Emerging economies more exposed to external risks, but better prepared to address them
Economic growth in the EBRD regions is broadly expected to track the global economy lower in 2019, before a likely upturn in 2020, when Turkey should return to positive territory following a contraction this year.
The EBRD’s latest economic outlook has revised down predictions for 2019. It now expects average growth across the EBRD economies of 2.3 per cent, a 0.3 percentage point cut from the previous November forecast, and compared with 3.4 per cent expansion in 2018. It forecasts a recovery to 2.6 per cent in 2020.
The report also says EBRD countries have become more exposed to external shocks because of greater integration with the global economy. At the same time, countries are now better equipped to deal with such shocks because they have taken steps to increase their economic resilience.
The EBRD expects growth in 2019 to moderate across virtually all the EBRD regions, with the exception of the southern and eastern Mediterranean.
The report says the EBRD regions have been negatively affected by the considerable slowdown in global trade that emerged towards the end of 2018. Domestic demand has held up in most economies, with the notable exception of Turkey, where demand collapsed in the second half of 2018.
This EBRD’s downward revision to overall growth forecasts primarily reflects the expected slowdown in Turkey.
The report says Turkey’s recovery from an expected 1.0 per cent economic contraction in 2019 is likely to be gradual. The lira’s depreciation and high interest rates will continue to dampen consumption and investment, although net exports should make a positive contribution to growth. Growth of around 2.5 per cent is expected in 2020.
Spillovers from the sharp deceleration of growth in Turkey to the economies in the EBRD regions are expected to be limited in the light of relatively modest economic linkages via trade, cross-border investment and remittances.
Growth in central Europe and the Baltic States will moderate from 4.7 per cent in 2018 to 3.8 per cent in 2019 and 3.2 per cent in 2020, with key risks tilted to the downside in the light of slowing growth in advanced Europe.
Growth is also expected to slow in south-eastern Europe, to around 3.0 per cent in both 2019 and 2020, from 3.4 per cent in 2018. Growth in Romania will likely moderate from close to 7 per cent in 2017 and 4.1 per cent in 2018 to 3.2 per cent in 2019 and 2020, reflecting an increased perceived investment risk, tighter monetary policy and growing external imbalances.
The recovery in Greece is expected to continue, with growth projected to rise to 2.2 per cent in both 2019 and 2020, after a 1.9 per cent growth rate? in 2018.
In Eastern Europe and the Caucasus, average growth will likely fall from 3.0 per cent in 2018 to 2.8 per cent in 2019.
In Ukraine, a deceleration of growth in key trading partners and domestic political uncertainties due to twin elections are expected to cause a temporary slowdown in growth to 2.5 per cent in 2019, from 3.3 percent in 2018.
Reforms and monetary policy easing are expected to support growth, with a recovery to 3.0 per cent expected in 2020.
Russia’s growth is projected at 1.5 per cent in 2019, down from a previous 2.3 per cent, as higher interest rates, an increase in the rate of the value added tax and rising inflation hold down household consumption growth, and a stricter sanctions regime constrains private investment.
An agreement with OPEC that foresees reduced oil exports could also affect Russia’s economic growth. An upturn is expected in 2020, driven partly by an ambitious investment plan announced for the period 2019-2024.
Growth in Central Asia is also forecast to slow, from 4.8 per cent in 2018 to 4.4 per cent in 2019 and 4.2 per cent in 2020 due to slower growth in mining output.
In contrast, growth in the southern and eastern Mediterranean region is projected to pick up from 4.4 per cent in 2018 to 4.6 per cent in 2019, supported by the roll-out of reforms aimed at improving the business environment and boosting domestic and foreign investment.
Robust economic growth in Egypt is expected to continue, supported by the sustained recovery in tourist arrivals and exports, large public construction projects, higher natural gas production and various reforms.
EBRD Economies: More exposed – Better prepared
The EBRD report makes clear that the greater integration of EBRD economies into the global economy is a double-edged sword. On the positive side, integration has provided access to capital, generated employment, facilitated knowledge sharing and boosted productivity growth.
However, it has increased the sensitivity of economies to changes in external demand conditions, for example to slower manufacturing growth in western Europe. “In sum, a slowdown in global growth presents significant risks to the outlook for growth in the EBRD regions.”
EBRD countries have taken steps to deal with the challenges of greater integration by preparing their economies to deal more effectively with exogenous shocks.
EBRD economies are making better use of flexible exchange rates and inflation targeting to respond to external and domestic shocks, and are using fiscal policy as a counter-cyclical tool.
Change in forecast
|(as May 2019)|
|Central Europe and the Baltic states||4.4||4.7||3.8||3.2||0.3|
|Bosnia and Herzegovina||3.2||3.1||3.0||3.0||-0.5|
|Eastern Europe and the Caucasus||2.4||3.0||2.8||3.0||-0.4|
|Southern and eastern Mediterranean2||3.8||4.4||4.6||5.1||-0.1|
|EBRD Excl Turkey||3.1||3.5||3.0||3.1||0.0|