Emerging Europe is gradually experiencing a more broadly based economic recovery, but the region remains sharply divided between countries benefiting from rising commodity prices and capital inflows and others that are expected to remain in recession or see only a feeble recovery in 2010, according to EBRD’s latest economic outlook.
The EBRD’s new report predicts overall growth in the EBRD region of 4.2 percent 2010 and 4.1 percent in 2011, compared with a July prediction of 3.5 and 3.9 percent, respectively. The region as a whole contracted by 5.5 percent last year.
Despite the upward revision since July, the EBRD region will show considerably lower growth compared with some other emerging markets. South-eastern Europe is expected to continue showing particular weakness.
While catch-up growth rates in the region will be higher than in advanced Europe, they will remain below boom-related pre-crisis levels. However, with the implementation of appropriate policies, growth rates are likely to be more sustainable in the future.
Commenting on the outlook, Chief Economist Erik Berglof said: “This is precisely the time that the process of structural reform needs to be accelerated to strengthen productivity, underpin fiscal sustainability and shift countries towards a more balanced growth model. There is no room for policy complacency.”
Mr Berglof added that the region needed to rebalance: rely more on domestic sources of funding, develop local capital markets, reduce financial dollarisation and improve competitiveness through cost containment as well as productivity-enhanced investments.
“Enhanced cross-border banking supervision and crisis prevention and further fiscal consolidation will also help pave the way for more solid economic growth in the future” he said.
With some exceptions, the variations in the economic outlook reflect a divide between Central Europe and the Baltics (CEB) and south-eastern Europe, where growth is expected to remain broadly modest or even be negative, and eastern Europe, the Caucasus and Central Asia, which are expected to experience more robust growth.
The report sees more upside possibilities than downside risks. However, it points out that precisely those short-term factors that are supporting some economies, such as strong capital flows, could pose policy challenges in the medium term.
That said, many crisis-hit countries will also need to build up international reserves to cushion against external shocks. And, moreover, capital inflows have been considered beneficial for growth in the EBRD region over the long term.
Broken down by sub-region, the report notes that CEB has benefited in 2010 from a stronger than expected recovery in western Europe. As fiscal retrenchment continues, growth will be limited to 3 percent in this sub-region in 2011 – slightly less than the level projected in July. Growth of 2.2 percent is expected this year for CEB.
South-eastern Europe is expected to contract this year, by 0.6 percent, before seeing growth of 1.6 percent in 2011. While exports in this region are growing rapidly in most countries, domestic demand remains sluggish and many countries face challenges on the fiscal front.
“Risks of major spillovers from the crisis in Greece have been contained so far but they have the potential to disrupt economic activity in the region if the situation in Greece deteriorates further,” the report says, referring specifically to south-eastern Europe. Countries in eastern European and the Caucasus have benefited from higher commodity prices and a revival in remittance flows.
UKRAINE CONTINUES TO RECOVER
Ukraine has continued to recover from a 15 percent contraction in 2009, with a re-engagement on the part of the authorities with the IMF being well received by markets. Ukraine’s economy is expected to grow by 5 percent this year and by 4.5 percent in 2011.
Russia and Kazakhstan have both been on a strong recovery path from the crisis since the end of 2009, supported by higher oil prices, large-scale fiscal stimulus packages and banking system support.
Russia is expected to maintain the pace of growth it has seen in recent quarters, with expansion of 4.4 percent forecast this year, rising to 4.6 percent in 2011. The report notes that real incomes are increasing again and that the deterioration of asset quality in the banking sector is levelling off and remains manageable. However, credit growth is expected to remain subdued despite a gradual reduction of interest rates.
Kazakhstan is also recovering swiftly, on the back of increasing oil production and higher mineral extraction and also in reaction to the demand stimulus from government initiatives. However, potential growth remains constrained by stagnant credit. The Kazakh economy is expected to grow by 6 percent this year and by 5 percent in 2011.
A current strong rebound in the Turkish economy is expected to last into early 2011. The report notes that strong capital inflows, rising credit growth, and some moderate fiscal stimulus have supported rapid real GDP growth based on expanding domestic demand.
However, it also added that domestic demand growth has spilled into rapidly rising imports and a widening current account deficit that is increasing the economy’s vulnerability to a reversal in capital inflows. Turkey is likely to see growth of 8 percent this year, with that rate easing back to 5 percent in 2011.
