Emerging Europe is likely to live through another challenging year before any real recovery can start, EBRD economists say.
According to the latest Regional Economic Prospects – the Bank’s quarterly economic assessment - growth in the transition region is expected to drop from 4.6 per cent in 2011 to 2.7 per cent in 2012 before picking up modestly to 3.2 per cent in 2013.
The crisis in the Eurozone is continuing to negatively affect economic performance in the EBRD’s region of operations. However, thanks to the recent actions by the European Central Bank as well as announced European measures toward bank resolution and banking union the downside risks to growth have reduced somewhat.
The EBRD’s region of operations fared worse in the first half of 2012 compared to the second half of 2011, with central Europe, the Baltics and south-eastern Europe noticeably slower.
Growth in the new countries to which the EBRD is expanding – Egypt, Jordan, Morocco and Tunisia – picked up compared to the weak performance in the tumultuous period in 2011. But macroeconomic stability and job-creating growth remain urgent issues in the southern and eastern Mediterranean region.
Economists revised down their forecast for Ukraine, which is now expected to grow by a mere 1 per cent in 2012 – a 1.5 percentage point reduction from the EBRD’s previous forecast in July – compared to 5.2 per cent in 2011. Ukraine is feeling the squeeze from both its two biggest markets, the EU and Russia.
Also revised down were forecasts for Slovenia, Hungary, Croatia and Serbia, all of which are still in recession. Slovenia’s economy is expected to contract by 2.5 per cent this year and by 2 per cent in 2013; Hungary’s economy should experience negative growth of 1.5 per cent in 2012 but is predicted to stop its fall next year. Croatia and Serbia are expected to return to modest growth next year.
The effects of the European recession are spreading further east. As Russian growth slows down, weighed by the Eurozone, economies of the Caucasus and central Asia – not closely integrated with the EU markets - might start feeling the pain.
Meanwhile the southern and eastern Mediterranean is expected to grow 2.9 per cent on average this year. Egypt and Tunisia, where output contracted last year, are expected to return to growth; Morocco is slowing down although projected to pick up speed next year. The region’s prospects as a whole were slightly revised upwards from July. At the same time, growth has not generated enough employment opportunities and unemployment continued to rise in several countries.
Deleveraging in Europe
Cross-border bank deleveraging was strong in the second half of 2011 and continued, albeit at a much reduced pace, in the first half of 2012. Foreign banks' deleveraging eased in Q1 mainly as a result of the ECB's massive liquidity operations. As their impact waned in Q2, deleveraging picked up. CEB and SEE countries have experienced significant cross-border deleveraging for 12 months.
Banks have tried to replace the loss in external funding by domestic deposits. As this has been only partially successful, real credit continues to contract in almost all of central and south-eastern Europe and the Baltics. Within the CEB region, only Poland has recently recorded mildly positive year-on-year real credit growth.
The EBRD’s next economic outlook is expected in January 2013.