Wednesday, 20 April 2022

A Roundup of Inflation in Croatia

20 April 2022 - Like most countries around the world, Croatia has not been spared from increasing inflationary pressures over the past year. Here’s a round-up of inflation in Croatia so far, and what those living here may come to expect in the months to follow.

Inflation trend

It was around April 2021 that inflation numbers in Croatia started making headlines. As the world continued to be in the thick of the pandemic, inflation numbers in Croatia reached a then 2-year high of 2.1%.

This was largely attributed to supply chain issues, and uncertainty surrounding economic recovery after the pandemic, predominantly impacting the prices of energy, food, and construction materials in Croatia

By May 2021, this number grew to 2.4%, alongside other EU countries like Germany, Spain, and Sweden, but still lower than others like Hungary (5.3%) and Poland (4.6%). June 2021 saw a drop in inflation rates to 2.0%, but before everyone could breathe a sigh of relief, it rose to 2.8% in July and 3.1% in August 2021, compared to the same months in 2020.

November and December 2021 saw sharp increases with the DZS reporting inflation rates of 4.8% and 5.5% respectively, the highest level of inflation Croatia had seen since October 2008 when it stood at 5.9%.

Just as it seemed inflation may have leveled off, rates continued to gallop upwards around the time of Russia’s invasion of Ukraine, sending the global economy into a tailspin and energy prices through the roof. By February 2022, prices increased a staggering 7.1% compared to the year prior and March saw rates of 7.3%.

Despite this surge, when compared to other EU countries, inflationary pressures on the Croatian economy are still considered relatively average. Lithuania and Estonia saw price increases of 15.6% and 14.8% respectively, while on the other end of the scale sat Denmark with a 5.3% increase, and Sweden with 4.4%.

Government measures

Still, this prompted Croatian Prime Minister Andrej Plenković to launch a series of measures worth 4.8 billion kuna (€640 million) that recently came into force April 1, 2022.

Part of this 4.8 billion kuna package included reducing VAT (value-added tax) on gas from 25% to 5% from April 1, 2022, to March 31, 2023. This subsidy alone is expected to cost 600 million kuna (€80 million). With approximately 43% of European gas coming from Russia, the most significant price increase was in energy and gas. Here, gas prices skyrocketed by an eye-watering 22.5%.

According to this article, even with the lowering of VAT for gas on April 1, the average Croatian household is expected to allocate up to 990 kuna (€132) more for gas this year compared to last. Bearing in mind that without the VAT reduction from 25-5%, households would have ended up paying 3,762 kuna (€501) more instead.

VAT on food has also been lowered from 13% down to 5% for specific items like fresh meat and fish, eggs, fruits, vegetables, edible oils and fats, baby food, seedlings, fertilizers, and pesticides. The VAT for butter and margarine also shrank from 25% to 5%.

Additionally, VAT on feminine hygiene products fell from 25% to 13%, while VAT on tickets for sports, cultural and other events has been lowered from 13-25% to 5% across the board. The Croatian government also doubled the number of vouchers for the vulnerable, bringing the new total to 400 kuna.

pexels-mark-stebnicki-2252618_1.jpg

Rapid inflation in gas and energy prices is severely impacting other sectors like agriculture. Image: Pexels.

Consequences for other sectors

As of March 2022, in addition to gas prices, food and non-alcoholic beverages were seeing a 9.4% increase, alcoholic beverages and tobacco up 6.2% with restaurant prices growing by 4.7%.

Recent reports also reveal the price of pork is expected to rise 13% this year compared to the previous year, as increased prices of energy and fuel continue to push up costs of pork processing and animal rearing. With Croatians consuming an average of 50kg per person, the burden of a 13% increase in prices will be felt by consumers and producers alike considering pig rearing and pork processing makes up 25% of total agricultural production domestically.

Even basic items such as bread, coffee, and olive oil are not spared from soaring inflation and may reach levels not seen prior. Bread is expected to hit 15 kuna (€2) per loaf (500g) due to rising wheat prices, especially with Russia and Ukraine exporting a combined 23% of the world’s wheat. 1 kilogram of white flour in 2021 would have set you back 2.50 kuna (€0.33), which has now risen to 4 kuna (€0.53), an increase of almost 60%.

Coffee, a pastime for Croatians, is expected to increase by 1-2 kunas due to rising electricity costs for operators. Compounding this issue are the steeper costs of terrace rentals, where most cafe bars are located. So, if you’re already paying between 9-12 for an espresso, factoring in the increase means that one should expect espresso prices to balloon to 10-14 kunas a pop.

Even the prices of beloved Croatian olive oil will not be spared due to rising fertilizer prices. In 2021, one ton of fertilizer cost approximately 3,000 kuna (€400) but this year, it stands at 8,000 kuna (€1,066). Another staggering increase of 166%! Again, this stems from Russia being one of the world’s key exporters of fertilizers.

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Inflation continues to eat away at the savings and purchasing power of locals. Image: Pixabay.

Reduced purchasing power

Overall, inflation has and is expected to continue lowering purchasing power for the average Croatian. According to this article, here is a comparison of what 100 kuna (€13) would buy you in 2020 vs. 2022.

 

2020

2022

Milk

15.5 liters

13 liters

Sunflower oil

9 liters

6.5 liters

Petrol

11 liters

7 liters

Despite average monthly salaries rising approximately 8% from 6,763 kuna (€897) to 7,300 (€968), the rising rate of inflation continues to chip away at this, driving up the cost of living domestically.

Future predictions

According to this article, the Croatian National Bank (CNB), predicts that Croatian inflation could continue to rise, averaging 5.4% this year which is more than double that of 2021 when it stood a 2.6%.

Whether or not the scenario continues to play out is depending on a myriad of uncertainties and structural factors including the ongoing global recovery from the pandemic, the disastrous war between Russia and Ukraine, and Croatia’s adoption of the euro in January 2023.

However, finance ministers across the Eurozone remain confident that inflation will eventually stabilize close to the target rate with the right monetary policies and tools at their disposal.

(€1 = 7.54 kuna)

Monday, 11 April 2022

Croatia Sees 19.3% Drop in Job Seekers in March

11 April 2022 - A total of 125,604 unemployed persons were registered with the Croatian Employment Service (HZZ) at the end of March 2022, down by 3.7% from the previous month and by 19.3% from March 2021.

March was the second month in a row to see a decline in the number of unemployed persons on a monthly level. There were 4,849 fewer of them compared with February. Compared with March 2021, their number decreased by 29,984.

Daily figures indicate that the number of unemployed persons will continue to fall in April as well. On Monday, 122,139 job seekers were registered with the HZZ, which is 3,465 fewer than at the end of March, and 23,702 vacancies were advertised.

In March, 13,181 job seeker signed up with the HZZ, 0.3% fewer than in March last year.

Monday, 11 April 2022

Zagreb's Average Monthly Wage €150 Higher Than National Average

11 April 2022 - The average take-home monthly salary paid in Zagreb in January amounted to HRK 8,528 (€1,130), which is HRK 1,150 kuna (€152) higher than the national average for January of HRK 7,378 (€978).

According to the data provided by the city's strategic planning department, average monthly pay was 5.5% higher than in January 2021.

Broken down by business activities, the highest average monthly salary was paid to employees in the crude oil and natural gas  production sector (HRK 13,681) and the lowest in the leather manufacturing sector HRK 4,877.

(€1 = HRK 7.543431)

Monday, 4 April 2022

U.S. Market Represents Big Opportunity for Croatian Economy, Panel Hears

4 April 2022 - The U.S. market represents a big opportunity for the Croatian economy and the areas in which cooperation can increase include IT, tourism, and energy, it was said on Monday at a panel on trade, business and investment ties between the two countries.

The panel was held as part of the U.S.-Croatia Forum, organised by the U.S. Embassy on the occasion of 30 years of diplomatic relations between the United States and Croatia.

Croatia must find niches, five to ten products in which it can compete globally, and they can be sought in tourism and IT, said Mihael Furjan, CEO of the Pliva pharmaceutical company and president of the Croatian Employers Association.

Given the LNG terminal, there is also energy, he added, noting that Pliva is Croatia's biggest exporter to the U.S. and that HS Produkt is a major gun exporter.

The U.S. and Croatian governments must find areas in which we can cooperate. We must focus more, be creative, he said, adding that Croatia should learn from the U.S. where it is most successful, in innovation and business education.

U.S. business schools are among the best in the world and U.S. companies are the most innovative globally, Furjan said. 

Double taxation avoidance and visa-free travel

AmCham executive director Andrea Doko Jelušić said that Croatia, although a small country, had things to offer to the U.S. market. It's necessary to focus on high-added-value industries in which one can be competitive, not selling oneself cheaply but expensively, she added.

Many U.S. companies doing business in Croatia do so via a European centre, the Netherlands or Ireland for example, as a result of which official statistics don't show the real extent of their presence on the Croatian market, she said.

The Croatian and U.S. ministries of finance are still negotiating a double taxation avoidance agreement, whose adoption will make it much easier for small Croatian companies to enter the U.S. market, she said and underlined the importance of visa-free travel as of last October.

Končar exporting much more to US

Končar CEO Gordan Kolak said the company was exporting to the U.S. recently much more than before and that the U.S. was its main market for transformers.

He said increased investment in renewables would create new needs for electricity equipment and solutions for solar and hydroelectric power plants as well as wind parks. Emphasis will also be on digitalisation and grid modernisation as well as on more efficient energy management as consumers also become producers, he added.

Končar will invest much more in software development and smart grid management solutions, Kolak said.

Importance of U.S. investors in Infobip

Infobip is a global IT and communication company providing cloud mobile communication services for business clients. It also cooperates with WhatsApp, Snapchat, Google, and Microsoft.

It is the first Croatian company whose value exceeds $1 billion and in the last 18 months it has made four acquisitions on the U.S. market. Some U.S. investment funds have invested in it.

Infobip CEO Silvio Kutić underlined the importance of US investors. Speaking of enhancing U.S.-Croatia business cooperation, he underlined the importance of education and the need for an investment protection system.

Education for labour market

Coca-Cola HBC Adria general manager Ruža Tomić Fontana, too, underlined the importance of education, saying the education system must adapt to market needs in order to create a workforce with the necessary skills.

It's also necessary to enhance the communication between the public and private sectors on the business environment and to ensure the stability and predictability of doing business, said said, pointing to the problem of a too-high tax burden.

Anita Cvetić Oreščanin, Board member at Poslovna inteligencija, said Croatian companies should learn from U.S. companies and that everyone who had the opportunity should visit to get acquainted with the U.S. market.

Monday, 7 March 2022

RBA Marks Down Forecast of Croatia's 2022 GDP Growth to 4%

7 March 2022 - Raiffeisenbank Austria (RBA) analysts on Monday revised down their estimate of Croatia's economic growth in 2022 from 4.4% to 4%, underscoring uncertainty and negative risks, particularly regarding investments.

The analysts said that in light of the war in Ukraine and growing uncertainty, their forecast for the euro area economy has been marked down by 0.7 percentage points to 3.3%.

"The expected trends will have a negative, albeit a limited impact on Croatia's GDP. In the scenario that excludes the possibility of the war spreading to other countries of the EU and/or Western Balkans and implies, at least for the time being, that the tourism season will be successful, the forecast for the real annual GDP growth rate for 2002 has been revised from 4.4% to 4%," the analysts said.

The analysts however remain cautious, underscoring uncertainty and negative risks, particularly with regard to investments.

Inflation in 2022 at 4.9%

They also see a more significant risk in the spilling over of the global increase in energy and food prices, and have therefore revised up their inflation forecast.

RBA estimates that this year's inflation rate in Croatia will be 4.9% whereas previously it was forecast at 3.6%.

Data from the Croatian Bureau of Statistics (DZS) indicated an increase in inflation of 5.7% in January this year compared to January 2021, which is the highest increase since October 2008.

"We expect that this year will see stronger inflationary pressure, directly on food prices, and that the impact of price growth on producers will also affect consumers, which will negatively impact available income. In such circumstances we cannot rule out the possibility of additional fiscal support," the analysts said.

Monday, 31 January 2022

HNB: Household Deposits Increase by 9.2%, Loans by 4.5%

ZAGREB, 31 January 2022 - In 2021, household loans went up by 4.5% to HRK 141.5 billion on the year on the back of a strong rise in housing loans, while household deposits went up by 9.2% to HRK 246.1 billion, the Croatian National Bank (HNB) said on Monday.

At the end of 2021, monetary institutions' lending to domestic sectors, except the central government, totalled HRK 245.8 billion, up 3.9% on the year.

Loans totalled HRK 238.9 billion, of which HRK 141.5 billion were household loans, HRK 86 billion were corporate loans, and HRK 11.4 billion were loans to other domestic sectors.

Housing loans totalled HRK 67.8 billion, up 9.2% from the end of 2020. Non-purpose cash loans went up by 2.3% to HRK 53 billion.

Loans to non-financial companies went up by 1%, as against a 6% increase at the end of 2020. Their bonds went up by 58.7%. Corporate loans went up by 2.3%, as against a 2.3% increase at the end of 2020.

Month on month, monetary institutions' lending in December 2021 was up by HRK 2.8 billion (+1.1%). Loans went up by HRK 1.7 billion (+0.7%). Loans to non-financial companies were up by HRK 1.4 billion (+1.6) and those to other domestic sectors by HRK 400 million (+3.6%).

Household loans decreased by HRK 100 million month on month, as did non-purpose cash loans, while housing loans increased by HRK 300 million.

At the end of 2021, deposits reached HRK 365.8 billion, up by 35.5 billion on the year (+10.8%). Money on transaction accounts increased by HRK 13.6 billion (+21%).

(€1 = HRK 7.5)

For more, check out our dedicated business section.

Saturday, 10 July 2021

PM Says Croatia Preserves Its Financial Reputation

ZAGREB, 10 July 2021 - Croatia has managed to preserve its firm financial reputation, while weathering the COVID-19 pandemic and the consequences of the 2020 devastating earthquakes, Prime Minister Andrej Plenković said in his speech at the 14th edition of Dubrovnik Forum on Saturday.

The fourteenth annual international conference titled "Dubrovnik Forum: (Post)-Pandemic Geopolitics - Together in a World Apart" focused on the impact of the COVID-19 pandemic on the geopolitical relations and global economy. The programme includes three panels: "Unmasking the Geopolitics of a Post-Pandemic World"; "The International Community and the Western Balkans: How to End the Quarantine?"; and, "European Union, Three Seas Initiative and 17+China: How to support Central and Eastern Europe’s economic growth and societal development?".

Addressing the forum, PM Plenković said that Croatia's financial reputation remained firm owing to good results in the pre-pandemic period.

After being hit by the coronavirus pandemic and the devastating earthquakes, Croatia is now learning how to endure the pressure and tap considerable financial funds so as to provide the citizens with the real development that is evolving into two directions: admission to the Schengen Area during 2022, and the full readiness in 2023 for the admission into the euro area, he said.

The Croatian PM underscored the importance of international cooperation, notably joint efforts within the European Union.

The prevailing opinion of European leaders last summer was that we were faced with a huge problem that required the proper solution. The only way to find the solution for that big problem was to make agreement on the EU Next Generation instrument and withdraw a great amount of money for the recovery, Plenković explained.

He recalled that the European Commission had recently given its greenlight to Croatia's National Recovery and Resilience Plan, worth €6.3 billion, which could significantly boost the country's Gross Domestic Product and create 21,000 new jobs by 2026. 

The greenlight from Brussels is an important step towards the EU disbursing funds in grants and loans under the Recovery and Resilience Facility (RRF).

The EU plan for the recovery from the COVID-19 pandemic was described by the Croatian prime minister as the wisest move.

He also recalled that at the onset of the pandemic, Craotia did not have enough equipment and protective clothes to address the crisis. Only one telephone call to Chinese Prime Minister Li Keqiang was enough and the problem was solved, the Croatian PM added.

During his key-note speech Plenković said that the developments in the western Balkans was one of the topics of the Dubrovnik event and he reiterated his support to Balkan countries' striving for EU membership.

He expressed hope that Bulgaria and North Macedonia would find a solution to their bilateral dispute as soon as possible.

The time has ripened for Albania and North Macedonia to finally start their accession negotiations, he added.

PM recalled that Croatia perceived Bosnia and Herzegovina as its most important neighbour in the historical, geographic and cultural sense.

We support the current process that is being conducted with the assistance of the USA and the European Union in relation to efforts to amend the election law in that country. We believe that this issue should be settled and that institutions should include legitimate representatives (of constituent peoples) and that we should comply with the letter and law of the Dayton Agreement, Plenković said.

All the three constituent peoples should be equal, and the moves being taken since 2006 have not made Croatia happy. We do not think that such moves are conducive to the good functioning of Bosnia and Herzegovina, he said.

Croatia also supports reforms being taken in other EU membership aspirants: Montenegro, Serbia and Kosovo.

Plenković conveyed Croatia's readiness for the strengthening of cooperation in the Mediterranean region and announced that in September Croatia and Slovenia could join the informal group of Mediterranean countries called MED 7.

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Thursday, 11 February 2021

EC Expects Croatia's Economy to Rebound by 5.3% in 2021, 4.6% in 2022

ZAGREB, 11 February, 2021 - Croatia's Gross Domestic Product is estimated to have contracted by 8.9% in 2020, while it is expected to rise at a rate of 5.3% in 2021 and 4.6% in 2022, the European Commission says in its latest Winter 2021 Economic Forecast, published on Thursday.

The economy's contraction in 2020 "is mainly attributable to the impact of the COVID-19 pandemic on service exports, particularly tourism, which suffered greatly due to the fall in demand for air travel and the imposition of travel restrictions in many countries."

Croatia's private consumption also fell, reflecting the accumulation of involuntary and precautionary savings.

Following a better-than-expected third quarter, the country's GDP is estimated to have contracted again towards the end of the year as pandemic suppression measures were reintroduced in December.

This contraction is lower than the previous projections of -9.6%, as stated by the EC in its Autumn Economic Forecast. However, the latest forecasts about the rise in 2021 are smaller in comparison to the previously projected recovery at a rate of 5.7%, while the projected growth for 2022 has been revised upward from 3.7% to 4.6%.

"Real GDP is forecast to bounce back by 5.3% in 2021, as domestic demand should rebound once pandemic containment measures are phased out and more people are vaccinated.," the EC says.

"Pent-up demand, coupled with a gradual recovery in the labour market, is expected to boost private consumption. Investment should rebound on the back of the already strong dynamics in the construction sector, supported by rebuilding efforts following the strong earthquakes in the Banija region and Zagreb.

"A gradual pick up in longer-term investment projects, is also expected. The recovery in external demand, however, is expected to be uneven. Goods exports are expected to increase strongly on the back of the improved global outlook but services exports are projected to remain subdued in both 2021 and 2022 compared to their 2019 levels.

"This is mainly because the recovery in the travel and hospitality sectors are likely to take several years. This forecast does not include any measures expected to be funded under the Recovery and Resilience Facility, posing an upside risk to the growth projections.

"HICP inflation rate dropped to 0% in 2020 on the back of a strong decline in energy prices, while core inflation remained broadly stable at around 1%. As the effect of last year’s fall in oil prices dissipates, inflation is expected to pick up slightly in 2021 but should remain subdued throughout the forecast horizon (1.2% in 2021 and 1.5% in 2022)," reads the Croatia section of the EC Winter Economic Forecast.

Croatia ranks 3rd in terms of expected rise in 2021, fourth in terms of fall in 2020

For the sake of comparison, Spain is expected to have the most robust recovery in 2021, at  a rate of 5.6%, France follows (5.5%), and Croatia ranks third among the 27 EU member-states.

When it comes to the economic downturn in 2020, Spain again tops the ranking (-11%), Greece is  the runner-up (-10%), and Malta ranks third (-9%), while Croatia comes as fourth with a negative growth rate of 8.9%.

Sunday, 22 November 2020

Analysts Say Croatia's GDP Dropped by About 10% in Q3 2020

ZAGREB, November 22, 2020 - Despite the fact that Croatia's economy somewhat recovered from the record decline in the second quarter, thanks to activities after the lockdown, analysts estimate that in the third quarter it also fell at a double digit rate compared to the previous year.

The national statistical office (DZS) will release at the end of next week the first estimate of gross domestic product (GDP) for Q3, and seven analysts who took part in Hina's survey expect a drop in GDP of 10.4% on the year.

Their estimates of the decline range from 9.5% to 11%.

Economy in recession

That will be the second quarter in a row that the economy declines on the year, which means it has entered a recession, but the decline will be milder compared to the record 15.1% drop in the previous quarter.

The record decline in Q2 was a consequence of the coronavirus pandemic and restrictive measures aimed at curbing the spread of the virus, which paralysed economic activity from the second half of March to the end of April.

"When the measures were relaxed in June, and especially during the summer months, most activities already started to recover. First high-frequency indicators confirm that Q3 will see a growth compared with the period from March to June, but a relatively steep decline in GDP on the year is inevitable," one of the analysts said.

Personal consumption continues to decline

The decline is mainly due to weak personal consumption, which is the largest component of GDP. Data from the national statistical office show that retail trade turnover fell by 7.6% in Q3 compared to the same period last year.

"That is mainly a consequence of trends in hospitality services, which didn't manage to compensate for losses caused by the closure of the economy even during the summer months, and tourist spending was markedly lower compared to the previous year," it was said in the survey.

Even though the summer tourist season was slightly better than expected at the start of the coronavirus crisis, the decline in tourist turnover was sharp.

According to the DZS's data, there were 6.6 million tourists in commercial accommodation establishments in the first nine months of 2020, which is a drop of about 63% from the same period last year, while the number of tourist nights dropped by 54% to 39.7 million.

The decline in industrial production also had a negative effect on GDP. In the past quarter, production dropped by 1.3% on the year.

That is a consequence of weak domestic demand, as well as foreign demand, as indicated by the decline in exports since the start of the year.

According to the DZS's data, the value of exports of goods in the first nine months of 2020 totalled about HRK 80 billion, which 4.8% less compared to the same period last year, while imports dropped by 10.1%, to approximately HRK 126 billion.

"High levels of uncertainty and worsening expectations also curbed stronger investment, while government spending is the only GDP component that is mitigating the negative trends on the demand side with its growth," one of the analysts said in Hina's survey.

Second wave of corona crisis

Because of the second wave of coronavirus spreading in Croatia and Europe, analysts also expect an economic decline in Q4 compared to the previous year.

It is expected that holiday spending and tourist activity will weaken due to epidemiological measures.

In addition, a further decline in exports and imports is expected, given the new restrictive measures introduced in most European countries due to the second wave of coronavirus, as is recession in Croatia's largest trading partners, Italy and Germany.

Deep, but brief recession?

Because of all this, a record decline in economy is expected in the entire 2020.

According to Hina's survey, seven analysts on average estimate that in the entire 2020 the economy could decline by 9.2%. Their estimates of the decline range from 8% to 10%.

The estimates of the decline have slightly decreased since three months ago analysts on average expected a drop of 10.5%.

According to one analyst, some of the reasons for that include a somewhat salvaged main tourist season, the resilience of construction (more) and industry (less) to negative trends, reduced gap in trade in goods (goods exports more resilient than imports) and, finally, the government's fiscal impulse through wage subsidies and maintaining household income levels, as well as the moratorium on loan repayment.

Despite being mitigated, this year's economic downturn could be greater than during the 2009 financial crisis, when the GDP dropped by a record 7.4%.

The government itself expects a greater drop in economy than in 2009, so it estimates that the GDP will decline by 8%.

The Croatian National Bank also expects a drop of about 8%, while the European Commission estimates that Croatia's economy will decline by 9.6% this year.

While the drop in GDP in 2020 will likely be deeper than during the global financial crisis, it is expected that this recession will be shorter. Then, the recession lasted for six years, while this time the economy is expected to grow as soon as next year.

Tuesday, 7 July 2020

Croatia Among Three Worst Hit Economies by Corona in EU

 

ZAGREB, July 7, 2020 - The coronavirus pandemic has impacted all European Union countries but not equally and the most affected countries are those that largely depend on tourism, notes the European Commission's summer 2020 economic forecast released on Tuesday.

Croatia is among the three most affected countries in the European Union. The commission forecasts that Italy's GDP will contract the most (-11.2%) followed by Spain (-10.9%) and Croatia (-10.8%).

Poland's economy is expected to decrease the least (-4.6%), and is followed by Denmark (-5.2%), Sweden (-5.3%), while Romania and Malta are with a fall of 6% respectively.

The greatest EU economy Germany can brace itself for a 6.3% decrease in GDP.

"The shock to the EU economy is symmetric in that the pandemic has hit all Member States. However, both the drop in output in 2020 and the strength of the rebound in 2021 are set to differ markedly. The differences in the scale of the impact of the pandemic and the strength of recoveries across Member States are now forecast to be still more pronounced than expected in the Spring Forecast," the commission said in a press release.

The average drop in the euro area economy in 2020 is estimated at 8.7% while it is expected to grow by 6.1% in 2021.

The EU economy is forecast to contract by 8.3% in 2020 and grow by 5.8% in 2021.

Based on current forecasts the contraction in 2020 is, therefore, projected to be significantly greater than the 7.7% projected for the euro area and 7.4% for the EU as a whole in the Spring Forecast released on May 6.

Growth too will be somewhat weaker than had been forecast in the spring.

"This forecast shows the devastating economic effects of that pandemic. 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. 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,” Commissioner for the Economy, Paolo Gentiloni was quoted as saying.

Executive Vice-President for an Economy that works for People, Valdis Dombrovskis however warned of the second wave of the pandemic.

"The economic impact of the lockdown is more severe than we initially expected. We continue to navigate in stormy waters and face many risks, including another major wave of infections. If anything, this forecast is a powerful illustration of why we need a deal on our ambitious recovery package, NextGenerationEU, to help the economy. 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,” said Dombrovskis. 

The impact of the pandemic on economic activity was already considerable in the first quarter of 2020, even though most Member States only began introducing lockdown measures in mid-March.

With a far longer period of disruption and lockdown taking place in the second quarter of 2020, economic output is expected to have contracted significantly more than in the first quarter.

On the other hand, early data for May and June suggest that the worst may have passed. The recovery is expected to gain traction in the second half of the year, albeit remaining incomplete and uneven across the EU, the commission's press release said.

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