bne IntelliNews – Ukraine faces one of worst post-war GDP declines, says EBRD
Ukraine could suffer one of the worst drops in GDP after a war, predicts the European Bank for Reconstruction and Development (EBRD) in its report. Transition report 2022/23.
In an analysis of the economic damage suffered by nations after wars, the development bank estimated that in half of the countries growth was still below its trend rate 25 years later. Projections indicate that Ukraine’s GDP contraction will be among the worst 10-20% of those in conflict over the past 200 years, according to the report.
In his economic forecast in september, the bank predicts that Ukraine’s GDP will fall 30% this year but will start to recover by increasing 8% in 2023. The World Bank last month predicted a 35% drop in GDP this year. The EBRD will make its next forecast in February.
“The great threat to [September] The forecast is the destruction of infrastructure in Ukraine due to bombings from Russia,” said chief economist Beata Javorcik. bne IntelliNews in an interview.
She argued that it was imperative for the international community to help Ukraine now, to encourage its people to stay in the country and to give the refugees a reason to return. Ukraine has the highest number of internally displaced people in the world.
“While most discussions about rebuilding Ukraine focus on rebuilding the capital stock, it is equally important to ensure that Ukraine retains the human capital it has, because human capital will be just as important during the reconstruction phase,” Javorcik said. “That is why it is very important to help Ukraine now, both in terms of budgetary support and urgent reparations, so that the people who are currently in Ukraine can stay there.”
The EBRD has granted about €1 billion this year to Ukraine and has pledged to spend up to €3 billion in total for this year and 2023.
According to the World Bank, Ukraine’s recovery and reconstruction needs total at least $349 billion, more than 1.5 times the size of Ukraine’s pre-war economy in 2021.
Regarding the damage to Russia’s economy from war and sanctions, the EBRD predicted in September that the country’s GDP would fall by 5% this year and 3% in 2023. The wiiw predicted a decline of only 3.5% this year and 3% in 2023.
“It’s a nasty recession but it’s still manageable,” Javorcik said, noting it was smaller than some Western European economies contracted during the worst of the coronavirus (COVID-19) pandemic.
“Initial expectations that the sanctions would lead to a financial and economic crisis were unrealistic,” she said.
Import substitution, which boosted domestic production, as well as intermediate trade from neighboring countries, helped cushion the blow.
However, she argued that the sanctions were still hitting the economy hard. “Where you see the sanctions working is in the fact that there is a bigger decline in manufacturing output in industries that rely on imported inputs than in manufacturing as a whole,” said- she declared.
The decline in the inflow of knowledge, technology, components and capital following the exit of many multinational companies would also have long-term implications.
“The presence of multinational companies does not only benefit a country when it enters. It is the constant flow of knowledge from services that makes foreign affiliates more competitive,” Javorcik said. “It’s something you can’t see yet but [it] will certainly affect medium and long-term growth prospects.
Russia’s prospects are also undermined by the huge exodus of mostly young and often highly skilled migrants to neighboring countries such as Armenia, Georgia, the Baltic States and Central Asia.
Economies in the Caucasus saw double-digit growth in the first half thanks to this influx of capital and people, Javorcik said, as well as brokerage trade between Russia and the rest of the world.
Central Europe also benefited from the influx of refugees, this time from Ukraine, in particular due to the region’s poor demographics. According to the transition report, this influx could increase the EU workforce by 0.5% by the end of 2022, double the impact of the flow of migrants across southern borders block in 2015-2016.
Javorcik, who is Polish, said her country has seen a tangible increase in social security payment inflows. “It is certain that countries with unfavorable demographic trends can benefit from this influx of people.
“People leaving their county are ‘positively self-selected’ as economists would say,” she said. “On average, they tend to be younger, better educated, more enterprising. And in that sense, they provide a benefit to their beneficiary countries.
However, the EBRD’s forecast for growth in central Europe may need to be revised due to the worsening energy crisis caused by Russian restrictions on gas flows west and tougher sanctions by the bloc.
“Our base case still assumed gas flows from Russia,” Javorcik said. “We are now moving to a more pessimistic scenario where there are essentially no gas exports from Russia. percentage.”
Moreover, convergence with the level of Western European economies has all but stopped, and the region is also lagging behind in preparing for the transition to a sustainable green economy.
“Since the onset of the pandemic, convergence has largely stalled across the board,” the report finds, and there is “considerable divergence [from Western Europe] in the field of green reform”.
In the medium term, Central Europe could still benefit from the overhaul of global supply chains after the pandemic – which notably cut off supplies from China – and now the war in Ukraine, which has cut off many inflows from from Russia and Ukraine.
“The war in Ukraine and Russia’s militarization of energy supplies and raw materials have given new impetus to the overhaul of supply chains,” Javorcik wrote in the introduction to the transition report.
The EBRD’s chief economist said bne IntelliNews that the reorganization of global value chains had begun. “The war in Ukraine has become a trigger for action on global value chains,” she said. “The war has made it clear that geopolitical shocks are not going to go away and therefore disruptions will continue.”
An EBRD survey found that more than three-quarters of companies in global supply chains have implemented at least one measure to improve the resilience of supply chains – 55% of respondents had increased inventory, while 49% had diversified their suppliers. Nevertheless, China hasn’t necessarily suffered so far – imports from China have recovered quickly from the worst of the pandemic and have remained flat ever since.
Suppliers from Central Europe are considered more reliable than those from Southeast Asia and China and could potentially benefit from offshoring or ‘friendshoring’ as multinationals seek supplies from closer countries or those who share Western values. Already in Hungary and Slovakia, more than 35% of production comes from labor for global supply chains.