Recession in Russia is likely to be less severe

Central and Eastern Europe’s economies will contract somewhat less severely than previously expected this year, but output will return to pre-pandemic levels in most countries only after 2021 as the COVID-19 health crisis weighs on economic activity, Scope Ratings agency says in a recent report.


Lingering uncertainties over the duration of the COVID-19 pandemic are the main downside risks to the CEE region’s growth prospects in Q4 2020 and 2021, which are also tied to the uneven and slowing economic rebound in Western Europe — assuming that CEE governments impose restrictions to contain the renewed wave of COVID-19 infections that are less economically damaging than those in the spring.

Daily coronavirus cases and fatalities have reached record levels in many countries of the region, which will inevitably have an adverse impact on economic recovery,” says Giacomo Barisone, head of sovereign and public sector ratings at Scope. “That said, this year’s slump in GDP in Central and Easter Europe may not be as bad as it looked several months ago due to less severe declines in Q2 output and a stronger Q3 rebound that we expected at the time of our previous forecasts in July. We caution against expectations of a rapid and uniform economic comeback in 2020. The regional recovery, after significant interruptions, will remain subject to setbacks in 2021 even if we expect gradual economic normalization to resume by early next year. Decisive monetary-policy action by the region’s central banks and fiscal stimulus from governments have spared the region from a possibly markedly larger economic contraction this year,” says Barisone.

For CEE euro area member states, the ECB’s asset purchase programs underpin low borrowing rates, bolstered by the euro’s reserve-currency status. Scope does not expect monetary tightening by most non-euro-area CEE central banks near term, as they remain focused on providing accommodative financial conditions in support of weakened economies. The Turkish central bank is one exception, with pressures for tighter monetary policy stemming from rising inflationary pressure linked to the Turkish lira’s loss in value this year.

Much is also riding on the efficient deployment of the recently agreed EU budget, including the 750 bln recovery fund, which should support recovery in EU member states of the region and facilitate needed medium-term investment,” says Levon Kameryan, analyst at Scope.

The strength of recovery across CEE depends in part on labor markets. Governments’ short-time work schemes have forestalled sharp rises in unemployment. The possible extension of support programs assisted by the EU’s SURE loans will prove crucial in containing future rises in jobless rates.

Scope has marginally improved its 2020 forecast for Poland to a 3.9% decline in output from 4.2% forecast three months ago, reflecting the economy’s relatively modest exposure to international tourism and global supply chains, both badly disrupted by the pandemic.

We have moderated our forecast for the scale of the 2020 recession in Russia as well to -5.5% from a previous expectation of -6.8%. Russia’s sizeable fiscal and FX reserves enable an extensive policy response in support of its economy, but uncertainty over oil prices, upcoming fiscal consolidation and sluggish private-sector demand may impede recovery,” says Kameryan.

Economic prospects in Turkey remain finely balanced, given the tense geopolitical situation in the eastern Mediterranean and the Caucasus and ebbing foreign investor confidence in Ankara’s domestic economic policy, reflected in declining foreign-exchange reserves and a weakening currency. Scope forecasts Turkey’s output to fall 1.4% this year, revised from -4.2% in July forecasts.

Recessions this year could also be milder than previously expected in the Czech Republic at -7% compared with -7.5% in July, Romania -5.5% vs -6.3%, Slovenia -7% vs -7.6% and Bulgaria -5% vs -7%. Scope’s forecasts for a deep contraction in GDP are unchanged in Hungary at -6%, Slovakia at -8.1%, and Croatia at -8.9%.

The economic outlook is less gloomy in the Baltics this year. Scope forecasts a fall in GDP in Lithuania of -1.5%, revised from a previous forecast of -7.6%, after surprisingly resilient economic activity in the second quarter; Estonia revised to -5.5% from -7.7%; Latvia to -5.5% from -8%.

Georgia faces a steep recession this year equivalent to a 5% drop in GDP.

Scope expects a rebound in growth for most economies in the region next year, ranging from 3.5% in Russia to 7.2% growth in Turkey under its baseline scenario, which assumes that pre-crisis output levels are reached in most country cases by early 2022.

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