Recovery in south-eastern Europe affected by Russia-Ukraine crisis

By Viktorija Melohina

The economies of south-eastern Europe are continuing to recover, but growth this year and next will remain modest, and a number of countries will feel the adverse impact of the crisis in Ukraine and Russia.

The latest economic report from the EBRD, published today, predicts average growth across south-eastern Europe of 2.2 per cent in 2014 and 2.4 per cent in 2015.

The forecast for Serbia has been revised down to 1.0 percent for this year from 1.3 per cent in January and the report refers specifically to the country’s important trade and investment links with Russia. Serbian growth will also be affected by the likelihood of significant spending cuts announced by the new government elected in March. Fiscal tightening is now essential and will constrain growth in the next two years, with exports continuing to be the main growth driver in 2014.

Romania’s economy is continuing to accelerate and the EBRD has revised its economic projection up to 2.6 per cent in 2014, from the January forecast of 2.4 percent and it sees growth of 2.8 per cent next year. The main drivers are exports and a pick-up in domestic demand. However, the high level of non-performing loans (over 20 per cent of total loans), continuing cross-border deleveraging and increased uncertainties in neighbouring Ukraine, may weigh on growth prospects in the near term.

Growth in Bulgaria is strengthening, and the economy is likely to expand by 1.9 per cent this year and 2.0 per cent in 2015 on the back of an expected improvement in exports and some recovery in domestic private consumption.

Growth in Bosnia and Herzegovina is likely to increase this year and next to 2.0 percent due to big infrastructure investments and a further improvement in exports, but downside risks, both internal and external, remain considerable. The authorities remain committed to reforms agreed under the IMF Stand-By Arrangement, approved in September 2012 and recently extended into 2015. However, political stalemate has held back necessary structural reforms.

Economic activity has picked up in Montenegro. However, the country is still suffering from a high current account deficit and rising public debt. Growth in 2014 is forecast at 3.0 per cent, an increase from January’s projection, on account of the improvements in external demand, as well as the progress in several major infrastructure projects, but downside risks remain large.

The Macedonian economy performed well in 2013, benefiting mainly from a strong rise in investments. The country continues to make strong efforts to attract much-needed foreign direct investment (FDI), and these efforts should maintain positive growth prospects in the coming years. The EBRD expects growth of 3.0 per cent this year and 2.5 per cent in 2015.

Albania will see a modest upturn in 2014-2015, with growth of 1.7 and 2.0 per cent, respectively. The economy has been supported by a new agreement with the IMF. With the help of the World Bank, Albania is also taking steps to deal with high levels of non-performing loans and weak credit growth.

Kosovo remains the poorest country in the region with unemployment and poverty at elevated levels. However, growth is accelerating, supported by strong remittance inflows and a pick-up in external demand. The overall macroeconomic environment is stable, with low inflation and fiscal deficit and modest levels of public debt. The Bank sees growth of 3.5 per cent in both 2014 and 2015, up from 2.5 per cent last year.

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