Recovery in central Europe and Baltic states affected by Russia-Ukraine crisis

By Axel  Reiserer

The countries of central Europe and the Baltics (CEB) are enjoying an improvement in their outlook thanks to a stronger recovery in the eurozone and improving domestic demand.

The latest EBRD economic report, published today, sees average growth for the eight countries of the region at 2.3 per cent in 2014.

Nevertheless, the outlook is being dampened by the Russia-Ukraine crisis and its impact. The three Baltic states’ trade and investment linkages to Russia and Ukraine are significant, and financial contagion may deepen. Several central European countries are also dependent on Russia’s gas and oil. Greater risk aversion in bank and bond market funding is more likely to present a downside risk to growth this year.

Poland’s recovery continues to accelerate and the EBRD projections have been revised up to 2.8 per cent this year and next compared with the previous forecasts from January.

External demand is improving and very strong growth in real wages should lead to an expansion of private consumption. While the direct exposure through trade to either Russia or Ukraine remains relatively small, downside risks could materialise in terms of more adverse financing conditions for enterprises.

In Hungary the economy rebounded last year with growth of 1.1 per cent. While an underlying lack of investment demand remains, local currency lending picked up last September under the central bank’s “Funding for Growth” programme. The EBRD is raising its projections to 1.6 per cent this year and 1.2 per cent in 2015 due to stronger domestic demand.

After a significant slowdown in 2013, GDP growth in the Slovak Republic is expected to pick up markedly this year as domestic demand recovers. The EBRD lifted its forecast to 2 per cent growth in 2014 and 2.3 per cent next year. Industrial production has been boosted by robust results for manufacturing, stimulated by demand from Germany and domestically.

Lithuania and Latvia stood out in Europe in 2013 with 3.3 and 4.1 per cent growth, respectively. Private consumption was one of the main growth drivers and this trend is likely to continue, given increasing demand from the eurozone and recovering business sentiment. However, the economic performance of all three Baltic States is more directly exposed to trade with Russia than in other central European countries.

Croatia remained in recession in 2013 with real GDP dropping by 1.0 per cent and the outlook remains negative with an expected contraction of 0.5 per cent due to depressed investment and credit. The recovery is expected to begin in 2015 on the back of an improved external environment and the absorption of some EU structural and cohesion funds.

After two years of recession the year-on-year growth rate in Slovenia turned positive in the last quarter of 2013, although the economy contracted by 1.1 per cent overall. As corporate deleveraging and bank restructuring continue, growth is unlikely to resume with much momentum for the time being. However, this process is necessary to lay the foundations for a resumption of growth which is expected to reach 1.0 per cent in 2015.

Read the full Regional Economic Prospects - May 2014 (944KB - PDF)