No quick recovery in sight, coronavirus risks looming large

12 November 2020

wiiw just released its new economic forecasts and analysis for Eastern Europe

by Vasily Astrov

According to new projections released by the Vienna Institute for International Economic Studies (wiiw), the recovery of Eastern European economies will be sluggish and will depend on success in containing the pandemic without resort to lengthy lockdowns, as well as on the continuation of government support measures.

Main conclusions

The main conclusions of the wiiw Autumn Economic Forecast for Central, East and Southeast Europe (CESEE) as follows: 

  • Most of CESEE withstood the first wave of the pandemic better than Western Europe, but many economies in the region still suffered badly – especially those reliant on tourism (Croatia and Montenegro) and those with a high dependence on foreign trade (the smaller Visegrád countries and Slovenia).
  • Historically large policy interventions across the region have helped to partly offset the worst of the economic and social fallout from the pandemic.
  • The accelerating second wave of the pandemic has resulted in the reintroduction of strict lockdowns, and this could intensify in coming months, making a renewed downturn in economic activity almost certain.
  • The medium-term outlook is hugely uncertain. After an estimated contraction of 4.5% this year, the region should grow by 3.1% in 2021 and by 3.3% in 2022. The top performers in 2021 will be Croatia and Montenegro, while the recovery will be much more subdued in Bulgaria and Ukraine; Belarus will record another year of recession.
  • Even in this benign scenario, only Lithuania. Serbia and Turkey will regain their 2019 levels of economic activity before 2022.
  • The risks to the above forecasts are clearly on the downside, in both the short and the medium term. Aside from the potential for tighter lockdowns in the winter months, the pandemic will leave lasting legacies in the form of depressed demand for many services, such as aviation, hospitality and recreation.
  • Significant further government support is likely to be required across the region. This should be broadly manageable for EU-CEE, but could be more problematic in some Western Balkan countries, as well as Ukraine and Moldova, which have high public debt-to-GDP ratios and/or are heavily dependent on external assistance.

Most economies in CESEE withstood the first wave of the pandemic better than Western Europe

This was the case despite the fact that the lockdowns introduced there were generally as strict as – or even stricter than – those in Western Europe. This can partly be explained by the relatively small size of the service sector, which suffered the most from the pandemic. However, there were strong negative spill-overs from the effective closure of borders during the lockdowns and from the slump in the euro area. As a result, those CESEE economies that rely on tourism (Croatia and Montenegro) and foreign trade (the smaller Visegrád countries and Slovenia) were the worst affected during the first wave.

As in Western Europe, CESEECs have responded with a marked policy relaxation

Governments in CESEE also took advantage of the available fiscal and monetary space. Policy rates have been cut sharply, contributing to currency depreciations (of more than 20% since the start of the year, in some cases) which mitigated the impact of the external demand shock. Besides, a wide range of government support measures has been adopted, including most notably subsidised short-time work schemes, which saved many jobs and have limited the rise in unemployment, at least so far.

CESEE economies rebounded strongly in the third quarter

This was partly due to the policy stimuli enacted (especially on the fiscal side) by governments. Retail trade benefited from purchases delayed during the lockdown, and international production chains largely resumed their operation. However, the pre-crisis levels of economic activity have not been reached. Besides, the second wave of the pandemic, which started in many CESEE countries in September, has given rise to concerns over the ability of healthcare systems to cope with the soaring numbers of hospitalisations. This has already prompted a renewed full lockdown in the Czech Republic and partial lockdowns in Poland, Slovakia and Slovenia, while other countries may soon follow suit, making double-dip recessions (on a quarterly basis) almost unavoidable this year. The region as a whole will post a full-year contraction of 4.5% for 2020, with risks to this estimate now weighted quite heavily on the downside.

The medium-term economic prospects for CESEE are surrounded by enormous uncertainty

In our baseline scenario, which assumes that an effective vaccine/treatment for COVID-19 will contain the pandemic without the need for lengthy lockdowns, CESEE economies are projected to grow on average by 3.1% in 2021 and 3.3% in 2022. Across the CESEE countries, the economies of Croatia and Montenegro are expected to grow by 5% next year, as the tourism industry partly recovers the losses incurred this year. By contrast, in Russia and Kazakhstan, growth will barely exceed 2.5%, as the oil prices are unlikely to recover substantially from their current levels and oil production will still be constrained by the OPEC+ quotas. Even in this benign scenario, the 2019 levels of economic activity in CESEE countries will not be reached before 2022 (except in Lithuania, Serbia and Turkey), and Belarus will record another year of recession due to the fallout from the current political crisis.

The risks to the above forecasts are clearly on the downside. Any further spread of the virus would not only necessitate further lockdowns (in both CESEE and Western Europe), with direct contractionary effects for the economies of the countries involved, but would also affect the demand for durable consumer and investment goods, due to the high level of uncertainty. Besides, the pandemic – even if successfully contained – may leave a lasting legacy in the form of depressed demand for many services, such as aviation, hospitality and recreation, making businesses in those sectors dependent on continued government support. The need for such support will clearly increase in the event of renewed lockdowns.

In EU-CEE countries, continued government support should be less of a problem

These countries have generally enough fiscal space and will benefit from various EU transfers, including the Next Generation EU funds, which in some cases (such as Croatia and Bulgaria) will exceed 3% of GDP per year. However, such government support may be more problematic in some Western Balkan countries, as well as Ukraine and Moldova, which have high public debt-to-GDP ratios and/or are highly dependent on external assistance. Similarly, the continuation of monetary stimulus in Turkey renders it vulnerable to any change in sentiment on international markets. Any premature withdrawal of government support will result in a fresh wave of bankruptcies, a rise in unemployment and further income losses. This would weigh heavily on the economic prospects of countries located on the southern and eastern periphery of the CESEE region.