BusinessEurope Economic Outlook Autumn 2021 - Keeping the recovery on track despite mounting price pressures
The EU economy is undergoing a strong recovery, but rapid price increases and bottlenecks in global supply chains are threatening to blunt the upturn.
The rollout of vaccinations allowed EU governments to largely remove lockdown restrictions over the summer. The result has been a very strong surge in consumer spending, with retail sales having risen well above their pre-crisis levels.
At the same time however, Europe’s exports performed very strongly in the earlier stages of the pandemic, supported by our main trading partners recovering faster, but are now increasingly suppressed by the growing strains and bottlenecks in global supply chains that push up input prices and cause production to come to a halt due to lack of necessary materials.
Further exacerbating the upward price pressure and costs on companies, energy prices have surged and are now 7% higher than in January. At the same time bottlenecks have also appeared in the labour market, adding to the upward wage pressures, with the proportion of firms experiencing hiring difficulties back at pre-pandemic levels.
As a result, there is a clear risk that they, if not met with sufficient moderation, give rise to a damaging wage-price spiral, forcing both a premature withdrawal of monetary policy support and risking damaging Europe’s global competitiveness.
Overall, we project for the EU27 economy to grow by 4.8% this year, boosted by the strong stronger than expected recovery following the end of pandemic restrictions, followed by 4.3% next year. This also means we expect the EU economy overall to reach its precrisis level this 2021, albeit with strong country differences.
Economic projections
Policy recommendations
• The strong economic recovery gives cause for optimism, but it remains essential that a premature tightening of supportive fiscal policy and related measures is avoided in the short run in countries where this would not be appropriate. In the medium term EU Member States must return to fiscally sustainable positions, aided by rapid agreement on a revised EU economic governance framework.
• Wage moderation will be important in ensuring that temporary price rises do not give rise to a damaging wage-price spiral, forcing both a premature withdrawal of monetary policy support, and risking damaging Europe’s global competitiveness and causing permanently higher inflation.
• Full implementation of Member States’ Recovery and Resilience plans, including ambitious, growth-enhancing reforms, is also essential to support both growth and sustainable finances.
• Renewed efforts to support vaccinations, particularly in Member States will relatively low rates, are required to reduce the risk of an increased in hospitalisation rates leading to a return of restrictions on activity.