EBRD calls for urgent structural reforms as growth slumps

The EBRD has called for urgent structural reforms in emerging Europe after winding back its economic forecasts. The Bank revised down its overall outlook for growth to 2.2 per cent for 2013, well below the 3.1 per cent seen only four months ago.

It said the worsening mood reflected a slowdown particularly in Russia, even as the threat from turmoil in the eurozone appeared to be abating. Weaker activity in other large economies such as Poland and Turkey was also weighing on the outlook.

However, the report said the biggest downside risk to the outlook remained a possible further deterioration of the Eurozone crisis. The recovery might falter in the absence of more growth-friendly economic policies in advanced Europe, it added.

Chief Economist Erik Berglof said the latest slowdown was a “wakeup call across the region to reenergise structural reforms that have been on hold since the start of the crisis”.

Referring to a current debate about the relative merits of stimulating growth versus the need for fiscal austerity, Mr Berglof said: “This trade-off is not the main issue in our region. Fiscal responsibility is of course important. But most of our countries have already made significant progress in this area during the crisis. What is urgently important now is to advance structural reforms."

He pointed to areas such as promoting the entry of new firms, strengthening competition and removing obstacles to business. Structural reforms were also important for the southern and eastern Mediterranean, where fiscal issues did still need to be addressed. A shift towards market-based pricing would reduce subsidies and help cut fiscal deficits.

The report said several countries were turning to unconventional tools to stimulate their economies. “Their effectiveness will depend, among others, on good institutional setups as well as removing any other major policy obstacles in the way of recovery,”  the EBRD cautioned.

The EBRD's latest Regional Economic Prospects report expects growth this year to be below the 2.6 per cent seen in 2012. It sees a moderate upturn to 3.2 per cent in 2014.

Regional Economic Prospects (1MB - PDF)

The report said the slowdown in Russia partially reflected a decline in global demand for its key energy resources, a reduction in public social spending growth after the 2012 elections and possible dents to investor confidence following setbacks with business environment reforms and the treatment of foreign investors. There was also an impact from supply-side bottlenecks.

In Poland, the EBRD noted that earlier resilience to the impact of the crisis appeared to have reflected a number of transient factors, including the rapid absorption of EU structural funds and the ensuing boom in public investment. There was now little room for stimulus due primarily to constitutional constrains on public debt.

After a strong performance in 2010 and 2011, the Turkish economy had slowed down significantly in 2012 because of weak domestic demand and manufacturing activity coupled with a large drop in the private sector’s capital investments, the report said. But it appeared to have skilfully avoided a hard landing.

One bright spot was the current performance of the Baltic States, where economies were reaping the benefits of the drastic adjustment in their economies following the output collapse in 2009/10.

In central Asia, remittances have held up well, providing foreign exchange and household income in many early transition countries. However, lower growth in Russia could have a negative impact on remittance flows to these economies.

The report said economic momentum has slowed down across the four countries in the southern and eastern Mediterranean where the EBRD began investing last year, although there will be a modest pickup next year.

Unemployment, especially among the youth, is a chronic problem in all four countries and remained persistently high in 2012. In Egypt and Tunisia, volatile political and security conditions have weighed on the economy, adversely affecting investor confidence. The main challenges in Morocco and Jordan are weak external demand and high commodity prices. Growth however is projected to pick up in the region next year helped by a modest recovery in Egypt as well as stronger growth in Morocco.