The COVID-19 response will improve medium-term growth prospects for the CEE-4. Stronger government finances provided countries with room for stimulus measures. The ECB’s response has also allowed authorities to cut rates and start bond purchases. Finally, the EU’s proposed recovery fund would improve growth prospects markedly.

We now expect an even deeper output contraction of 5.7% in the CEEMEA region. Effects of the COVID-19 shock are increasingly visible in the data for March-April. We downgrade growth in South Africa, the Czech Republic, Ukraine, and Russia. The fall in activity prompted authorities to implement fiscal stimulus measures. Together with cyclical revenue weakness, additional spending will widen deficits. CEEMEA central banks cut rates and some began government bond purchases.

COVID-19 is projected to bring about a 4.7% output contraction in 2020. This is partly the result of the looming deep recession in the Euro area. Virus containment measures will also lead to weaker domestic demand. Markedly wider fiscal deficits could intensify debt sustainability concerns.

Labor shortages and fragile investor confidence will constrain output growth. Policies will likely become more accommodative, thanks to a dovish ECB and Fed. The external financing and inflation outlook will remain challenging for some. Slow progress in addressing structural problems will intensify vulnerabilities.

Strong domestic spending has kept output above potential, intensifying inflation pressures. Weaker foreign demand should allow policies to remain accommodative in the near term. Labor shortages and reduced access to EU funds will be the main medium-term challenges.