The severe impact of the COVID-19 pandemic has been felt across the Europe and Central Asia (ECA) region through the collapse in global commodity prices, disruption to global and regional supply chains, and the effect of heightened global risk aversion on financial markets, says a report released by the World Bank.
The June 2020 edition of the Global Economic Prospects report, in particular, notes that since March, many countries have closed schools and international borders, issued stay-at-home orders, and restricted travel from heavily hit areas, all of which are weighing on domestic activity.
Financial markets have reportedly been roiled by the pandemic, with economies in ECA suffering from substantial flight-to-safety outflows and a rise in bond spreads.
Weaker currencies have contributed to higher borrowing costs, particularly in economies with high levels of foreign-currency-denominated debt or where nonresident investors account for a sizable share of the local bond market, according to the report.
Roughly two thirds of the region’s central banks have reportedly responded to deteriorating growth prospects this year by providing further monetary support.
The report notes that regional economies are expected to contract by 4.7 percent in 2020, with recessions in nearly all ECA economies. The outlook assumes that restrictive measures to slow the spread of the virus are gradually lifted by the start of the second half of 2020. Growth in ECA is projected to recover to 3.6 percent in 2021, as the economic effects of the pandemic gradually wane and the recovery in trade and investment gathers momentum. The impact on growth, however, remains highly uncertain and could be more severe if the pandemic or the associated collapse in activity worsens.
In Central Asia, growth is forecast to sharply slow in 2020, to -1.7 percent, as the subregion grapples with negative spillovers from the Euro Area and China through trade, commodity, and remittance channels.
Risks to the outlook are strongly to the downside. An intensification of the spread of infections across ECA economies would worsen the outlook, while associated restrictive measures could weigh on private consumption and investment more than expected. An even harsher recession in the Euro Area, perhaps from a worsening of the pandemic or more prolonged restrictive measures, could amplify the negative spillovers in economies with tightly linked trade ties to these economies, including through global value chains, as well as through commodity, financial, and remittance channels. The pandemic also poses medium-term risks, particularly if global value chain linkages are lost or if extended school closures have a significant impact on learning, dropout rates, and human capital development.
