Knowledge Note

"The potential channels of transmission, estimates of spillovers, and necessary policy responses"

In February 2020, the COVID-19 (coronavirus) outbreak interrupted the incipient recovery that was underway earlier in the year. Given the rapidly evolving situation, this Regional Economic Update summarizes the recent developments and growth outlook for the region under different scenarios regarding the outbreak.

The report discusses the potential channels of transmission, provides estimates of spillovers, and emphasizes necessary policy responses. The impact of the coronavirus pandemic on growth in the region will depend on how the outbreak evolves. If the outbreak is largely contained by the second half of the year and measures to stop the spread of the virus—including quarantines, travel restrictions, and international border closures—are lifted, economic activity could resume, supply chains could recover, and financial markets and commodity prices could stabilize. However, if the virus spreads to most countries and efforts to contain the outbreak spill into the third quarter of 2020, financial market pressures continue, commodity prices remain weak, and domestic healthcare systems are strained, the growth impacts will be more severe. Either way, the region is bracing for a recession.

Although the magnitudes are uncertain, the pandemic is likely to derail the near-term outlook by interrupting daily activity, putting further downward pressure on commodity prices, disrupting tightly linked global and regional supply chains, reducing travel and tourist arrivals, and decreasing demand for exports from economies in the region. There are trade-offs between the health benefits of policies to slow down the spread of the disease and the economic costs of these actions. During these difficult times, it is important for policymakers to act decisively to save lives and invest in their public health systems; but also minimize the economic cost by strengthening the safety net for the most vulnerable; supporting the private sector through short-term credit, tax breaks, or subsidies; and being prepared to lower interest rates and inject liquidity to restore financial stability and boost confidence.

This document is an Executive Summary of the World Bank Group's Europe and Central Asia Economic Update, Spring 2020: Fighting COVID-19. To read the entire report, please click here.