Economic growth in the region where EBRD invests will improve in 2014 but the recovery is likely to be weaker than expected six months ago, the EBRD says in its latest economic outlook.
The EBRD’s Regional Economic Prospects report has revised down forecasts for growth for both 2013 and 2014, driven in part by slower growth in Russia. Although growth in the eurozone has recently improved, it is expected to remain weak.
The report shows a slight reduction in the average growth forecast for 2013 to 2.0 from the 2.2 per cent growth seen in May. This compares with 2.7 per cent growth in 2012. The forecast for 2014 has been cut to 2.8 per cent from May’s 3.2 per cent.
The reasons for the weak regional outlook are both cyclical – reflecting continuing weak external demand – and structural - reflecting lower growth potential, limited sources of finance for investment and unfinished structural reforms.
This unfinished reform agenda is the focus of the EBRD’s Transition Report 2013 “Stuck in Transition?” which will be published on 20 November and which makes proposals on how to break out of the vicious circle of economic downturn and reform stagnation.
“Potential growth will continue to be weak in the absence of reforms, low investment and high structural unemployment that is eroding skills,” said EBRD Chief Economist Erik Berglof.
Risks to the new forecasts include a possible further deterioration of the situation in the eurozone. The chance of this happening seems less likely now, but there is an increased risk of an impact from economic slowdown in China and other large emerging markets. In addition, the risks to growth from a new fiscal impasse in the United States have not gone away.
The downward revisions to growth primarily reflect a slowdown in Russia, Eastern Europe and the Caucasus as well as in the southern and eastern Mediterranean, compared to what was expected in May.
Some countries – such as Lithuania and Latvia – are performing more strongly. But the report points out that, even so, levels of output in these and many other countries in the transition region remain below their pre-crisis peaks.
The slowdown in Russia has intensified amid a subdued investment climate. While growth in Central Asia has remained strong and the economy in Turkey has performed better than expected in the first half of this year, growth in the south-eastern Mediterranean has generally weakened.
Unemployment has remained high across the region. With the exception of Egypt, Kazakhstan, and the Kyrgyz Republic, inflation rates have generally declined. This is potentially creating some room for easier monetary policies that could support growth, the report said.
Cross-border deleveraging by international banking groups has continued, albeit at a slower pace than previously. Credit growth remains negative or near-zero in real terms in many countries.
The report also says that non-performing loans are continuing to weigh heavily on bank balance sheets.