Coronavirus brings recession to CEE
Extent of economic downturn will depend on length of quarantine period and production breaks, pace of catching up and efficiency of government measures. Downside risks to our current forecast prevail amid dynamically changing situation and high level of uncertainty.
The spread of coronavirus to Europe and exponentially rising number of infected people forced the introduction of preventive measures to reduce its speed. While economic activity in CEE throughout the first two months of the year was mostly unaffected by Covid-19, March will take a hit that will bite into the second quarter. The Eurozone is expected to slide into recession this year. Such a scenario will be hard to avoid in CEE as well. We now see Slovakia contracting 1% in 2020, while Czech GDP is expected to drop by 0.5%. Croatia should stagnate, while growth dynamics in other countries is seen around 1%. The CEE8 growth forecast stands currently at 0.8% on average – the lowest since the 2012 recession.
The final economic impact of Covid-19 will depend on the length of the quarantine period needed to get the virus under control, pace of catching up on the production side and efficiency of measures aimed to mitigate the economic losses. We believe that governments will try to be as generous as possible in letting their automatic stabilizers work. That should result in a temporary increase of their deficits and shift in debt levels. In an adverse scenario in which production is severely contracted for an extra month or two, CEE growth would dive deeper into negative territory.
The environment has substantially changed around regional central banks in just a few weeks. While in February the question was still whether to hike or not due to elevated inflation rates, currently the question is what measures local central banks can use to ease market stress and help the ailing economy. The recent moves on FX and bond markets are truly exceptional. After the relative resilience of CEE currencies at the end of the first week of March, regional currencies were increasingly hit. Bond markets are no less erratic than FX markets. Large moves started in the second week of March; daily changes in yields of plus and minus 30-50 basis points are not uncommon. While central banks are increasingly providing liquidity in the region, fiscal stimulus will surely come, increasing the bond supply substantially.