Wounded EM economies may lag in recovery amid long-term scarring risks
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Wounded EM economies may lag in recovery amid long-term scarring risks

Gruenwald: worried about deskilling

The economies in the EBRD’s ambit may be enjoying a growth bounce-back after Covid-19 but economists are worried that the long-term scarring caused by the pandemic could leave EM behind

Economies at the heart of the EBRD’s area of operation are leading the economic recovery from Covid-19 among EM regions. But they are not safe from the perils of potential permanent scarring that risks jeopardising years of progress across emerging markets, according to economists worried about the long-term damage the pandemic has wrought on the capacity to grow and create jobs.

EM economies are rebounding more strongly than expected on the back of the pick-up in vaccinations and fewer restrictions of mobility and activity. The EBRD this week upped the 2021 GDP growth forecast for its countries from 3.6% in September to 4.2%.

Yet although the EBRD raised its outlook for growth this year for all its regions other than the southern and eastern Mediterranean, the bank’s chief economist Beata Javorcik said that the region had lost ground because of the Covid-19 outbreak.

“From the growth perspective, the last two years have been lost, and the catch-up with advanced economies has slowed down,” said Javorcik. “Moreover, in more than half of the countries where we operate, GDP will recover to pre-pandemic levels only in 2022 or later.” The bank listed “persistent economic damage from the crisis (scarring)” as one of the downside risks to its forecasts.

Yet the damage could run even deeper. Ed Al-Hussainy, a senior analyst at Columbia Threadneedle Investments in New York, said the issue of returning to pre-pandemic levels was a “pedestrian” question.

“The question is how much scarring is left ahead? We are still sorting through the degree of this recession,” he told GlobalMarkets. “In the US we’re reducing the risk of scarring by putting 25% of GDP in fiscal stimulus into the system, but you have to think that the odds of scarring in EM are much higher.”

This is going to lead to some “large disparities” in terms of global growth next year. And CEE is not safe yet.

“In Latin America, it’s a foregone conclusion, they going to lose a decade,” said Al-Hussainy. “CEE has an OK short-term growth story and hot inflation, but it is still right on the cusp.”



S&P’s chief economist Paul Gruenwald highlighted the need for the recovery to accelerate across EM. “I agree that scarring is going to be larger in emerging markets,” said Gruenwald. “The longer they underperform, the longer that resources lie idle, the more of the work force that deskills, the more scarring there will be.

“The other thing that minimises the scarring is fiscal space, and most EMs do not have that.”

In this respect, those EBRD countries in the EU could have the best chance of avoiding medium-term damage. 

“Being plugged into the German export machine and getting large transfers from the EU is a major advantage,” said Gruenwald.

Looking ahead, Odile Renaud-Basso, the Bank’s president, said at the opening of the EBRD governors’ meeting on Thursday: “Relaunching the economy and addressing the scars of the crisis is a huge challenge in all our countries of operation.”

She said planning and investing for long term recovery would mean “making our economies greener, more inclusive and more digital”.

This would require new tools — “more equity finance, even greater levels of financial support for SMEs and also advice to SMEs and others on how to become greener.”


Additional reporting by Jon Hay

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