Central and eastern Europe will see recovery in 2021

Vaccines and stimulus packages will help revive the economy in countries with ISP subsidiaries, according to Intesa Sanpaolo’s International Research team

Elena Berton


It has been one of the darkest years in recent history, but now Gianluca Salsecci, head of Intesa Sanpaolo’s International Research Network, sees light at the end of the tunnel. The COVID-19 virus, which wreaked havoc in 2020, will continue to impact economies in the first quarter of 2021, but he believes there will be a gradual recovery during the year.

Massive vaccination campaigns from January, combined with the robust fiscal and monetary policies launched since the outbreak of the pandemic, should help revive battered economies in central and eastern Europe, according to Salsecci.

“Of course, it will take time for the distribution of the vaccine, but we are quite confident that efforts will be made to get most of it distributed by summer 2021,” he says. “This is good news, because at that time most of the restrictions to contain the spread of the contagion can be removed and all the economic sectors – including those especially hit by social-distancing restrictions, such as hospitality services – can restart being fully operational.”

Salsecci’s team, which he has headed since 2007, produces regular research on the regions and countries covered by Intesa Sanpaolo’s International Subsidiary Banks Division (ISBD).

With 7.3 million customers, 22,000 employees and 1,100 branches across 12 countries, ISBD encompasses the group’s commercial banking operations in central and eastern Europe and Egypt.

After the rebound in the third quarter of 2020, fresh curbs rolled out from mid-October to contain the second wave of the virus are likely to have hit economic activity hard in the last quarter of 2020 and will continue to do so in the first quarter of 2021, although to a lesser extent than in the second quarter of 2020, when lockdowns caused the GDP to fall by about 10% on average in central and eastern Europe.

But the rollout of COVID-19 vaccines and the bold monetary and fiscal measures introduced in all the countries to support growth are expected eventually to drive the recovery in 2021.

In the CEE/SEE region an additional boost is expected to come from the implementation of the “Next Generation EU” funds, a massive €750 billion extraordinary recovery package (€390 billion in grants and €360 billion made available in loans) provided by the EU to support pandemic-hit member states and to jump-start Europe’s recovery.

The central-eastern European region is set to receive more than €75 billion in grants and potentially over €60 billion through loans, in addition to the funds made available from the EU’s 2021-27 multi-year budget.

“If well distributed and efficiently used, especially for investments and high-value-added sectors, the funds may provide an important stimulus to the economic recovery of the region,” says Salsecci.

All in all, GDP is “prudently” forecast by the International Research Network of Intesa Sanpaolo to rebound by 3.5% in the CEE/SEE Region and 2.7% in Russia in 2021, from respectively the 4.6% and 4.4% falls expected to be recorded for 2020.

“The economic upturn is well expected to continue in 2022, when the GDP levels of 2019 are forecast to be reached again” says Salsecci.

“The upturn will continue in 2022, when the GDP levels of 2019 are forecast to be reached again”
Gianluca Salsecci, head of Intesa Sanpaolo’s International Research Network

Still, the economic fallout in central and eastern Europe remains significant. The International Research Network has estimated that GDP loss due to the pandemic will be around 7 cumulative percentage points between 2020 and 2021.

Salsecci warns, however, about the uncertainties that could create bumps on the road to recovery. Virus mutations, new aggressive contagion waves and glitches in the distribution of vaccines could suddenly halt or reverse progress so far. Risks are still tilted on the downside and recovery forecasts are therefore to be cautious, Salsecci says.

Looking at the banking sector, in parallel with the European Central Bank in the EA and the Federal Reserve in the US, central banks in central and eastern Europe, as well as in Russia, have passed measures aimed at ensuring liquidity to the banking system and flow of credit to households and enterprises, especially SMEs, severely hit by the COVID-induced economic shock.

State guarantees have been ensured by governments to support bank lending to the corporate sector at more favourable interest rates. At the same time, households whose balance sheets have been hit by the restrictive measures necessary to contain the spread of the virus have been able to take advantage of repayment holidays and lending facilities.

“This is why banking aggregates have performed quite well so far – with loans to the private sector foreseen to record a two-digit growth rate overall in 2020 in the countries with ISP subsidiaries, despite a recession causing a drop not only in real but also in nominal GDP,” Salsecci says.

Those measures have been essential to avoid a credit crunch during a severe recession and the risk that both illiquid and solvent corporates could go bankrupt and households’ balance sheets could end up being disrupted.

The fiscal and monetary stimulus packages are helping soften the impact the pandemic on the economy and build a bridge to bring corporates and households safely to the post COVID-19 world. But they should be phased out, at a certain point, as the recovery gains pace, Salsecci cautions: “What is absolutely crucial is that the removal of these measures is gradual to avoid any cliff effect.”

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