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EU economy’s recovery from pandemic faces ‘mounting headwinds’, warns Brussels - FT 11.11.21

Supply chain bottlenecks, rising energy costs and resurgence in Covid cases threaten to constrain recent pick-up

Sam Fleming in Brussels for the FT 11.11.21

Supply chain bottlenecks and rising energy costs threaten to constrain the EU’s recovery from the pandemic despite a recent pick-up in growth, the European Commission has warned.

Economic growth in the EU and euro area would reach 5 per cent this year, the commission said in its autumn report on the economy, quicker than the 4.8 per cent pace it previously expected.

But it warned of “mounting headwinds” as a result of logistics logjams, strained supply chains and shortages of raw materials, which are hitting Germany, Europe’s largest economy, and other manufacturing centres.

Brussels is also worried that an acceleration in Covid-19 cases could mar the EU’s economic prospects, especially in countries where vaccination rates are low.

The balance of risks to growth had “tilted to the downside”, the commission warned.

“The European economy is moving from recovery to expansion but is now facing some headwinds,” said Paolo Gentiloni, the EU’s economics commissioner.

“There are three key threats to this positive picture: a marked increase in Covid cases, most acute in areas where vaccinations are relatively low; rising inflation, driven largely by a spike in energy prices; and supply chain disruptions that are weighing on numerous sectors.”

The EU’s powerful economic rebound follows its unprecedented decline in 2020, with post-Covid reopenings enabling higher consumer spending and freer travel. Meanwhile, public investment is on track to hit its highest levels in a decade.

The revival in demand has been so strong that supply is struggling to keep up.

The report singled out logistics disruptions, shortages of semiconductors, and problems sourcing a range of commodities and raw materials as key constraints for industrial recovery.

EU surveys suggest that roughly 43 per cent of the manufacturing sector has been affected by “severe shortages” of material or equipment, while services companies are far less concerned.

The overall growth outlook should remain strong, with both the EU and eurozone forecast to sustain a 4.3 per cent expansion in 2022. However, the outlook was more unpredictable, the commission said.

The EU’s industrial core risks being most heavily affected by shortages of components and materials. Germany’s economy is predicted to grow 2.7 per cent this year, slower than the overall EU rate, before it accelerates to 4.6 per cent in 2022.

France, the EU’s second-biggest economy, will expand 6.5 per cent this year and 3.8 per cent in 2022, according to the commission. Italy will grow 6.2 per cent in 2021 and 4.3 per cent next year.

Sectors where activity was surging most were beginning to experience labour shortages, the commission found. About 3.4m jobs are projected to be created in 2022 and 2023, bringing the unemployment rate in the EU down to 6.5 per cent in 2023 compared with 7.1 per cent this year.

However, overall, the report did not find signs of mounting wage pressures from pay negotiations. In the second quarter of this year, negotiated wages in the euro area grew at a rate below 2 per cent, more moderately than in the period before the Covid recession, the commission said.

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EU economy’s recovery from pandemic faces ‘mounting headwinds’, warns Brussels - FT 11.11
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A global shortage of semiconductors held back sales at Germany’s Volkswagen, leading it to miss out on around €500m of profit © Liesa Johannssen-Koppitz/Bloomberg

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