wiiw raises its GDP forecast for 20 out of 23 countries in CEE

wiiw raises its GDP forecast for 20 out of 23 countries in CEE
The Vienna Institute for International Economic Studies has raised its GDP growth forecasts for 20 out of 23 countries in CEE.
By bne IntelliNews July 8, 2021

The Vienna Institute for International Economic Studies (wiiw) has raised its GDP growth forecasts for 20 out of 23 countries in Central and Eastern Europe (CEE) as the coronavirus (COVID-19) pandemic starts to recede.

The institute has raised its average growth for the region to 4.2% in 2021, an increase of 0.4% on the previous forecast in April. Sharp increases in the first quarter in countries outside the region are helping to lift all the CEE boats at the same time, including the US (1.6%) and China (18.3%), as well as a sharply upward revised growth forecast for the euro area (4.4%) and the EU (4.5%) for 2021.

“Another reason is the improved resilience of CESEE economies,” says wiiw. “Despite the depressing health situation, in the first quarter the region performed much better than previously expected, indicating that economies have adapted to the pandemic,” according to Branimir Jovanovic, wiiw economist and main author of the report.

Growth in CESEE will be driven primarily by private consumption, which could boom as the pandemic moderates. This will be fuelled by the accumulated savings from 2020 and supportive bank lending. Business investment should also contribute, with companies resuming projects they put on hold in 2020.

Strong FDI inflows (on average 6.5% of GDP in the first quarter) will further increase economic activity, according to wiiw. So will recovering exports, driven by a favourable external environment and increased foreign demand.

Unemployment falling

Employment is expected to rise in the second half of the year, whereas unemployment should drop; the crucial factor is the fiscal support provided by national governments.

Unemployment is already falling in several of the countries of Eastern Europe. Russia saw unemployment decline from a peak of 6.4% in August 2020 to 4.9% in May (recently revised down from the earlier preliminary result of 5.1%).

Poland has also seen unemployment come off its high of 6.5%, set in January, decreasing to 6.3% in April, but that is still higher than the 6.1% rate it was running at for almost all of the second half of 2020.

Hungary’s unemployment has also contracted from a peak of 4.5% in February to 4.1% in May.  

And the story was very similar in Czechia, where unemployment fell from a peak of 4.3% in January to 3.9% in May.

But the results are uneven, as in Ukraine unemployment rose to its highest level in a decade, reaching 10.5% in the first quarter.

Inflation

Inflation will be higher than previously expected, driven primarily by the global increase in energy and food prices. Average inflation in CESEE in May stood at 4.5% – higher than at any time since 2015.

“However, we consider a rise in inflation by and large to be a temporary phenomenon,” stresses Jovanovic.

As bne IntelliNews reported in a DATACRUNCH into inflation and central bank rates, wiiw says that higher inflation will force central banks to raise their interest rates in 2021. Six central banks have already done so, while several more will likely follow suit, wiiw believes.  

“As the hikes have so far been mostly symbolic, they will not have any significant effects on economic or credit activity,” wiiw said.  

Tourism is set to improve over the course of 2021, with positive implications for certain countries such as Croatia and Albania. Still, pre-pandemic levels will not be seen this year, and what improvements there are will mainly be due to the low base in 2020.

A new COVID-19 outbreak and fiscal tightening could endanger the recovery  

The primary risk to economic recovery in CESEE is a new wave of coronavirus (COVID-19). Several countries are experiencing rapid rises in new infections. Russia is currently reporting 20,000 new cases a day, which is almost twice the rate of infection at the peak of the first wave.  

Due to logistical, production and delays to regulatory approval the vaccination roll-out has been slow, leaving populations vulnerable to the more aggressive mutations that have appeared recently.  

“Herd immunity will not be reached in most CESEE countries, as the vaccination rates are inadequate. However, a new wave is unlikely to wreak the same economic damage as previous waves did. Societies and economies across the region have learned to cope with the pandemic. Thus a new COVID-19 wave will lead only to a slowdown in growth, rather than to a recession,” wiiw said.

“The second risk is premature fiscal consolidation. Revived economic activity may impel some CESEE governments to consider consolidating their finances as early as 2021. This would certainly stall the recovery,” wiiw concluded.   

 

Features

Dismiss