EBRD region: Growth prospects improve but with increasing risks

By Anthony Williams

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Growth prospects for the economies in the EBRD region have improved, but concerns are growing about the possible fallout from sovereign debt problems in some euro zone countries and inflationary pressures are emerging as a new risk.

The EBRD’s latest Regional Economic Prospects has revised up its outlook for the region to average growth of 4.6 percent in 2011 and by 4.4 per cent in 2012. The previous forecast for 2011 in January predicted growth of 4.2 percent.

The report notes that the recovery is becoming more widespread and that growth differentials across the group are narrowing. But it also points out that countries remain at very different stages in the recovery process and some countries will still not see their output recovering to pre-crisis levels even in 2012.

Domestic demand, rather than exports, is now driving the recovery, despite some notable exceptions such as Bulgaria, Croatia and Hungary. Private consumption is an engine of growth in some of the strong economic performers such as Turkey and Poland.

The report points to positive factors including the fact that the weakening of the labour markets is bottoming out in many countries, but in some (including Poland and Slovakia) unemployment remains stubbornly high.

Credit growth is recovering especially in Albania, Russia, Turkey, Poland, Serbia and eastern European and the Caucasus countries. But it remains weak or negative in Ukraine, the Baltics, Hungary, Slovenia and Romania where the economic recovery has proceeded more haltingly or where pre-crisis credit booms were strongest. Excessive regulation in the form of high bank levies may have also played a role in some cases.

Looking to specific risks, the EBRD report points to possible financial turmoil as a contagion risk for countries with financial systems that are deeply integrated with the euro zone.

If turmoil in sovereign debt markets – and closely linked financial institutions – disrupts financial markets more broadly, then the recovery in central and south eastern Europe would stall, the report warns.

The report also says that rising commodity prices are presenting a challenge to policy makers, especially in eastern Europe, Russia and Central Asia. Pressures from nominal wage growth may feed into core inflation and, conversely, rising inflation may increase political pressures for wage increases.

The  region’s deep integration in trade networks and commodity markets means also that it remains exposed to any broad-based downturn in the global economy stemming for example from monetary tightening in the euro zone and the United States or a downturn in rapidly growing emerging market countries in other regions.

The EBRD has revised up slightly its outlook for Central Europe and the Baltics to 3.5 percent in 2011, compared with the 3.2 percent seen in January, with growth seen at 3.3 percent in 2012.

In south eastern Europe and Turkey the picture is mixed, with the Turkish economy continuing to boom and most of south eastern Europe continuing to lag. But economic prospects have improved in the two EU members, Romania and Bulgaria.

In eastern European and the Caucasus, economies are benefiting from stronger external demand, commodity price increases and a revival of remittance flows. While Ukraine’s economy has continued to recover from its deep crisis, critical fiscal and energy sector reforms are facing political resistance.

Ukraine’s economy is seen growing by 4.5 percent this year and by the same amount in 2012.

Russia and Kazakhstan have also been recovering on the back of higher oil prices, major fiscal stimulus packages and support for the banking sector.

With the Russian economy picking up again, growth is seen at 4.6 percent this year and slightly higher in 2012, after 4 percent in 2010. The banking sector has become healthier and credit growth in Russia has gradually resumed. But rapid increase in government social spending resulting in sustained fiscal deficits could make the economy more vulnerable to swings in commodity prices.

Kazakh growth is expected to remain at a strong 7 percent in 2011, driven mainly by a strong performance in the hydrocarbons sector. However, credit growth remains stagnant as non performing loans remain high and Kazakh banks remain largely excluded from foreign borrowing.

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