Growth picking up in EBRD regions despite political uncertainty

By Anthony Williams
@ebrdtony

Growth picking up in EBRD regions despite political uncertainty

East-West growth gap narrowing

Economic growth is expected to pick up across the EBRD regions this year and next, supported by higher oil prices and Russia’s recovery from recession, according to the EBRD’s latest Regional Economic Prospects report.

On the back of developments in Russia and on the commodity markets, growth in eastern Europe and the Caucasus is also forecast to accelerate and activity in Central Asia is likely to stabilise at slightly higher levels.

Turkey, however, is expected to see a slowdown in growth during 2017, partly reflecting security and geopolitical risks that have also led to a downward revision in EBRD forecasts for countries in the southern and eastern Mediterranean.

On average, economic growth in the 36 EBRD countries of operations is seen rising to 2.4 per cent in 2017 and to 2.8 per cent in 2018, compared with expansion of 1.8 per cent last year.

The latest forecasts reveal a narrowing of an East-West growth gap that has characterised the economies of the EBRD regions in recent years following a stronger upturn of growth in the East.

Countries further east had previously suffered from weak commodity prices and the Russian downturn and countries to the west had benefited from the softer oil price and accommodative monetary policies in the eurozone.

In those western regions, growth in central Europe and the Baltic states is now expected to accelerate slightly in 2017 to around 3 per cent following an investment-driven dip in 2016. It is projected to remain at the same level in 2018.

In south-eastern Europe, average growth is also forecast to reach the 3 per cent mark. Greece is expected to return to growth as reforms advance further and business confidence gradually improves.

The report says the latest forecasts are subject to major risks related to geopolitical tensions in and around the region, set against a backdrop of increased political uncertainty. “The economic outlook for the region remains materially affected by terrorism, geopolitical tensions and the refugee crisis. Over the last six months Egypt, Jordan, Russia and Turkey saw several terrorist attacks while Syria remains in a humanitarian crisis.”

The outlook for China is also cited as a risk as the country seeks to rebalance its economy and any reversal of the recent oil price recovery would be a major source of risk to Russia and to the countries which with it has close economic links.

The report also notes that capital flows to the EBRD regions were stronger than expected in the first months of 2017, despite the gradual tightening of monetary policy in the United States of America. This reflects the fact that the pace of monetary tightening is now slower than previously anticipated.

As a result, the post-US-election depreciation of the regions’ currencies against the US dollar has been fully reversed in most countries, with the notable exception of Turkey where domestic factors have played an important role.

Levels of non-performing loans remain elevated across many of the EBRD regions despite some improvements in south-eastern Europe.

Russia

After contracting by a total of around 3 per cent over the past two years, Russia’s economy is now expected to recover, underpinned by increasing oil prices. In 2017 and 2018 growth is forecast to pick up to 1.2 and 1.4 per cent, respectively, also supported by recovering private consumption and investment.

The main risks for these projections come from oil price developments, a lack of business environment reforms supporting investment, and from geopolitical tensions and a continuation of sanctions. “Without significant reforms, long-term growth will remain at around 1 to 2 per cent annually due to low investment,” the report warns.

Turkey                         

The Turkish economy has slowed significantly since 2015, with growth halving to 2.9 per cent in 2016 due to a sharp fall in tourism receipts, to Russian sanctions, and to geopolitical tensions in the Middle East. Weak consumption and investment following the attempted military coup in July 2016 compounded these earlier problems.

Growth is projected to moderate further to 2.6 per cent in 2017, reflecting worsening investor sentiment compounded by the downgrade of Turkey’s sovereign rating to sub-investment-grade level. A pick-up to 3 per cent is expected in 2018.

In the southern and eastern Mediterranean region (SEMED), projected growth in 2017 has been revised downwards slightly, to 3.7 per cent, owing to a worse-than-expected performance across all the countries of the region, but with national variations.

Average growth in SEMED is expected to reach 4.1 per cent in 2018, on the back of a rebound in agricultural output in both Morocco and Tunisia, higher domestic demand in Jordan driven by the refugee crisis, and an improvement in competitiveness and the business climate in Egypt.

Growth in Central Asia in 2017 is expected to rise slightly to 3.8 per cent, compared with 3.5 per cent in 2016, reflecting the improved external environment. Commodity-exporting countries will benefit from the pick-up in oil prices and other key commodities, while countries with strong economic links with Russia are expected to be supported by a rebound in remittances, leading to a recovery in domestic demand.

In 2018 real GDP growth in the region is forecast to increase to 4.6 per cent, driven mainly by a stronger performance in commodity-exporting countries.

Growth in Eastern Europe and the Caucasus as a whole is expected to turn positive in 2017 after last year’s stagnation. However, both Azerbaijan and Belarus are projected to remain in recession. A gradual recovery in the region is set to continue in 2018.

Cyprus

After a return to growth in 2015 of 1.7 per cent, the economy in Cyprus continued to perform well in 2016, with GDP growth reaching 2.8 per cent, above expectations. Tourism was one of the main drivers of the economy, while other sectors such as construction and professional services are also contributing to the recovery. Overall growth is likely to continue in 2017 and 2018 at between 2 and 2.5 per cent. However, high levels of indebtedness in the economy and a large legacy of non-performing loans remain major challenges.

Real GDP Growth (In per cent; EBRD forecasts as of 10 May 2017)

  Actual Estimate

Current

forecast

Current forecast EBRD Forecast in November 2016 EBRD Forecast in November 2016
  2015 2016 2017 2018 2017 Change Nov.-May
EBRD Region 1.3 1.8 2.4 2.8 2.5 -0.1
Central Europe and the Baltic states 3.4 2.6 3.1 3.1 3.0 0.1
Croatia 1.6 2.9 2.9 2.6 2.0 0.9
Estonia 1.4 1.6 2.4 2.7 2.4 0.0
Hungary 3.1 2.0 3.0 3.0 2.4 0.6
Latvia 2.7 2.0 3.1 3.2 3.1 0.0
Lithuania 1.8 2.3 2.9 3.0 2.9 0.0
Poland 3.8 2.7 3.2 3.2 3.2 0.0
Slovak Republic 3.8 3.3 3.2 3.5 3.2 0.0
Slovenia 2.3 2.5 2.5 2.2 2.3 0.2
South-eastern Europe 2.4 2.9 3.1 3.0 3.0 0.1
Albania 2.6 3.5 3.5 3.7 3.5 0.0
Bosnia and Herzegovina 3.0 2.0 2.5 3.0 3.0 0.0
Bulgaria 3.6 3.4 3.2 3.0 2.8 0.4
Cyprus 1.7 2.8 2.5 2.2 2.2 0.3
FYR Macedonia 3.8 2.4 2.4 3.0 3.0 -0.6
Greece -0.2 0.0 2.0 2.2 2.0 0.0
Kosovo 4.0 3.4 3.5 3.5 3.5 0.0
Montenegro 3.4 2.5 3.0 3.3 3.5 -0.5
Romania 3.9 4.8 4.0 3.5 3.7 0.3
Serbia 0.8 2.8 2.9 3.0 2.7 0.2
Eastern Europe and the Caucasus -4.8 0.0 1.1 2.4 1.7 0.6
Armenia 3.0 0.2 2.5 3.0 2.0 0.5
Azerbaijan 1.1 -3.1 -0.5 2.0 1.0 -1.0
Belarus -3.8 -2.6 -0.5 2.0 1.0 -1.5
Georgia 2.9 2.7 3.9 4.2 3.9 0.0
Moldova -0.5 4.1 3.0 3.5 2.5 0.5
Ukraine -9.8 2.3 2.0 3.0 2.0 0.0
Turkey 6.1 2.9 2.6 3.0 3.0 -0.4
Russia -2.8 -0.2 1.2 1.4 1.2 0.0
Central Asia 3.7 3.5 3.8 4.6 3.9 -0.1
Kazakhstan 1.2 1.0 2.4 3.5 2.4 0.0
Kyrgyz Republic 3.9 3.8 3.9 4.1 2.6 1.3
Mongolia 2.4 1.0 1.4 2.8 3.2 -1.8
Tajikistan 6.0 6.9 3.8 4.0 4.1 -0.3
Turkmenistan 6.5 6.2 5.7 6.0 7.1 -1.4
Uzbekistan 8.0 7.8 6.2 6.5 6.2 0.0
Southern and Eastern Mediterranean 4.0 3.4 3.7 4.1 4.0 -0.3
Egypt 4.4 4.3 3.8 4.5 4.0 -0.2
Jordan 2.4 2.0 2.3 2.5 2.8 -0.5
Morocco 4.5 1.5 4.2 3.8 4.8 -0.6
Tunisia 1.1 1.0 2.2 2.7 2.5 -0.3
Average "East": EEC, CA, Russia -2.1 0.4 1.6 2.1 1.7 -0.1
Average "West": CEB, SEE, SEMED, Turkey 4.2 2.9 3.1 3.3 3.2 -0.1

1 All averaged use weights corresponding to countries' nominal GDP values in US dollars at PPP.

2 Egypt's growth numbers are for the fiscal years ending June.