Coronavirus to lead to significant economic contraction across EBRD regions

The coronavirus pandemic will lead to a significant contraction in output across the EBRD’s emerging economies and a swift recovery, while possible, is not guaranteed, according to the latest assessment from the Bank’s economists.

The extent of the contraction and the speed of recovery will depend largely on the duration of measures to contain the virus, which even now is expected to result in the greatest disruption to global economic activity since the Second World War.

In the longer term, the COVID-19 crisis may lead to a reassessment of concentration risks in global manufacturing, perhaps leading to a new emphasis on diversification and reshoring. This could open new business opportunities for companies in the EBRD regions.

Even before the onset of the deadly virus, economic growth in the EBRD regions had been easing as a result of a slowdown in global expansion and moderating global trade growth.

“The COVID-19 pandemic hit on top of this deceleration and is expected to result in a substantial output contraction, at least in the near term,” the EBRD report says.

Under the EBRD’s central scenario, restrictions on cross-border and domestic activity are assumed to last for several months, with a gradual relaxation and a return to normality during the second half of the year. If this is the case, output in the EBRD regions is likely to contract in 2020, with growth resuming after lockdowns are eased.

If lockdowns remain in place for much longer, the economic impact will be significantly deeper. Prolonged quarantines and extended closures of schools and businesses may result in substantial loss of production capacity.

This would have a negative impact on the potential rate of medium-term growth and may result in deep structural damage to consumer service industries, such as airlines, cinemas and restaurants, although others, including food deliveries, may benefit.

Containment measures across the EBRD regions are affecting both domestic demand and supply as countries shut down borders and close universities, restaurants and shops. Some countries have seen significant disruptions beyond the services sectors. For instance, all major car factories have closed in Hungary, Serbia and the Slovak Republic.

Lower demand for commodities will hit the region’s commodity exporters, notably Azerbaijan, Kazakhstan, Mongolia, Russia and Turkmenistan. Lower oil prices will also weigh on those economies in Central Asia and in eastern Europe and the Caucasus with strong commercial ties to Russia.

Some commodity exporters, however, most notably Russia and Kazakhstan, have accumulated significant fiscal buffers and international reserves and have been able to introduce containment measures combined with economic stimulus.

Economies in the EBRD regions are among the most integrated into global value chains. In central Europe, around 45 percent of exports by value added are first imported in the form of inputs and components.

Several EBRD economies are highly vulnerable to broad disruptions in global tourism. Tourism revenues exceed 20 percent of GDP in Georgia, Albania, Croatia, Montenegro, Cyprus and Greece.

Other countries depend strongly on remittances and recipient economies are vulnerable to large shocks hitting the “sending” countries. Remittances account for almost 30 percent of GDP in Tajikistan and the Kyrgyz Republic and exceed 10 percent of GDP in many other countries in Central Asia, the Caucasus, Eastern Europe and the Western Balkans.

Read and download the EBRD Regional Economic Prospects.

Original source: EBRD
Published on 08 April 2020