The FTSE 100 index (INDEXFTSE:UKX) has dipped 1.54% or 96.70 points on the back of Tuesday’s gloomy Summer 2020 Economic Forecast published by the European Commission (EC), projecting an 8.7% contraction of the economy across the year – significantly worse than the earlier 7.7% prediction from the EC’s Spring Forecast back in May.
Despite the “swift and comprehensive” response of EU member states to the coronavirus pandemic, the EC outlines that the impact of the crisis is going to hang over the European economy for a while longer than initially thought. The gradual lifting of lockdown measures at “a more gradual pace” than assumed by the Spring Forecast has stifled hopes of a quick recovery, and dragged down growth projections for 2021.
The European economy is expected to gain traction over the next quarter, however, with the loosening of lockdown restrictions and the long-awaited reopening of the retail and service sectors. Early data for May and June have already indicated that “the worst may have passed”, although the EC was quick to emphasise that the recovery remains “incomplete and uneven” across the EU member states.
Paolo Gentiloni, Commissioner for the EC’s ‘An Economy that Works for People’, commented on today’s figures:
“Coronavirus has now claimed the lives of more than half a million people worldwide, a number still rising by the day – in some parts of the world at an alarming rate. And 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”.
Virtually every European nation has felt the burden of the crisis, in what the EC has described as a “symmetric shock” to the economy across the continent. However – although united by shared suffering during the pandemic – the EU’s solidarity is set to be put to the test over the next few months as individual rebounds are expected to differ “markedly”. Countries quick to clamp down on the virus, such as Germany, are more likely to see a stable and sustained recovery, while hard-hit Italy and Spain face a much steeper uphill battle in the months ahead.
With this in mind, the EC’s projections are plagued by a hefty dose of uncertainty – the Summer Forecast itself contains a disclaimer that it “assumes that lockdown measures will continue to ease and there will not be a ‘second wave’ of infections”. The pandemic has by no means disappeared overnight simply because the economy has jolted back into action, and with local lockdowns already implemented in Leicester and the Australian city of Melbourne, we are being increasingly reminded that coronavirus is here to stay.
Along with the uncertainty surrounding the pandemic, the looming shadow of Brexit poses further complications for the EC’s projections. Since future relations between the UK and the EU remain unclear, the figures are based on “a purely technical assumption of status quo in terms of their trading relations”. The outcome of Brexit negotiations is likely to overhaul the standing relationship with the EU member states, and with the UK emerging from the coronavirus crisis with the highest death toll in Europe, the EC’s predictions are going to be at least a little bit off.
The FTSE has not taken well to the news, with the index down a disappointing 1.54% or 97.60 points to 6,189.24 at BST 15:53 07/07/20.