EDB forecasts 4% growth in the aggregate GDP of the Bank`s member  states in 2021

ArmInfo.The Eurasian Development Bank (EDB) has published an updated macroeconomic forecast for the Bank's operating region for 2021 and the medium term. In March, EDB analysts projected a strong recovery in the Bank's member states, but the reality of the first half of the year exceeded expectations.

As a result, the region's largest economies Russia and Kazakhstan already reached the  pre-pandemic levels by the end of Q2 2021, according to EDB  estimates. 

The rapid recovery of the global economy, fuelled by credit and  budgetary injections in developed countries, is accelerating  inflation globally. Inflation in the EDB member states is moving in  line with the global trend, with the regional average rising to 6.6%  YoY in May 2021 from 5.6% in December 2020. Many inflationary factors  will be neutralised with time. EDB analysts forecast that inflation  in the Bank's member states will slow to an average of 5.6% by the  end of 2021 and return to target levels during 2022. 

The review notes that the world's largest economies this year will  register their fastest growth in a decade but it will be associated  with recovery. China's GDP may increase by 8.5%, that of the Eurozone  by 4.3%, and the U.S. economy by 6.5%. As early as 3Q 2021, the U.S.  economy may be overheating due to massive budget and cash injections.  However, the baseline scenario assumes that the Fed's policy remains  soft this year and that a cautious rate hike will start from late  2022-early 2023. Oil prices in 2021-2023 are projected to be within a  comfortable range for the Bank's operating region of US $60-65 per  barrel.

The 2021 projection for aggregate GDP growth of EDB member states has  been raised by 0.7 p.p. to 4% due to strong support from the global  economy. The revision is attributable to an improved GDP growth  estimate for Russia this year, from 3.3% to 4.1%. The pace of  Russia's economic recovery has exceeded expectations. Oil prices are  higher than projected before and higher budget revenues are likely to  result in additional support for business activity on the spending  side.

The EDB's GDP growth forecasts for Armenia and Belarus have also been  raised to 4.2% and 1.3% in 2021, respectively. The stronger economic  recovery of Russia, a key trading partner of Armenia and Belarus, has  boosted the exports of these countries in the first half of the year.  However, Belarus is projected to see a slowdown in economic growth in  the second half of the year due to the introduction of restrictive  measures by the U.S., EU, and UK.

The EDB maintains its projection for Kazakhstan's economy to grow by  4% in 2021. High oil prices will continue to support economic  activity in Kazakhstan. However, the more protracted effect of  restrictive measures largely offsets the positive impact of the  external environment.

The EDB's growth forecasts for Kyrgyzstan and Tajikistan for 2021 are  maintained at 3.9% and 6.1%, respectively. The faster-than-projected  recovery of the Russian economy may not have a significant effect on  the growth of the Kyrgyz and Tajik economies this year, as  restrictions on cross-border labour migration are set to linger.

EDB analysts note that the inflation path in the Bank's member  countries is broadly in line with the previous projection. The price  rises in the region are now largely imported. They are due to higher  commodity prices and the weakening of national currencies during the  previous year. With continued global constraints and rapidly  increasing demand, delivery times are often longer and the choice of  suppliers and components is shrinking.  Demand-side pressures on  prices are becoming increasingly persistent in most states in the  region.

"The rapid recovery of the global economy, fuelled by credit and  budgetary injections in developed countries, is driving asset prices  up massively," said Evgeny Vinokurov, EDB and EFSD Chief Economist.  "Temporary factors, such as pandemic-induced disruptions in  production chains, the shrinking choice of suppliers and components,  and the reduced supply of certain crops, also contribute to this  situation. As a result, we are seeing a global spike in inflation.  Almost forgotten in the 2010s, rising inflation rates have not only  returned to the agenda of central banks globally, but have also  become a difficult challenge for monetary policy. I believe that the  key to assessing the risks of high inflation is the relationship  between the fundamental and temporal factors that led to its  acceleration. So far, we believe that many of the inflationary  factors are temporary and will be neutralised as the pandemic 'wanes'  and the active phase of global economic recovery comes to an end. But  we also see the possibility of persistent increases in the average  inflation rate in the 2020s. It is realistic to assume that inflation  in developed countries will be steadily higher than in the 2010s -  not the 0-2% that the market was used to in the 2010s, but perhaps  2-4%. This is what the world's norm was before the global financial  crisis. Such persistent inflation rates do not constitute a  structural problem for the global economy. But they will require an  adjustment of the financial sector and the real sector."

EDB analysts forecast the average inflation in the Bank's member  states to slow from 6.6% YoY in May to 5.6% by the end of 2021 due to  an easing of demand-side inflationary pressures and the recovery of  production chains.  In Armenia, the EDB expects inflation of 5.4% at  the end of the year; in Belarus, 8.7%; in Kazakhstan, 6.7%; in  Kyrgyzstan, 7.7%; in Russia, 5%; and in Tajikistan, 7.4%.