A surprisingly strong rebound in the first half of this year has boosted economic activity in emerging and developing countries across Europe and Central Asia, with the regional economy now expected to grow 5.5% better than expected in 2021, according to the latest edition of the World Bank’s Economic Update for the region, released today.

The rebound was largely driven by a strong recovery in exports during the first half of this year, as activity in the euro area rebounded and commodity prices rose sharply, along with strengthening demand. home through vaccinations and support plans. The export surge, however, could fade due to the ongoing global and regional spread of more contagious variants of COVID-19, which has also dampened the recovery in regional domestic demand.

In 2022, regional growth is expected to moderate to 3.4%, as external demand and commodity prices stabilize more, global growth levels off and pandemic stimulus measures are removed. The outlook remains very uncertain given the continuation of the pandemic, particularly in a context of unequal access to vaccines and reluctance. The regional recovery has been accompanied by a rapid acceleration in inflation and remains vulnerable to financial tensions, which could be triggered by a sharp tightening of external financing conditions or a sharp increase in political uncertainty and geopolitical tensions.

“The pandemic continues to shape the economic outlook for Europe and Central Asia. However, with increasing immunization rates in the region, policymakers can now focus on ensuring that post-pandemic recovery is inclusive, resilient and sustainable. Ensuring a competitive business environment that facilitates entrepreneurship and fosters a vibrant private sector is important for long-term growth, ”said Anna Bjerde, World Bank Vice President for Europe and Central Asia.

Special Analysis on Competition and Business Recovery After COVID-19, Using Data from World Bank Business Surveys and Business Pulse Surveys, reveals that COVID-19 has had a profound and varied impact on businesses. On average, businesses in the region experienced significant declines in their monthly sales and in the number of full-time employees. As of May of this year, one in four businesses planned to incur liability arrears in the next six months. Smaller, younger, and female-led businesses had yet to see sales improve since the initial decline.

Crises can be devastating for many businesses, but they often have a silver lining, reallocating resources from less productive businesses to more productive ones. This is also the case in Europe and Central Asia, especially in countries with more competitive markets. Indeed, companies with high labor productivity before the crisis experienced much smaller declines in sales and employment than companies with low labor productivity before the crisis. More productive businesses were also more likely to adapt to the crisis by increasing online activity and working remotely.

“The role of competition is important because it is associated with dynamism, motivates companies to innovate, forcing the most efficient companies to enter and grow, while facilitating the exit of the less efficient,” said Asli Demirgüç-Kunt , World Bank Chief Economist for Europe. and Central Asia. “In countries with more competitive markets and stronger policies that protect competition, this reallocation to more productive firms was even greater. “

Many governments have implemented extensive policy support programs to respond quickly to the first economic fallout from the crisis. These policies brought immediate relief that protected businesses and workers from the worst effects. While the scope of government support measures varied widely from country to country, on average 50% of companies reported receiving government support in response to the economic fallout from the pandemic.

Overall, government support was more likely to go to less productive firms, large firms were more likely than small firms to receive support in the form of deferrals and tax breaks, and tax relief measures. support was given to companies regardless of their pre-crisis level. innovation.

As economies enter the phase of economic recovery, it will be important for policymakers in all countries to phase out general policy support measures as soon as appropriate and to focus on promoting an environment competitive business that is the key to a solid recovery; resilience to future crises; and long-term sustainable economic growth.

Most countries in Europe and Central Asia can improve both the institutional framework and law enforcement for a strong competitive environment, including policy reforms to strengthen insolvency and dispute resolution, facilitate entry of new businesses and improve the ability of the financial sector to provide credit to the business sector.

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