Emerging Europe and Central Asia are set for a modest recovery in 2021, but well below the forecast for the global economy, according to the World Bank.
The global economy is expected to expand 5.6 per cent in 2021, the fastest post-recession pace in 80 years, largely on strong rebounds from a few major economies. However, many emerging market and developing economies continue to struggle with the Covid-19 pandemic and its aftermath, the World Bank says in its June 2021 Global Economic Prospects.
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“While there are welcome signs of global recovery, the pandemic continues to inflict poverty and inequality on people in developing countries around the world,” says World Bank Group President David Malpass.
“Globally coordinated efforts are essential to accelerate vaccine distribution and debt relief, particularly for low-income countries. As the health crisis eases, policymakers will need to address the pandemic’s lasting effects and take steps to spur green, resilient, and inclusive growth while safeguarding macroeconomic stability.”
In Europe and Central Asia, the regional economy is forecast to grow by 3.9 per cent both this year and next, but there are wide regional variations.
Growth in Central Europe is projected to rebound to 4.6 per cent in 2021 and remain at that pace in 2022, supported by a recovery in trade as activity improves in the euro area. Exceptional policy accommodation is expected to continue through 2021, including near-zero policy interest rates in Hungary and Poland. The sizable European Union (EU) fund packages for member states — including for all Central European economies — should help mitigate the weakness in investment.
The boost, however, could be tempered by low absorption of the funds due to challenges relating to administrative capacity and governance.
Travel restrictions hamper growth in tourism-dependent countries
Growth in the Western Balkans is expected to rebound to 4.4 per cent in 2021 and to moderate to 3.7 per cent in 2022, assuming that consumer and business confidence is restored as vaccination rollout accelerates, and that political instability eases.
Activity in tourism-dependent economies, particularly Albania and Montenegro, will continue to be hampered by international travel restrictions. However, Montenegro is forecast to see the highest level of growth of anywhere in emerging Europe and Central Asia – 7.1 per cent, although this follows a drop of 15.2 per cent in 2020.
Medium-term growth in Albania and North Macedonia should be boosted by accelerating structural reforms in preparation for EU membership, provided negotiations surrounding the accession process are not further delayed. The subregion is also expected to benefit from the EU’s recently adopted Economic and Investment Plan, which will mobilise funding to support competitiveness and inclusive growth, as well as the green and digital transition.
After suffering the sharpest collapse in output among the Europe and Central Asia subregions in 2020 amid armed conflict, the South Caucasus is projected to return to positive growth, expanding 3.6 per cent in 2021; growth is then expected to strengthen to 4.2 per cent in 2022.
The recovery in early 2021 remains muted, reflecting subdued domestic demand due to the pandemic, as well as an escalation in domestic political tensions (Armenia) and continued weakness in transport and tourism (Georgia). Monetary policy has also tightened, with Armenia and Georgia having hiked policy rates. Growth in Azerbaijan is expected to be supported by stabilization of oil prices as well as investment and reconstruction spending.
The November 2020 ceasefire agreement between Armenia and Azerbaijan has alleviated geopolitical tensions in the region, although risks to stability remain elevated.
It is growth in Eastern Europe in the near term that the World Bank projects to be the weakest in Europe and Central Asia, rising only to 1.9 per cent in 2021 and 2.8 per cent in 2022. The banking sector remains fragile amid high dollarisation in some economies, with sharp currency depreciations and weak activity having eroded bank asset quality.
In Central Asia, growth is forecast to recover to 3.7 per cent in 2021 and 4.3 per cent in 2022 — well below historical averages.
Bolstering the recovery
An analytical section of the Global Economic Prospects report examines how lowering trade costs such as cumbersome logistics and border procedures could help bolster the recovery among emerging market and developing economies by facilitating trade. Despite a decline over the past 15 years, trade costs remain almost one-half higher in these countries than in advanced economies, in large part due to higher shipping and logistics costs. Efforts to streamline trade processes and clearance requirements, to enable better transport infrastructure and governance, encourage greater information sharing, and strengthen competition in domestic logistics, retail, and wholesale trade could yield considerable cost savings.
“Linkages through trade and global value chains have been a vital engine of economic advancement for developing economies and lifted many people out of poverty. However, at current trends, global trade growth is set to slow down over the next decade,” says World Bank Group Vice President for Equitable Growth and Financial Institutions Indermit Gill. “As developing economies recover from the Covid-19 pandemic, cutting trade costs can create an environment conducive to re-engaging in global supply chains and reigniting trade growth.”
Another section of the report provides an analysis of the rebound in global inflation that has accompanied recovering economic activity. The 2020 global recession brought about the smallest inflation decline and the fastest subsequent inflation upturn of the last five global recessions.
While global inflation is likely to continue to rise over the remainder of this year, inflation is expected to remain within target ranges in most inflation-targeting countries. In those emerging market and developing economies where inflation rises above target, a monetary policy response may not be warranted provided it is temporary and inflation expectations remain well-anchored.
“Higher global inflation may complicate the policy choices of emerging market and developing economies in coming months as some of these economies still rely on expansionary support measures to ensure a durable recovery,” adds World Bank Prospects Group Director Ayhan Kose. “Unless risks from record-high debt are addressed, these economies remain vulnerable to financial market stress should investor risk sentiment deteriorate as a result of inflation pressures in advanced economies.”
Rising food prices and accelerating aggregate inflation may also compound challenges associated with food insecurity in low-income countries. Policymakers in these countries should ensure that rising inflation rates do not lead to a de-anchoring of inflation expectations and resist subsidies or price controls to avoid putting upward pressure on global food prices.
Instead, the World Band suggests that policies focusing on scaling up social safety net programs, improving logistics and climate resilience of local food supply would be more helpful.
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