The short-term economic cost of these second lockdowns is expected to represent 30-50% of the economic impact that the region experienced in March-May. This is because the new measures are more targeted, mostly towards “Covid-19-vulnerable” services sectors (for example domestic trade, transportation, hotels and restaurants, education, social work, leisure and sports activities) and less restrictive in some countries, while industrial sectors, construction and agriculture will hardly be impacted this time. Moreover, supply-chain disruptions from Asia, which had added to the industrial recession seen in the spring, will be very limited now.  However, we expect differences across countries based on (i) the size of the affected services sectors ; (ii) the sanitary situation, which influences the stringency and length of the lockdowns ; (iii) the external trade structure and (iv) the immediate economic policy leeway.  As a result, we forecast the regional GDP to shrink by approximately -4.4% q/q in Q4, taking the full-year 2020 decline to -5.0%. This upward revison from our -5.4% forecast in September is explained by the significantly better-than-expected growth in Q3, which does in the short term more than offset the now expected contraction in Q4. 

The bad news is that the outlook for the recovery in 2021 has worsened, resulting in a downward revision of our full-year growth forecast by -1pp to +2.8% for the Emerging Europe region as a whole. The first reason is the negative carry-over from the contraction in Q4 2020. Another reason is that the second reopening after the Q4 lockdowns is likely to be more gradual as governments will aim to learn from the mistakes of summer 2020 in order to avoid a third lockdown and a triple-dip recession. Moreover, we have noticed a sharp decline in FDI inflows into the region in the first eight months of 2020, which will not only affect growth in 2020 but also medium-term perspectives. Furthermore, monetary policy leeway is largely exhausted in the region, with interest rates being at record lows. Some countries engaged in Quantitative Easing-style policies in 2020 but this should be continued very cautiously in 2021 as this path will otherwise increase debt sustainability and inflationary risks, with adverse effects for medium-term growth.