EU Economic Forecasts: Positive Growth with Government Assistance Expected as COVID-19 Recedes from the Continent

Business Opportunities from the Pandemic - Panayiotou Legal

EU Economic Forecasts: Positive Growth with Government Assistance Expected as COVID-19 Recedes from the Continent

A year and a half since the emergence of the COVID-19 pandemic, it is widely believed that the global economy is set for an unprecedented recovery from the current economic slowdown in 2021. The recovery is expected to be uneven across the globe, however major economies of the European Union (EU) are poised to record pre-pandemic growth levels.

Global economic growth is expected to increase to 5.6% this year, based on the strength of the major economies of the world such as the United States, China and the EU. Despite the fact that global GDP is expected to be 3.2% below pre-pandemic levels, growth for almost every region in the world has been revised upwards for 2021. The European Commission has predicted a positive change in real GDP for all major countries of the EU as illustrated below:

The EU is expected to contribute approximately one sixth of global economic growth in 2021. Mass vaccine inoculations will play a crucial role in the resurgence of EU economies as developed countries such as Germany, France and Spain have fully vaccinated half of their population, on par with the United States, giving a sense of optimism in industries such as agricultural and tourism that have been hardly hit.

NextGenerationEU

In 2020, the EU approved a financial support package of €750 billion for individuals and businesses negatively impacted by the pandemic known as “NextGenerationEU”. The main focus of this package is to invest in start-ups with high growth potential, which will ensure that the EU economies become technologically advanced and environment-friendly while promoting a digital and secure marketplace. This package also applies to already established small and medium-sized businesses. Since the onset of the pandemic, the EU has experienced a sharp increase in the number of start-ups. Working from home and reduced travel expenses resulted in unexpected savings for individuals, which propelled an interest in self-funded businesses. Coupled with government financial assistance, we can expect an improved success rate and profitability for start-ups and businesses respectively. The EU has approved funding of €1.2 billion in grants and loans to Cyprus. €157 million will be disbursed immediately, and further disbursements will be authorised based on the satisfactory fulfillment of milestones and targets.

NextGenerationEU: European Commission endorses Cyprus's €1.2 billion recovery and resilience plan. Image Source: https://bit.ly/2WY5d2D

Real Estate

Many economists have predicted a cyclical recovery of the EU economy starting in the third quarter of 2021. In this environment, fiscal tightening will be suspended, and monetary policy will remain highly accommodative (low-interest rates), which will support the real estate market and property prices for the foreseeable future. Lockdowns across the EU have affected residential rental properties while office use is also limited. According to a research by Aberdeen Standard, construction projects and residential schemes are back on track, and many projects which were suspended during the lockdowns have now been completed. During lockdowns, EU governments provided various income support packages which helped tenants meet their obligations. Only 1% of tenants across the continent requested for rent deferral during the pandemic. Given the lack of housing options in many cities coupled with government incentives for the real estate sector, growth is predicted to exceed expectations in the medium term.

In 2020, the European Central Bank (ECB) approved a €120 billion asset purchase program package which includes real estate assets. This is in addition to €20 billion a month it had previously committed to provide. This package aims to provide loans at below-market rates to small businesses and individuals who have been directly affected by COVID-19. Also, the “NextGenerationEU” package mentioned above has significantly loosened or removed all constraints and debt covenants associated with bank loans. This might result in an earlier recovery of GDP than predicted, given that more applicants will now be eligible for this relief.

Moreover, the European Commission (EC) recently announced a €250 billion package related to deep refurbishments and energy-efficient related reforms across all member states. This includes mandatory minimum energy performance standards, which will increase the affordability of green renovation through funding. Cyprus, under this plan, will devote 41% of its total allocation towards climate objectives such as the introduction of green taxation and subsidizing renewable energy equipment.

The relief packages mentioned above will generate a wide variety of opportunities for stakeholders in the real estate sector. Real estate owners will be able to tap the full potential of their buildings, tenants will be able to save on utility bills such as electricity and gas, and the government will be able to relax several carbon-based policies.

Consumer Goods

EU’s consumer sector worth €8.6 trillion contributes approximately 53% of the €16.4 trillion GDP3. Unanticipated lockdowns and travel restrictions caused a severe contraction of real household consumption, which fell by 8% in 2020 as compared to the previous year. However, the ECB is expecting a growth of 4.7% and 4.8% in 2021 and 2022 respectively as more consumers are vaccinated and the likelihood of future lockdowns diminishes.

Lockdowns resulting from COVID-19 led to many employees working from home, a phenomenon that used to be uncommon before the pandemic. As shopping malls and clothing outlets were temporarily closed, the ascent of e-commerce began. E-commerce sales have been consistently increasing over the past few years, while the biggest uptick was seen in 2020, during which sales were recorded at €717 billion as compared to €521 billion in 2019. Given that the pandemic has changed the landscape for the consumer goods industry, we can expect to see a positive trend in e-commerce sales in the long term. More and more consumers are becoming comfortable with ordering goods online and retailers are in the process of upgrading their websites and supply chains to cater for the increase in demand of goods.
Another consequence of this pandemic has been an increase in household savings, some of which is not voluntary. According to UBS, household savings shot up to 25% in the second quarter of 2020 compared to 12% in the fourth quarter of 2019. Part of this is forced savings because consumers could not purchase some goods which they would typically purchase, and part of it is precautionary savings given the economic slowdown. Now that the economy is picking up steam and future lockdowns seem less likely, we can expect a faster recovery in developed countries such as Germany and France, with retail stores, restaurants and clothing outlets expected to reap the most benefits out of this recovery.
The EU government (through NextGenerationEU) has pledged to support the e-commerce and consumer goods industry by making online shopping more secure and by funding online training so that everyone can improve their digital skills. Small and medium businesses will also be given incentives to go online. All these factors will ensure that the consumer goods industry, which contributes the most to the EU GDP, will be able to recover from this current downturn earlier than anticipated.

Technology

The EU used to lag behind the United States and China in the technology sector in the past. One of the major reasons was the level of government involvement in the industry. The US government has long made clear its intentions to make tech investment its national priority, allocating a considerable portion of its budget towards R&D and removing barriers to innovation. The EU on the other hand has had access to a wide pool of talent and a strong tech start-up community, with minimal government support.
Recently, the EU has taken a number of steps to promote the tech industry. Since 2020, the EU has significantly loosened the red tape, which prevented start-ups from acquiring finance overseas. Instead, it has developed its own regulatory standard, which is slowly being adopted worldwide. By setting the regulations, the EU can design a space where European companies can thrive. Funding has also been approved via NextGenerationEU towards 5G and ultra-fast broadband, secure online shopping, and artificial intelligence, which will help counter climate change and improve healthcare. All these factors clearly show the governments’ intent to increase the tech industry’s market share worldwide. Cyprus has devoted 23% of its allocation towards the transition from manual to digital. The plan includes upgrading broadband speeds and enhancing digital infrastructure to facilitate online learning.
Funding has always been the main hindrance for the tech industry in reaching its true potential. However, in recent years, tech start-ups have managed to take advantage of the global digital transformation by gaining overseas capital funds. According to venture capital firm Atomico, European tech companies raised investments totaling $41 billion in 2020, making 2020 a record year despite the economic slowdown around the globe. Digital markets have enabled tech companies to raise money remotely, which does not require a strong presence in tech hubs like Silicon Valley. Remote access to finance will continue to be more accessible in the future not only to tech companies but also to other small and medium-sized businesses. Tech start-ups with high growth potential will also be eligible for funding from NextGenerationEU.

Opportunities from the pandemic

The current pandemic has left us with unprecedented avenues of growth and new consumer behavior patterns, which will leave a lasting impression on the consumer goods industry. This disruption offers a path of high productivity and growth with extraordinary speed if companies seize the opportunities emerging from this downturn. Specialist companies such as Panayiotou Legal can assist with such business needs. While most businesses and individuals will be taking a precautionary approach towards recovery, the current phase is ideal for start-ups and small businesses to take advantage of favorable business conditions and heavily funded government incentives.

Reach out to us to see how we can help your business