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War bombshell to fall on European countries wounded by Covid-19

Military hardware moved across Crimea, Russia

EBRD countries’ economies will be squeezed between the impact of the war on Ukraine and Russia and the secondary impact via their richer Western neighbours 

The largest and most intense crisis to hit eastern Europe since the collapse of the Soviet Union three decades ago has left economists struggling to estimate how great the impact will be.

While the pain will be felt most deeply by the two combatants — Ukraine and Russia — its second round effects will also hit both their immediate neighbours and the European continent as a whole.

For Ukraine itself the numbers are almost beyond comprehension. The International Monetary Fund estimates the war-torn republic’s economy will shrink by 35% this year. But the Vienna Institute for International Economic studies (which shortens to its German acronym WiiW), says it may collapse by as much as 45%.

Ukraine’s most war-affected regions, where activity has ground to a halt, normally underpin the country’s growth. According to the WiiW, they account for just over half of GDP, 43% of industrial production and 34% of agricultural production. The Black Sea ports, many of which have closed, handle half of all exports.

The Russian economy may shrink 8.5% this year while Oxford Economics forecast a near 11% contraction this year and 3.3% in 2023. This will cut household income that in turn will depress private consumption even further.

But the issues worrying ministers and central bankers at the EBRD’s annual meetings this week will be the shock to their economies not just from the war itself but also from its impact on the European Union.

The region has benefitted both from the globalisation of finance and trade that has been underway since China joined the World Trade Organisation in 2001 but also stimulated as a result of the efforts of development banks such as the EBRD and the European Investment Bank.

EBRD countries of operation in central and eastern Europe have enjoyed a boost in supply chains and investment programmes linking them to wealthier countries in the western European Union.

But the war has dealt a blow to a lucklustre economic recovery from the impacts of the Covid-19 pandemic that were still only beginning to pay dividends. The EBRD’s annual economic forecasts published on Tuesday are likely to show severe downgrades for the region and individual countries.

The IMF forecasts that GDP growth in 2022 in advanced European economies is now forecast to decline to 3% from the 4% it had pencilled in in January and even further below 2021’s 5.6% growth. Several major economies — such as France, Germany, Italy and the United Kingdom — are projected to fall into a technical recession this year.

Growth in emerging European economies excluding Russia and Ukraine will drop from 6.7% to 3.2% between 2021 and 2022. WiiW sees Belarus and Moldova diving into recession and sharp slowdowns in the other 21 economies it covers.

Many smaller countries will be hit by spikes in commodity prices. High metal prices, for example, will hit countries with sectors that are strongly integrated into global value chains such as the Czech and the Slovak republics.

“Already we see that there are supply chain problems in many sectors because of the sanctions,” says Vasily Astrov, senior WiiW economist. “That, together with the withdrawal of many Western companies for example in the car industry, is hammering industrial production.”

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