Signs of stabilisation in the eurozone are reducing the risks facing emerging Europe, leading to cautious optimism that the worst of the transition region’s problems may slowly be drawing to a close.
After a sharp slowdown in economic activity in 2012, the EBRD’s economists are expecting a moderate acceleration of growth this year.
The Bank’s latest economic outlook (993KB - PDF) says, “Downside risks to the outlook have continued to recede as the likelihood of further deterioration of the eurozone crisis diminishes.”
It added, “Growth in the transition region continued to slow down in the third quarter of 2012, but the deceleration is showing signs of bottoming out.”
Across the whole transition region, the EBRD expects growth of 3.1 per cent in 2013, after a sharp slowdown to 2.6 per cent in 2012 from 4.6 per cent in 2011.
The 2013 forecast is marginally lower than the 3.2 per cent seen in October. However, Chief Economist Erik Berglof said, “For the first time in a long while we are now seeing the possibility of a reduction in the risks facing emerging Europe, especially the risks from the eurozone. It is too early to sound the all-clear but there are signs of stabilisation.”
The report notes that declines in exports in the latter part of 2012 moderated compared to levels seen earlier in the year, while modest private capital inflows into the region that had returned in the second quarter continued in the third quarter.
Moreover, cross-border bank deleveraging in the region, and especially in central and eastern Europe and the Baltics and in southern and eastern Europe, continued in the autumn of 2012 but at a much slower pace than earlier.
However, these developments had not yet translated into a consistent improvement in credit growth in the region, the report said
The EBRD report points to policy decisions taken within the eurozone in recent months as increasing the chances of an economic improvement in the single currency bloc, albeit a very slow and gradual one.
Recent such decisions include the European Central Bank signalling its readiness to help countries under pressure on the sovereign debt markets as well as moves to create a European Banking Union.
“The euro area crisis will continue to negatively impact growth in the transition region, but as the eurozone recession bottoms out economic activity in the transition countries that depend on it is likely to stop deteriorating,” the report says.
Performance still varying from country to country
In recent months the eurozone recession has caught up with relatively strong performers such as Poland and the Slovak Republic.
After easing to around 2 per cent in 2012, the EBRD’s new 2013 forecast for growth in Poland is 1.5 per cent.
Hungary entered a renewed recession resulting in an overall contraction of about 1.5 per cent in 2012. The country shows the most rapid pace of bank deleveraging of any transition country and a further small contraction of 0.1 per cent is expected in 2013.
However, forecasts for the Baltic countries have been raised for both 2012 and 2013 relative to the previous outlook in October.
In southern and eastern Europe, the slowdown in the eurozone and a significant drop in agricultural output have had significant dampening effects on Romania’s growth. After only negligible growth for 2012 some recovery is likely in 2013, with growth seen at 1.4 per cent.
Meagre growth of 1.0 per cent is seen returning to Ukraine after stagnation in 2012. After strong expansion in Turkey in 2011, there was a slowdown last year and relatively moderate growth is expected in 2013 of 3.7 per cent.
The Russian economy has not been immune to the impact of the eurozone crisis. In 2012, the weaker global environment and lower investor and consumer confidence led to a significant slowdown in both external and domestic demand. Russian GDP growth is estimated at 3.5 per cent in 2012 and expected to remain at around 3.5 per cent in 2013 and the medium term, which is less than half of the rapid growth rate that Russia enjoyed in the years before the 2008-9 crisis.
The four countries in the Middle East and north Africa where the EBRD launched investments in 2012 will deliver better results than last year and a substantial improvement on 2011 as the region remains on a recovery path from the political turmoil of the “Arab spring”.
Recovery in the largest economy, Egypt, continues to face significant headwinds. The recent return of political turmoil and widespread protests are likely to weigh on the Egyptian economy, impacting normal business activity, tourism, and confidence.