ECB Economic Bulletin, No. 8 - 2021

The global economy remains on a recovery path, although persisting supply bottlenecks, rising commodity prices and the emergence of the Omicron variant of the coronavirus (COVID-19) continue to weigh on the near-term growth prospects. Recent surveys of economic activity suggest that growth momentum remained weak at the start of the fourth quarter, particularly in the manufacturing sector owing to the above-mentioned supply bottlenecks, whereas the services sector benefited from the reopening of large economies. Compared with the previous projections, the growth outlook for the global economy in the December 2021 Eurosystem staff macroeconomic projections has been revised downwards for 2021, remained unchanged for 2022 and been revised upwards for 2023. Global real GDP growth (excluding the euro area) is estimated to increase to 6.0% in 2021, before slowing to 4.5% in 2022, 3.9% in 2023 and 3.7% in 2024. Euro area foreign demand is projected to expand by 8.9% in 2021, 4.0% in 2022, 4.3% in 2023 and 3.9% in 2024. However, foreign demand has been revised downwards for 2021 and 2022 compared with the previous projections. This reflects the adverse impact of the ongoing supply bottlenecks on global imports. Supply bottlenecks are expected to start easing from the second quarter of 2022 and to fully unwind by 2023. The export prices of euro area competitors have been revised upwards for 2021 and 2022 amid the confluence of higher commodity prices, supply bottlenecks and recovering demand. The future course of the pandemic remains the key risk affecting the baseline projections for the global economy. Other risks to the growth outlook are judged to be tilted to the downside, whereas the balance of risks to global inflation is more uncertain.

The euro area economy continues to recover. Growth is moderating, but activity is expected to pick up again strongly in the course of this year. The continued economic recovery is foreseen to be driven by robust domestic demand. The labour market is improving, with more people having jobs and fewer in job retention schemes. This supports the prospect of rising household income and consumption. The savings built up during the pandemic will also support consumption. Economic activity moderated over the final quarter of last year and this slower growth is likely to extend into the early part of this year. We now expect output to exceed its pre-pandemic level in the first quarter of 2022. To cope with the current pandemic wave, some euro area countries have reintroduced tighter containment measures. This could delay the recovery, especially in travel, tourism, hospitality and entertainment. The pandemic is weighing on consumer and business confidence and the spread of new virus variants is creating extra uncertainty. In addition, rising energy costs are a headwind for consumption. Shortages of equipment, materials and labour in some sectors are hampering production of manufactured goods, causing delays in construction and slowing down the recovery in some parts of the services sector. These bottlenecks will persist for some time, but they should ease during 2022.

Although the COVID-19 crisis continued to weigh heavily on public finances in 2021, the December Eurosystem staff macroeconomic projections show that the fiscal balance is already on a path to improvement. Having peaked at 7.2% of GDP in 2020, the deficit ratio is estimated to have fallen to 5.9% in 2021 and is projected to fall further to 3.2% in 2022 and to stabilise just below 2% by the end of the forecast horizon in 2024. These improvements are due to a combination of higher cyclically adjusted primary balances and, particularly from 2022, a significantly larger contribution from the economic cycle. In terms of the euro area fiscal stance, a strong expansion in 2020 was followed by only a marginal tightening in 2021 once adjusted for Next Generation EU (NGEU) grants. In 2022, the stance is projected to tighten considerably, albeit much less than forecast previously, mainly owing to a reversal of a significant part of crisis emergency support. The tightening is projected to continue over the remainder of the forecast horizon, but to a much smaller extent, as significant support to the economy will remain in place over the coming years. Targeted and growth-friendly fiscal measures should continue to complement monetary policy. This support will also help the economy adjust to the structural changes that are under way. An effective implementation of the NGEU programme and the 'Fit for 55' package will contribute to a stronger, greener and more even recovery across euro area countries.

Growth is expected to rebound strongly over the course of 2022. The December Eurosystem staff macroeconomic projections foresee annual real GDP growth at 5.1% in 2021, 4.2% in 2022, 2.9% in 2023 and 1.6% in 2024. Compared with the September staff projections, the outlook has been revised down for 2022 and up for 2023.

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