FORECAST/RESEARCH/STUDY

EBRD Revises Down Economic Forecasts Amid Continuing Coronavirus Uncertainty

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By Anthony Williams

The European Bank for Reconstruction and Development (EBRD) has wound back forecasts for the emerging economies where it invests, after measures to contain the impact of the coronavirus lasted for longer than previously anticipated.

The EBRD is now forecasting an overall contraction across its economies of 3.9 per cent this year, and a return to growth next year of 3.6 percent.

The previous forecasts published in May had projected a 2020 decline of 3.5 per cent and a stronger recovery of 4.8 per cent in 2021.

The EBRD’s Chief Economist Beata Javorcik said: “Output in the EBRD regions contracted sharply in the second quarter of 2020 by around 8.2 per cent year on year. In many economies the contraction was larger than declines seen during the global financial crisis. The speed of recovery is expected to be similar to the one observed in the aftermath of that crisis, with pre-pandemic levels of GDP returning towards the end of 2021.”

EBRD economies have seen pressure on supply and demand because of domestic measures to contain the pandemic, while external shocks have included low commodity prices, shrinking exports, a collapse in tourism and drops in remittances.

The EBRD invests in emerging economies from central and eastern Europe through to Central Asia and the Middle East and North Africa, primarily promoting the private sector and supporting sustainable and inclusive development.

The Bank’s latest set of forecasts are subject to a high level of uncertainty and are dependent to some extent on the accuracy of early estimates of growth in the first half of 2020.

They are also sensitive to whether governments impose further lockdowns or to how people may react to a continuation of the virus, possibly by self-imposed social distancing.

The new report warns that some sectors, such as tourism, may face lasting damage in the longer term, but says others, such as online retail, could benefit from increased digitalisation.

It says that contractions this year are likely to be largest in economies highly dependent on external sources of income, such as Albania, Croatia, Cyprus, Greece and Montenegro which lost most of their tourist season this year.

Exports from EBRD regions were down by over 14 per cent in the first half of 2020, compared with the same period of 2019. International as well as domestic tourism fell sharply, with international tourist arrivals to the EBRD regions down by some 65 per cent in the first six months, compared with the same period a year earlier.

Other highly affected economies include countries that saw large drops in remittances such as the Kyrgyz Republic, or which are strongly integrated within global value chains, such as the Slovak Republic.

Remittances from Russia to Central Asia, eastern Europe and the Caucasus fell by 29 per cent year on year in the second quarter of 2020, relative to the same period of 2019, similar to the decline seen during the global financial crisis. Payments back to Serbia fell by 30 per cent in January to May 2020, compared with a year earlier.

The report said that, while some remittances may have been only postponed, many migrants returned to their home countries, suggesting that remittances may fall further in the future.

It said Lebanon’s output is likely to contract sharply, reflecting rising uncertainty after an explosion in Beirut in August that caused extensive damage and loss of life and compounded existing economic and political challenges in the country.

The new report includes findings from a survey conducted in August 2020 by the EBRD and the Munich-based ifo Institute showing that the economic impact of the Covid-19 crisis on people’s lives was more pronounced in the EBRD regions than in advanced Europe.

According to the survey (*), job losses, and in particular business closures, appear to be more widespread than during the global financial crisis and the burden of the crisis is disproportionately borne by those with lower levels of education and income.

The survey reveals that 73 per cent of respondents in the EBRD regions say they were personally affected by the Covid-19 crisis, compared with only 41 per cent in advanced Europe, where stimulus packages were typically larger.

Workers in the region have so far relied more on supplementary employment than during the global financial crisis. About a fifth of respondents in the EBRD regions say they increased their hours in their existing job. A similar share is saying they started a second job.

A separate EBRD survey (**) of small and medium-sized enterprises (SMEs) suggests that SMEs are more optimistic about recoveries in economies where stimulus packages were larger.

The survey shows that the crisis had the strongest impact on SMEs in hospitality and recreation services, non-food retail, light industry and construction. Over 40 per cent of SMEs in hospitality and recreation services saw sales fall by more than half in the first quarter of 2020.

Exporting SMEs in particular were more affected, and were also more pessimistic about recoveries – reflecting widespread travel restrictions and border closures.

* The EBRD and the ifo Institute conducted a survey of almost 40,000 adults in 14 countries in August 2020. The survey covered eight economies in the EBRD regions (Belarus, Egypt, Greece, Hungary, Poland, Serbia, Turkey and Ukraine) and six advanced European economies (France, Germany, Italy, The Netherlands, Spain and Sweden). It is representative by age, gender, income and subnational regions.

** In June and July 2020, the EBRD conducted a survey of 1,652 SMEs in 15 economies in the EBRD regions (Bulgaria, Croatia, Egypt, Jordan, Kazakhstan, the Kyrgyz Republic, Lebanon, Mongolia, Morocco, Romania, Tajikistan, Tunisia, Turkmenistan, Uzbekistan and the West Bank and Gaza), aiming to assess the early effects of the Covid-19 crisis on SMEs.

Regional economic forecasts

Output in central Europe and the Baltic states is expected to drop by 4.4 per cent in 2020, with a recovery of 3.5 per cent seen in 2021. That forecast assumes a gradual normalisation of activity, some recovery in external demand and a boost from European Union funds.

Strict lockdowns and travel restrictions that had a major impact on the tourist seasons weighed on growth in the southern European Union in 2020. GDP in the region is forecast to fall by 6.5 per cent in 2020, with a partial rebound of 3.3 per cent in 2021.

Output in the Western Balkans is projected to fall by 5.1 per cent in 2020 due to a collapse in tourism, in Albania and Montenegro, disruptions in global supply chains and lower industrial output, declines in foreign direct investment inflows and remittances. GDP growth could recover to 3.4 per cent in 2021.

GDP in Russia is expected to shrink by 4.5 per cent in 2020 as a result of the COVID-19 crisis and a drop in oil prices. The introduction of the National Plan for Economic Recovery has helped mitigate some of the negative effects. A rebound of 3.0 per cent is expected in 2021, conditional on some recovery in oil prices.

The COVID-19 crisis weighed on growth in eastern Europe and the Caucasus through a sharp fall in remittances during the early months of the pandemic, lower commodity prices, which affected Armenia, Azerbaijan and Ukraine, and a collapse in tourism that weighed on growth in Georgia. GDP in the region is expected to fall by 4.5 per cent in 2020, recovering somewhat to 2.5 per cent growth in 2021.

Economies in Central Asia are likely to contract by 3.3 per cent on average in 2020, with the Kyrgyz Republic and Mongolia most severely affected. Assuming a partial recovery in tourism and some improvements in the external environment, the region could see growth of around 3.2 per cent in 2021.

Turkey’s economy is expected to contract by 3.5 per cent in 2020, following a fall in external demand which led to a collapse in exports. Domestic lockdowns and supply chain restrictions hurt the services and manufacturing sectors. GDP growth could pick up to 5.0 per cent in 2021.

Output in the southern and eastern Mediterranean region is expected to contract by 1.3 per cent in 2020 as a result of containment measures, a drop in tourism, falling external demand and a slowdown in foreign direct investment inflows. GDP could rebound to 4.4 per cent in 2021, conditional on the implementation of reforms and reduced political uncertainty.

Egypt is the only economy across all of the EBRD regions likely to escape recession in the 2020 calendar year, with projected growth of 2.0 per cent supported partly by large public construction projects and a boom in the telecommunications sector.

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