Title page

Contents

Acknowledgements 7

Abbreviations 8

Country Groupings Used in this Report 8

Executive Summary 9

Part I. Inclusive Growth 11

Chapter 1. A Year into the Pandemic: Growth and Outlook 12

Impact of COVID-19: swift and severe 13

Unprecedented policy support and increased adaptation 17

Rising public indebtedness 19

Recovery gaining momentum but carefully targeted and coordinated policy support still needed 21

Chapter 2. Inclusion has been compromised but resilience remains highly visible 25

Poverty impacts have been moderated by the rapid rollout of government support measures. Poverty is anticipated to have risen, but not uniformly, due to pre-existing differences in... 26

Contraction in employment and the associated reduction in labor income was the main driver of rising poverty 28

The crisis disproportionately impacted already vulnerable workers 30

Deterioration of household income leading to worsening financial vulnerability and economic distress 34

A careful transition of government support and inclusive growth policies is needed going forward 35

Although the crisis has brought its challenges, it has also provided opportunities to pivot towards more sustainable growth with a renewed focus on fostering resilience and cohesion 37

Annex 1. Methodology for the collection of COVID-19 Rapid Response Survey data 39

References 40

Figure 1.1. The pandemic triggered an unprecedented economic contraction across the EU 13

Figure 1.2. The COVID-19 induced economic contraction is more pronounced than the Global Financial Crisis 14

Figure 1.3. Private consumption remains the main driver of economic activity 14

Figure 1.4. Further away from an even lower potential GDP growth across the board 15

Figure 1.5. Unemployment increases were limited by government-supported job retention schemes 17

Figure 1.6. Government response stringency had a significant impact on growth, especially at the onset of the pandemic 18

Figure 1.7. Current account positions remain relatively stable 19

Figure 1.8. Increased spending was the main driver behind fiscal deficits 20

Figure 1.9. Cyclical and structural factors contributed to the fiscal deficit in 2020 20

Figure 1.10. Public debt increased sharply 20

Figure 1.11. A higher primary deficit along with a lower GDP raised indebtedness 20

Figure 1.12. The EU27 countries still lag behind in terms of vaccination but the rollout is gaining momentum 21

Figure 1.13. Productivity lull already strained economic growth before the pandemic 22

Figure 1.14. The economic impact of the pandemic reversed the convergence of income in the EU27 23

Figure 2.1. Poverty - benchmarked against 2016 lines - is projected to rise and remain elevated until at least 2022 26

Figure 2.2. Experimental poverty estimates in Romania show a sharp rise in poverty early in the pandemic that have subsided as the pandemic progresses 26

Figure 2.3. The role of benefits targeted towards the poor in reducing poverty is limited 27

Figure 2.4. The role of benefits targeted towards the poor in reducing inequality is limited 27

Figure 2.5. Employment declines were substantial in Q2 of 2020 - and most pronounced in Southern Europe 28

Figure 2.6. Absences increased substantially in Q2 of 2020 and to a lesser extent, hours of work 28

Figure 2.7. Households across the income distribution reported declines in income in Bulgaria 29

Figure 2.8. Fewer households reported declines in income in the second wave of the crisis in Bulgaria 29

Figure 2.9. Temporary workers bore the brunt of employment adjustments 31

Figure 2.10. Self-employed workers reported the greatest decline in hours worked 31

Figure 2.11. Low-skilled workers bore the brunt of employment adjustments 31

Figure 2.12. Youth disproportionately reported employment losses 31

Figure 2.13. Lower-wage workers were less able to continue work at all points in the pandemic 32

Figure 2.14. Increases in youth inactivity was highest in the Southern Europe 32

Figure 2.15. Low and middle-income households were showing signs of financial distress prior to the COVID-19 crisis 34

Figure 2.16. Reports of economic stress were highest among low and middle-income households 34

Figure 2.17. The proportion of households reporting adequate savings was lowest in Central European 34

Figure 2.18. The proportion of households reporting arrears was highest in Central and Southern European countries 35

Figure 2.19. Expenditure on Active Labor Market Policies is lowest in Southern and Central European countries 36

Figure 2.20. Southern and Central European countries have the lowest level of digital skill competencies 36

Boxes

Box 1.1. The impact of COVID-19 on human capital accumulation through education, healthcare and mental health 16

Box 2.1. COVID-19 impact on under-served communities, including the Roma communities 30

Box 2.2. Impact of the COVID-19 pandemic on women 33

Box Figures

Figure B.1.1.1. Concern surrounding various aspects of life were heigtened during the first wave of the crisis 16

Figure B.2.2.1. Women shouldered more of the increased care responsibilities brought on by COVID-19 33

Annex Tables

Table A.1.1. Schedule of COVID-19 Rapid Response Surveys 39