Vaccine deployment and investment are key to sustaining an economic recovery

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With the exception of Belarus, all countries in emerging Europe and Central Asia should return to growth in 2021, but the World Bank’s latest forecasts come with many caveats. Vaccine deployment and investment will be key to sustaining the recovery.

The global economy is expected to expand four per cent in 2021, assuming the initial Covid-19 vaccine roll-out becomes widespread throughout the year.

The recovery, however, will likely be subdued, unless policy makers move decisively to tame the pandemic and implement investment-enhancing reforms, the World Bank says in its January 2021 Global Economic Prospects.

“While the global economy appears to have entered a subdued recovery, policymakers face formidable challenges—in public health, debt management, budget policies, central banking and structural reforms—as they try to ensure that this still fragile global recovery gains traction and sets a foundation for robust growth,” says World Bank Group President David Malpass.

“To overcome the impacts of the pandemic and counter the investment headwind, there needs to be a major push to improve business environments, increase labour and product market flexibility, and strengthen transparency and governance.”

Montenegro hit hardest

In Europe and Central Asia, the Covid-19 pandemic has generated a major health and economic crisis in the region that has been compounded by social unrest and conflict. After stabilising in mid-2020, the rate of cases sharply accelerated in the fourth quarter, forcing governments to maintain or reintroduce mitigation measures.

According to the World Bank, regional GDP is estimated to have contracted 2.9 per cent last year, with nearly all economies in recession and roughly two-thirds expected to experience deeper contractions than during the global financial crisis. The economies hardest hit by the pandemic are those with strong trade or financial linkages to the euro area and those heavily dependent on services and tourism, such as Croatia, Kosovo, and Montenegro, which is likely to record the biggest fall in GDP in the region for 2020, of almost 15 per cent.

The region’s emerging market and developing economies have experienced larger portfolio outflows than other economies, reflecting a loss of confidence and a flight to safety. Fiscal support packages have been announced in nearly all Europe and Central Asia economies, but despite these and other support measures, the pandemic is estimated to have triggered millions of job losses in the first three quarters of last year in Europe. Increases in the number of unemployed were particularly pronounced in Central Europe and Russia.

The World Bank expects the economy in Central Europe to firm this year to 3.6 per cent, supported by recovery in trade, as activity rebounds in the euro area. Exceptional policy accommodation is expected to continue throughout 2021, including near-zero policy interest rates in Hungary and Poland. Growth in the Western Balkans is expected to recover to 3.5 per cent in 2021, assuming that consumer and business confidence are restored as Covid-19 is brought under control and that political instability eases.

The Belarus exception

The sub-regional economy of Eastern Europe is projected to rise to a tepid 1.3 per cent in 2021, reflecting challenges related to the pandemic, subdued domestic demand, and political tensions in Belarus, where the recession is forecast to continue, with the country’s economy shrinking 2.7 per cent.

Growth in the South Caucasus is projected to rise 2.5 per cent in 2021, as the shocks related to the pandemic and conflict dissipate, and as tourism recovers alongside improving consumer and business confidence.

In Central Asia, growth is expected to recover to three per cent this year, supported by a modest rise in commodity prices and foreign direct investment as the region deepens its integration with China’s Belt and Road Initiative.

“The pandemic has greatly exacerbated debt risks in emerging market and developing economies; weak growth prospects will likely further increase debt burdens and erode borrowers’ ability to service debt,” says World Bank Acting Vice President for Equitable Growth and Financial Institutions Ayhan Kose. “The global community needs to act rapidly and forcefully to make sure the recent debt accumulation does not end with a string of debt crises. The developing world cannot afford another lost decade.”

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