EC hikes economic growth forecast to 5pc for 2021

The European Union hiked its expectations for economic growth on Thursday, saying it now expected the common currency area’s economy to expand by 5% this year, up from a previous 4.8%.

That prediction was made by the European Commission for all of the EU’s 27 member states as well, and came despite new waves of Covid-19 cases, surging energy prices and supply chain difficulties across the continent.

It did, however, lower its growth predictions for 2022 to 4.5%, ahead of a bigger slowdown in 2023, to 2.4% economic growth.

On inflation, the EC said it was expecting price rises to peak at 2.6% in 2021, before a slight ease next year, with inflation set to fall below targets in 2023.

That was reflective of the European Central Bank’s view that current price rises were set to subside - an opinion of ‘transitory inflation’ held by a number of central banks worldwide.

Europe’s economic affairs commissioner Paolo Gentiloni said the EC had a “very positive outlook”, but warned there were still some risks to the downside, with a “high level” of uncertainty.

“A reintroduction of restrictions would impact economic activity, though to a much lesser degree than in the past,” he said.

“So if we will have a reintroduction of restrictions, and for the moment we are seeing them in a very, very limited way, in any case this will have a lower impact than in the past.

“This risk is particularly relevant in member states with relatively low vaccination rates.”

Gentiloni added that there were also risks around the potential protracted impact of the current supply constraints and bottlenecks.

“Energy and commodity prices could also remain high for longer, pushing production costs further up and weighing on investment and consumption.

“Should such risks materialise, any premature withdrawal of policy support could worsen the economic situation.”

Finally, he warned that inflation could turn out higher than forecast if supply constraints were more persistent and above-productivity wage increases were passed on to consumer prices.

“The overall picture remains a positive one, confirming the large achievements that our national and European response reached,” Gentiloni said.

“But we must remain vigilant and act as needed to ensure these headwinds do not blow the recovery off course.

“Continued, albeit more targeted, support from governments and the EU will remain essential for the European economy to progress towards strong and sustainable growth.”