Economies in the euro area face "extreme uncertainty" as activity continues to be disrupted by the Covid-19 pandemic, the International Monetary Fund warned.
Although "unprecedented" policy responses at national and EU levels helped to cushion the economic blow caused by the pandemic, by limiting unemployment and insolvencies, the recent second wave of infections and restrictions introduced to stop the spread are likely to weigh on short-term economic activity, the Washington-based lender said.
"Unless pandemic dynamics change significantly in the coming months, economic activity is set to recover more gradually than forecast in the October 2020 World Economic Outlook," the IMF said in a statement on Tuesday.
In the outlook, the fund forecast euro area GDP would shrink 8.3 per cent this year, rebounding to grow by 5.2 per cent next year. Euro area unemployment is forecast to shrink 1.7 per cent this year and only grow slowly by 0.6 per cent in 2021.
"Risks remain to the downside through early 2021, but the recent promising news on vaccine development provide a significant upside further out," the IMF added.
"While rapid and widespread delivery of safe and effective vaccines would likely spur a faster recovery, a prolonged health crisis and slower recovery could depress investment and increase private and public sector vulnerabilities".
The ongoing Brexit negotiations and a potential escalation of trade tension between the UK and the EU add to the uncertainty, the fund said.
The IMF's directors praised the historic action taken by the EU to undertake fiscal stimulus as part of its €1.8 trillion budget that was signed off earlier this month aimed at green and digital economic transformation, but said its effectiveness "will hinge on a quick implementation, the quality of spending and its capacity to catalyse structural reforms".
It also praised the European Central Bank's monetary policy response, which included a €500bn increase in its bond-buying programme earlier this month, bringing the total so far to €1.85tn.
However, its directors also warned that "further accommodation could prove necessary", in terms of extending the programme if economies continue to be affected by Covid containment measures.