Activity is projected to contract by around 5½ per cent in 2020, driven by falling private consumption, business investment and exports. Growth is set to recover slowly to 2.8% in 2021 and 3.3% in 2022. Private consumption and exports initially rebounded rapidly, but demand for services will stay weak into 2021 as virus containment measures have been tightened. Further uncertainty will constrain the recovery of investment as well as demand for capital goods exports before general deployment of a vaccine increases confidence. Short-time work has cushioned the increase in unemployment, but sustained falls in the unemployment rate are not expected until after mid-2021, once employees on short-time work have been reabsorbed.
Strong fiscal support has protected jobs and firms in 2020 but the rate of fiscal consolidation needs to be carefully managed. Additional targeted support is merited in 2021 and 2022 to reduce taxes for those on low incomes, increase research and development, support job placement and training, and deliver infrastructure needed for digital transformation and the energy transition.