for 41% of total production. Vehicles, machinery, chemical goods, electronic items, electrical equipment, pharmaceuticals, transport equipment, basic metals, food products, and rubber and plastics are among Germany’s top ten exports. Germany’s economy is Europe’s largest manufacturing economy, and it is less likely to be damaged by a financial crisis. Germany performs applied research with real-world applications and sees itself as a link between cutting-edge academic research and industry-specific product and process enhancements. In its own laboratories, it generates a vast deal of knowledge.
Is the German economy contracting?
The advent of the coronavirus’s omicron strain adds to drags on output from supply snarls and the fastest inflation in three decades, causing Germany’s GDP to decline by as much as 1% in the fourth quarter of 2021.
Will the UK economy catch up to Germany’s?
Others have altered and updated Goldman Sachs’ work, most notably by the London-based Centre for Economics and Business Research in its World Economic League Table, which was released shortly after Christmas.
Its primary signals are that China will definitely overcome the United States in size in 2030, that India will pass France next year and rank third behind China and the United States in 2031, and that Germany will surpass Japan in 2033.
And what about the United Kingdom? The analysis is upbeat about the country’s economic prospects, predicting that it will outperform France by having a 16 percent larger GDP by 2036.
Several of these major predictions are self-evident. China and India, with their massive populations, were the world’s largest economy until the Industrial Revolution began in the 19th century, propelling the United Kingdom, Europe, and eventually the United States to developed country status.
Now, emerging nations are catching up by using technology produced (primarily) in the West. China is no longer a poor country, but rather a middle-income one.
The bright view for the UK, on the other hand, may come as a surprise considering the doom and gloom surrounding the country’s economic prospects, not just because of Brexit and the epidemic, but also because of the recent spike in prices.
In fact, the UK’s overall prospects are remarkably identical to those predicted by Goldman Sachs over two decades ago. By 2040, the UK was anticipated to be not just larger than France, but also larger than Germany, according to the original estimate.
Will there be inflation in the United Kingdom in 2021?
The Consumer Price Index (CPI) increased by 5.5 percent from 5.4 percent in December 2021 to 5.5 percent in January 2022. This is the highest 12-month CPI inflation rate since the National Statistics series began in January 1997, and it was last higher in the historical modelled series in March 1992, when it was 7.1 percent.
CPIH was stable on a monthly basis in January 2022, compared to a 0.1 percent drop in the same month the previous year. The strongest downward contributions to the monthly rate in January 2022 came from price drops in apparel and footwear, as well as transportation. Housing and household services, food and non-alcoholic beverages, and alcohol and tobacco were the biggest contributors to the monthly rate going increased. Section 4 contains more information about people’s contributions to change.
The CPI declined 0.1 percent from the previous month in January 2022, compared to a 0.2 percent drop in the same month the previous year.
The owner occupiers’ housing costs (OOH) component, which accounts for roughly 17% of the CPIH, is the principal cause of disparities in CPIH and CPI inflation rates.