Eurozone crisis impact spreads further east

By Anthony Williams

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The negative impact of the eurozone crisis on emerging Europe is spreading further east as lower global demand is feeding through to lower commodity prices and generally lower risk appetite. These are now  having a negative impact, particularly on Russia, according to the EBRD’s latest economic outlook.

The EBRD’s Regional Economic Prospects (517KB - PDF) report now sees economies across the countries where the Bank invests growing more slowly in 2012 and 2013 than envisaged in May, mainly because of a downgrade of projections for growth in Russia. It also said growth remained very sluggish in the southern and eastern Mediterranean region.

While central and south-eastern Europe had already been experiencing a slowdown, “falling commodity prices have now begun to affect Russia and other commodity exporters as well," the report said.

The latest forecasts see growth falling sharply across the whole EBRD region in 2012, to 2.7 per cent from 4.6 per cent last year. A modest pick-up to 3.2 per cent is expected in 2013. Two months ago the EBRD was forecasting 2012 growth of 3.1 per cent and 3.7 per cent in 2013.

The 2013 forecast for Russia has been cut by 1.0 percentage points to just 3.3 per cent compared with the May outlook, with expansion in 2012 now seen at 3.1 per cent compared with an earlier prediction of 4.2 per cent.

The report said the biggest downside risk for the whole transition region remained a possible further deterioration of the eurozone crisis. "A timely implementation of the latest EU summit decisions may limit such risks," it added.

The EBRD saw economic contractions this year in Slovenia, Hungary and Croatia, with the 2012 outlook for Croatia having deteriorated since May. Brighter spots included both Poland and the Slovak Republic, which had surprised on the upside in the first three months of this year.

South-eastern Europe remains particularly vulnerable to events in the single currency zone. The report noted that after a first quarter contraction in Romania, “the weak external environment and the political crisis that arose in July could negatively affect short-term growth.”

The report added that Serbia’s economy was showing several weaknesses at present. While risks mainly stemmed from exposure to the eurozone, domestic policies were now adding to uncertainty.

The report noted that, while the negative impact of the eurozone crisis on growth in the region through overall capital outflows may have lessened, its effect on lending through cross-border bank deleveraging was apparently continuing.

It said latest balance of payments data suggested that, with a few exceptions, cross-border funding of local banks in the west of the transition region was still shrinking. “Reduced availability of cross-border finance for local banks has translated into continued credit contraction in most of the new EU members,” the report said.

The report also warned that investment remains well below its pre-crisis level in most countries, negatively impacting future growth.

The EBRD’s report highlighted the pressing challenges faced by some countries in the Middle East and North Africa, in which the EBRD is now preparing to invest.

It said countries in the southern and eastern Mediterranean region were continuing to face serious macroeconomic challenges that mainly reflected high political and investor uncertainty surrounding their social and political transformation.

As a result, growth remained sluggish in most countries in the area, with only Tunisia showing signs of recovery in the first quarter of 2012, reflecting some upturn following last year’s deep contraction. Unemployment, particularly among the youth, remains worryingly high and is rising in the region.

In addition to Tunisia, the EBRD is preparing to start investments in Egypt, Morocco and Jordan

The EBRD report said: “The economies of these four countries have taken a hit from declining tourism, FDI (Foreign Direct Investment), and trade, and investors have adopted a wait-and-see approach, at least in the short term”.

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