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Growth in most EU economies slowed in 2019, especially in the second half of the year (Figure 8a). Slowing exports and a drawing down of inventories dragged down growth in real GDP in a majority of EU Member States. Declining international trade throughout the year, the result of intensifying trade tensions between the United States and its key trading partners, was the most likely reason (UNCTAD, 2020a). The US economy was affected by these developments too, but growth there remained well above the European Union’s because of a strong increase in private consumption (Figure 8b).

Figure 8

Real GDP and contribution of aggregate demand (% change vs. the same quarter in the previous year)

Source: Eurostat, OECD national accounts and EIB staff calculations.

Note: Data for Q3 2020 are preliminary: Eurostat flash estimate for the European Union, and US Department of Commerce advance estimate for the United States. No breakdown of the components of aggregate demand components is provided GFCF stands for gross fixed capital formation.

In the European Union, the impact of the pandemic was already evident in the first quarter of 2020. Although sweeping measures to contain the spread of the coronavirus were introduced in the last two weeks of the first quarter, consumer spending and net exports declined significantly, causing a drop in real GDP in almost all EU members, particularly in Southern and in Western and Northern Europe. Nearly all EU members restricted the non-essential movement of people and closed most shops, along with schools and national borders, mid-March. Gatherings with people outside the household were also restricted. In most countries, the harshest measures lasted throughout April and for much of May. Figure 9 plots a stringency index of the measures taken by EU governments.

Figure 9

Stringency of government measures across the European Union

Source: Oxford COVID-19 Government Response Tracker, Blavatnik School of Government.

Real GDP fell precipitously in the second quarter of 2020, as economic activity was stifled by government restrictions across the European Union (Figure 9). The overall decline in real GDP in the European Union was more than 11% relative to the first quarter of 2020 and was the largest decrease in a single quarter on record. The falloff was clearly caused by government measures to contain the spread of the virus, and the decline varied widely across Member States. It was smallest, on average, in Central and Eastern Europe where real GDP in the second quarter fell by 9.7% relative to the first quarter. In Western and Northern Europe, it fell by 11.5%, while in Southern Europe the decline was nearly 15%. By way of comparison, the decline of real GDP in the United States in the second quarter was about 9%, compared to the first quarter.

EU GDP increased 13% in the third quarter of 2020 compared to the second quarter, recovering some of its losses. This increase is not surprising as most EU governments relaxed restrictions on movement and economic activity substantially in the third quarter. The biggest increases were in France, Spain and Italy, where GDP had declined by more than the EU average. While substantial, the increase in the third quarter still left EU real GDP 4% lower than the level in the same period a year earlier.

Significant declines in private consumption drove the decline in real GDP in the second quarter (Figure 10). Constrained private consumption accounted, on average, for about two-thirds of the total decline in GDP. Lower consumption represented around one-third or less of the total decline in only four countries.[2] In addition to the restrictions on shopping, private consumption most likely declined because many workers were uncertain about their jobs. In the European Commission’s Business and Consumer surveys, measures – such as unemployment expectations or respondents’ expectations for their financial situation in the next 12 months – indicated consumer anxiety (Figure 11a).

The decline in investment was the second largest cause of the overall contraction in the European Union’s GDP. Investment accounted for about one-third of the decrease, compared with only 14% in the United States. Within the European Union, the depth of the decline varied widely, ranging from just below 2% in Finland to 50% in Luxembourg. In general, the contribution of investment to the fall in GDP was higher in Western and Northern Europe (34%) than in Southern (21%) and Central and Eastern Europe (19%). Uncertainty is very likely to have played a larger role in the contraction in investment than government restrictions. Chapter 2 provides a more in-depth analysis of this drop in investment.

Figure 10

Real GDP change in H1 2020 and contribution of aggregate demand (percentage change in Q2 2020 vs. Q4 2019)

Source: Eurostat, OECD national accounts and EIB staff calculations.

Note: Other includes government consumption expenditure, net export and change in inventories.

Figure 11

Consumer expectations for the next 12 months and real disposable income per capita

Source: European Commission’s Business and Consumer Surveys and Eurostat.

Expectations about future consumption do not suggest a rapid recovery in GDP (Figure 11a). Consumers’ expectations about their financial situation and their willingness to make major purchases in the next 12 months improved to some extent in June and July. Those expectations stabilised in August and September, but they were well below levels seen before the pandemic. The expectations started to deteriorate again in October as the pandemic intensified again across EU members. Disposable income per capita fell sharply in the second quarter of 2020, and this decline will affect consumer spending, especially for lower-income, liquidity-constrained households (Figure 11b). Such developments in income and consumer expectations make a quick rebound in consumer spending somewhat unlikely, even though strict government restrictions on movement have been largely avoided in the fourth quarter of 2020. The corporate sector is not optimistic about investment either, as discussed in detail in Chapter 2. The economic recovery is therefore likely to be more gradual and prolonged (Box A).

Box A

Real-time monitoring of the pandemic’s impact

Since the start of the pandemic, new data sources have become available that help assess economic activity in almost real time. Oxford University coordinates an effort to compile daily indicators of policy stringency (Blavatnik School of Government, 2020). Google provides daily measures of the extent to which people, under these restrictions, are still going to work (Google, 2020). Policies and mobility vary substantially across EU Member States but still show a common pattern (Figure A.1).

Figure A.1

Indicators of policy stringency and mobility trace the impact of the first and second waves of the pandemic, with significant diversity across EU countries

Source: Blavatnik School of Government (2020), Google (2020), and EIB staff calculations.

Note: Monthly averages of work-related measures of policy stringency and mobility. Each diamond shows an EU country. Lighter shades result from overlapping diamonds.The lines shows the GDP-weighted EU averages. Data were collected on 23 November.

These indicators help assess economic activity using relatively simple econometric specifications. We base our assessments on pooled linear regressions of economic activity (industrial production or service sector turnover) in EU members on visits to places of work and on a composite indicator of policy stringency (Table A.1). The policy stringency indicator is an average of the extent to which workplaces, schools and public transport are closed, the stringency of stay-at-home requirements and restrictions on movement within the country. The regressions are weighted by active population and contain country fixed effects.

Assessments based on these indicators suggest that EU GDP declined by about 1-2% in October and 5-6% in November. Industrial production and service sector turnover, used here as monthly proxies for GDP, move closely in line with the policy index (Figure A.2, dark blue and red lines). Our forecasts suggest that by November, the start of the second wave had undone most of the recovery witnessed since May (Figure A.2, light blue and red lines). Google’s mobility indicator points in the same direction but suggests a somewhat smaller decline in activity. Given that a substantial relaxation of policies in December seemed unlikely, EU GDP may fall in the fourth quarter by about 3-4% vs. the third quarter, leaving GDP about 7-9% below its pre-crisis level.

Figure A.2

The pandemic’s second wave appears to reverse the summertime recovery

Source: Blavatnik School of Government (2020), Eurostat, and EIB staff calculations.

Note: Forecasts computed using pooled, population-weighted regressions of industrial production and service sector turnover on a work-related subset of Oxford stringency indices and on country fixed effects. Data as of 23 November 2020.

Table A.1

Regression specifications and results

Dependent variable	Level of industrial production1	Level of service sector turnover1
	(1)	(2)	(1)	(2)
Impact of a 1 point increase in the policy stringency index	-14.0[-16.0, -11.0]		-16.5[-20.6, -12.2]
Impact of a 1 point increase in mobility		0.64[.55, .73]		0.7[.61, .79]
R2	73.5%	74%	84%	89%
N	223	199	80	55

Source: EIB staff calculations.

Note: ¹ Seasonally and calendar day adjusted. 95% confidence intervals in square brackets.

As long as compliance with restrictions is high, the policy stringency indicator appears more useful than the mobility data in assessing economic activity. Google’s mobility indicator can be seen as a measure of compliance with the restrictions and might therefore be a more direct measure of activity. However, the mobility indicator shows pronounced seasonal variations, which detract from the underlying momentum in activity. For example, it declined during the summer holidays in August. And so far, surveys do not seem to suggest that compliance with restrictions is significantly declining in EU countries (Institute of Global Health Innovation, 2020).

The impact of the coronavirus pandemic varies substantially by sector. Sectors that rely significantly on physical presence, including passenger transport, the arts, entertainment, tourism and hospitality, were hit the hardest, declining by some 30% in the second quarter of 2020 from the first quarter. Others, such as agriculture, finance or real estate, contracted by 3% or less over the same period. The distribution of the economic impact across the various sectors was very different during the global financial crisis, when EU manufacturing sustained the largest decline – nearly 20% in the first quarter of 2009. The drop in other sectors remained relatively contained at near or below 6%.

The sectoral distribution of the decline will have a decisive impact on the speed of the economic recovery in the near to medium term. The industrial sector’s share in the overall decline in 2020 is the same as during the global financial crisis, while that of services is much higher (Figure 12). Given that a large part of the contraction in services is due to their being delivered in person, as is the case in passenger transport or accommodation, the recovery of a large part of the services sector will remain subdued until the pandemic is reined in, especially as many government restrictions on economic activity were being reintroduced in the fourth quarter of 2020. On the other hand, the recovery of the industrial sector, where manufacturing dominates, is dependent on the upturn in international trade. The different speeds of recovery exhibited by manufacturing and services became clear over the summer when the industrial sector bounced back fairly quickly, while certain services lagged significantly behind.

Figure 12

Gross value added of all industries (% change vs. the same quarter in the previous year)

Source: Eurostat and EIB staff calculations.

Note: The regions of Europe are referred to simply as Western and Northern, Southern, and Central and Eastern in subsequent charts throughout the Investment Report.

The speed of the recovery is likely to be uneven across the European Union. The decline in services, especially trade, transport and hospitality, is much larger in Southern Europe than in the rest of the European Union. Because these services represent a large share of the economies of Southern Europe, they will weigh significantly on the recovery, both weakening it and stretching it out over time.

Box B

The pandemic’s impact on GDP: A historical perspective

The extent of the expected economic decline in 2020-2021 rivals the steep drop in activity that followed the global financial crisis. It is therefore worth comparing the intensity of the ongoing economic crisis to the global financial crisis, which could provide insight into the likeliest paths to recovery. To this end, this analysis compares the expected decline in GDP in 2020-2021 (defined as the COVID-19 recession) with the worst two-year cumulative losses in GDP and with the global financial crisis for individual countries. One obvious caveat is that the 2020 and 2021 forecasts might turn out to be quite different from the actual data given the high uncertainty surrounding the recovery.

Figure B.1

Cumulative two-year contractions – comparison with the global financial crisis

Source: Penn World Table, Eurostat, IMF and EIB staff calculations.

Note: GDP forecasts for 2020 and 2021 are based on the European Commission’s July 2020 forecast and the IMF’s June 2020 WEO update (IMF, 2020b). For almost all advanced economies, the starting year of the analysis is 1950. However, for some countries, data only becomes available as late as 1990 (such as for many Central and Eastern European countries).

The global financial crisis is identified as the worst crisis in post-World War II history for many countries in Western and Northern Europe (Figure B.1). In Southern Europe, it sits close to the COVID-19 crisis. The expectations of a rebound in 2021 make COVID-19 a relatively short-lived recession. This latter forecast is also based on the assumption that the health crisis will be resolved in 2021.

Figure B.2 illustrates the comparison from a different angle. The vertical axis shows the percentage of two-year cumulative decline and the percentage of those contractions that are worse than the 2020-2021 result for the total sample. In general, the figure depicts the well-known fact that mature economies are more stable and less susceptible to frequent declines in output. For nine countries, all two-year periods of contraction were harsher than the 2020-2021 crisis. The countries of Central and Eastern Europe experienced dramatic losses after the fall of Communism with the entire economic system wiped out, which explains why for most of them the decline in 2020-2021 is smaller than previous declines. For Southern European countries, however, the decline from the pandemic stands out as one of the harshest contractions since World War II.

Figure B.2

Frequency of contractions and worse-than-2020 contractions (in %)

Source: Penn World Table, Eurostat, IMF and EIB staff calculations.

Note: GDP forecasts for 2020 and 2021 are based on the European Commission’s July 2020 Forecast and the IMF’s June 2020 WEO update (IMF, 2020b). For almost all advanced economies, the starting year of the analysis is 1950. However, for some countries data availability starts as late as 1990 (such as for many Central and Eastern Europe countries). The green bar shows the number of contractions that are bigger than the 2020-2021 decline as percentage of all years in the sample. When the two bars are equal, all contractions until 2020-2021 have been worse than the current contraction.