The European Commission raised its forecasts for EU and eurozone growth this year and next as better economic data and faster vaccinations liberalise economic activity in many countries, but warned that inflation from the spread of the COVID-19 virus and supply bottlenecks were the two main risk factors for the economy. The EU is also spending more on infrastructure, defence and economic recovery.

Upgrading economic growth forecasts

Local time on July 7, the European Commission announced the summer economic forecast report. The report forecasts growth of 4.8 percent for both the European Union and the eurozone in 2021, up 0.6 and 0.5 percentage points respectively from this spring's forecasts. The report also predicts that the EU and eurozone economies will grow by an average of 4.5 per cent a year in 2022.

The European Commission said economic activity in the European Union and the euro zone had exceeded expectations in the first quarter of this year, and that the lifting of containment restrictions in the second quarter was accelerated by the improvement of the epidemic, which was particularly beneficial to the services sector. The commission also said that recent data showed that private consumption had begun to rebound strongly and that private consumption and investment would be the main drivers of an accelerated recovery in the EU and the euro area.

European Commissioner for Economic Affairs Paolo Gentiloni said on Monday that the economic recovery in the European Union and the eurozone would be stronger. Mr. Gentiloni said real gross domestic product in the European Union and the euro zone is expected to return to pre-outbreak levels by the end of the year. But because countries are not as affected by the epidemic in 2020 as they are by the recession, there will be differences in the speed of recovery.

Mr Gentiloni attributed the upward revision to three factors: better-than-expected economic activity in the first quarter; Second, effective anti-epidemic measures and accelerated vaccination have allowed EU member states to liberalise their economies gradually. Third, with the implementation of the new crown digital certificate, intra-EU tourism will gradually resume.

At the same time, the European Commission revised up its forecast for the multi-country economy of the Eurozone, raising the forecast for Germany's GDP growth in 2021 from 3.4% to 3.6%, and for 2022 to 4.6%. Raised France's GDP growth forecast for 2021 to 6.0% from 5.7% and for 2022 to 4.2%; It raised its GDP growth forecast for Italy in 2021 to 5.0% from 4.2% and lowered its forecast for 2022 to 4.2% from 4.4%.

In addition, the improvement of the economies of trading partners and the use of the EU recovery fund have contributed to the EU's economic growth. The summer forecast says the wealth generated by the Recovery and Residency Facility in the Recovery Fund is equivalent to 1.2% of real EU GDP in 2019. The eurozone economy shrank by a record 6.5 per cent last year and the EU as a whole by a record 6.0 per cent. Both the European Union and the eurozone are recovering at the same time, with potentially record growth rates.

According to the report, economic growth in the EU is still facing a considerable degree of uncertainty, and the risk of a pandemic rebound caused by the spread of the COVID-19 Delta strain in the future remains the biggest risk to economic recovery, and the response measures taken by households and companies are the main variables affecting economic recovery.

Warning of upward pressure on prices

Although the Commission's view of the eurozone economy has improved significantly, there is a growing risk that inflation will persist in the euro area as demand picks up.

In its summer economic forecasts, the commission forecast that inflation in the EU would reach 2.2 per cent this year, up 0.3 percentage points from its spring forecast, and 1.6 per cent next year, also higher than previously forecast. Eurozone inflation is forecast at 1.9 percent in 2021, compared with 1.7 percent previously forecast and 1.4 percent in 2022. The report also noted that risks to the growth outlook are generally balanced, but uncertainty is high. If supply shortages persist for longer and price pressures are transmitted more strongly to consumer prices, inflation could be higher than expected.

"We will keep a close eye on rising prices, which are mainly driven by strong domestic and external demand," European Commission Vice President Valdis Dombrovskis said in a statement.

Higher energy and commodity prices and supply chain bottlenecks are exacerbating price pressures this year, but inflationary pressures should ease again in 2022 as the economy recovers and supply and demand converge, the commission said.

Daniel Moelis, chief market strategist at BNP Paribas, said the ECB would most likely announce a scaling back of its emergency bond-buying programme (PEPP) in September rather than December. As the economic damage from the outbreak diminishes, it no longer makes sense to continue with PEPP in 2022. He said the ECB could raise its inflation forecast in September if reasonably good macroeconomic data continued.

The European Central Bank (ECB) announced on July 8 that it would set its medium-term inflation target at 2%, allowing inflation to exceed its target "moderately" over a "transitional period" and dropping its previous phrase of "below but close to 2%", Reuters reported.

Infrastructure spending is expected to support the economy

While Europe's economy continues to recover, it is also spending more on infrastructure. The European Parliament on Tuesday approved the "Renewed Connecting Europe's Facilities" (CEF) plan, which will allocate 30 billion euros between 2021 and 2027 to finance transport, energy and digital infrastructure.

The plan will ensure the completion of key trans-European infrastructure projects by 2030, the European Parliament said in a statement. The plan includes a Baltic railway, alternative fuel charging facilities and 5G networks on major transport axes. The plan will be structured around three main areas: some €23bn will be spent on transport projects, €5bn on energy projects and €2bn on digitisation projects. The project will also support the development of projects of common interest to member states, such as secure and reliable high-capacity digital networks and 5G systems, as well as the digitization of transport and energy networks.

In addition, the European Commission held an online ceremony to launch the first European Defence Fund, which aims to improve the competitiveness and innovation of the EU defence industry. The Fund has also planned a pilot programme called the European Defence Industry Development Programme, which will allocate 158 million euros to 26 new projects, while two major development projects have received 137 million euros.

The European Defense Fund will fund cross-border cooperation between industrial entities between 2021 and 2027 to research and develop new defense capabilities in a number of areas. The 1.2 billion euros in 2021 allocation will fund weapons research and development projects such as next-generation fighter jets, tanks and ships, as well as key defense technologies such as military cloud, artificial intelligence, semiconductors, space, networking or medical solutions, according to the report.

Meanwhile, approval of the European Economic Recovery Fund is accelerating. European Commission President Jean-Claude von der Leyen said on Thursday that he hopes to approve as many economic recovery plans as possible by the end of July for European member states to use recovery funds to transform Europe's green ecology and digital economy. According to its introduction, the European Commission has recently successfully raised 35 billion euros in international capital markets for the recovery fund. The aim is to raise €800bn at current prices. The commission is also due to present a detailed proposal within two weeks to raise revenues from the EU's "own resources".