War in Ukraine and inflation slow growth in EBRD regions

By Marcus  Warren

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  • 2022 forecast revised down by 0.6 percentage points on projections in March
  • This year’s forecast for Ukraine is now negative growth of 30 per cent
  • Inflation reaching levels not seen since the 2008 financial crisis

The European Bank for Reconstruction and Development (EBRD) is predicting a greater economic slowdown and more inflationary pressure in its regions as a result of the war on Ukraine.

The Bank’s new research also suggests that Ukraine’s economy will shrink even more than was forecast earlier in the conflict.

According to the EBRD’s latest Regional Economic Prospects report, published today, output across its regions is still expected to grow by 1.1 per cent this year. But this amounts to a 0.6 percentage point downwards revision when compared with forecasts released as recently as late March.

Growth in these regions will recover to 4.7 per cent in 2023 but this still reflects another revision downwards - of 0.3 percentage points - since earlier in the spring.

The 2022 forecast for the Ukrainian economy is now for negative growth of 30 per cent. The projection at the end of March was minus 20 per cent.

GDP growth in Ukraine is forecast to bounce back to 25 per cent next year but this assumes that substantial reconstruction work is by then already underway. How long the hostilities last, the shape of any post-war settlement, the extent of reconstruction and how many refugees return home will also influence the recovery’s speed.

All forecasts for this year and next are vulnerable to major downside risks in the event that the scale of the war expands or the flow of exports of gas or other commodities from Russia is more restricted.

Should gas supplies be further disrupted, for example, output per capita in the EBRD regions in 2022 could be 2.3 per cent lower than the baseline scenario and 2 per cent lower in 2023.

EBRD Chief Economist Beata Javorcik said: “Only last November we were predicting growth of 3.8 per cent across our regions for this year. But at the time we described last year’s recovery and its momentum into 2022 as bitter sweet, tainted by worries over high commodity prices.

“The situation now is more concerning still, with new rises in food and energy prices, driven by Russia’s war on Ukraine, further stoking inflation.

“And, as we well know, poorer households suffer even higher rates of inflation than others because food and energy account for a larger share of their domestic budgets.”

The new Regional Economic Prospects projections paint a picture of the countries where the EBRD invests buffeted by the return of runaway prices, with, in March, average inflation reaching 11.9 per cent, close to the figure last recorded in the midst of the financial crisis in late 2008.

Oil prices are elevated and gas prices in Europe are above historical highs and around four times the level in the United States, putting European producers at a disadvantage.

Prices of wheat, corn, soybeans and other agricultural commodities have also risen rapidly.

Many economies in the EBRD regions are highly dependent on gas in their energy mix, while some economies in the Caucasus and southern and eastern Mediterranean rely heavily on wheat imports and have historically sourced wheat from both Russia and Ukraine.

Besides the impact of high food, energy and metals prices, some economies in the EBRD regions are also vulnerable thanks to trade, tourism and migration-remittance links to Russia.

Russia is an important trade partner for some economies in the Caucasus and to a lesser extent in the Baltics and Central Asia.

Central Europe is also closely integrated with Ukraine through their shared manufacturing supply chains.

Economies in Central Asia are vulnerable to drops in remittances from Russia, as migrants return home, the rouble faces limited convertibility and flight connections are reduced.

In 2019, spending by Russian tourists amounted to between 1 and 2 per cent of GDP in Estonia, Montenegro, and the three Caucasus countries.

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Table 1. GDP growth in real terms

  Actual Forecasts Revision since 
        Mar'22 Nov'21
  2019 2020 2021 2022 2023 2022 2023 2022
EBRD regions 3.4 -2.5

6.7

1.1 4.7 -0.6 -0.2 -3.1
                 
Central Europe and the Baltic States 4.0 -3.7 5.5 3.2 3.4 -0.2 -0.8 -1.5
Croatia 3.5 -8.1 10.4 3.0 3.5 -0.2 -0.5 -1.2
Czech Republic 3.0 -5.8 3.3 2.5 3.5 -0.5 -0.5 -2.1
Estonia 4.1 -3.0 8.3 1.5 2.5 -0.5 -0.5 -2.5
Hungary 4.6 -4.5 7.1 3.5 3.5 0.0 -1.0 -1.3
Latvia 2.5 -3.8 4.7 1.5 2.0 -0.5 -0.5 -4.0
Lithuania 4.6 -0.1 5.0 2.0 3.0 -0.5 -0.5 -2.0
Poland 4.7 -2.5 5.7 4.0 3.5 0.0 -1.0 -0.8
Slovak Republic 2.6 -4.4 3.0 2.0 3.5 -0.5 -0.5 -3.0
Slovenia 3.3 -4.2 8.1 3.5 3.0 -0.1 -0.8 -1.0
                 
South Eastern EU 3.3 -5.8 6.6 2.6 3.2 -0.2 -0.7 -1.6
Bulgaria 4.0 -4.4 4.2 2.5

3.0

-0.3 -0.6 -1.9
Greece 1.9 -9.0 8.3 2.9 3.5 0.0 0.0 -1.0
Romania 4.2 -3.7 5.9 2.5 3.0 -0.3 -1.2 -1.9
             
Western Balkans 3.7 -3.1 7.5 3.2 3.6

0.1

0.0 -0.8
Albania 2.1 -3.5 8.5 3.0 3.3 -0.3 -0.2 -0.7
Bosnia and Herzegovina 2.8 -3.1 7.1 3.0 3.0 0.7 0.0 0.0
Kosovo 4.8 -5.3 10.5 4.0 4.0 0.0 0.0 -0.5
Montenegro 4.1 -15.3 12.4 3.7 4.5 0.0 0.5 -2.0
North Macedonia 3.9

-6.1

4.0 3.0 3.0 0.0 0.0 -1.0
Serbia 4.3 -0.9 7.4 3.3 4.0 0.0 0.0 -1.0
                 
Eastern Europe and the Caucasus 3.5 -4.4 4.9 -18.4 17.5 -6.6 1.3 -22.1
Armenia 7.6 -7.4 5.7 1.5 4.0 0.0 0.0 -3.8
Azerbaijan 2.5 -4.2 5.6 4.5 2.5 -0.5 0.0 1.3
Georgia 5.0 -6.8 10.4 3.0 5.0 1.0 0.5 -2.5
Moldova 3.7 -7.4 13.9 1.0

3.5

-1.0 0.0 -3.0
Ukraine 3.2 -3.8 3.4 -30.0 25.0 -10.0 2.0 -33.5
                 
Turkey 0.9 1.8 11.0 2.0 3.5 0.0 0.0 -1.5
                 
Central Asia 5.1 -0.5 5.0 3.1 3.7 -0.1 0.0 -1.6
Kazakhstan 4.5 -2.6 4.0 2.0 2.5 0.0 0.0 -1.8
Kyrgyz Republic 4.6 -8.6 3.6 1.0 4.0 0.0 0.0 -4.0
Mongolia 5.6 -4.6 1.4 3.5 7.0 -2.5 0.0 -3.0
Tajikistan 7.4 4.4 9.2 3.0 5.0 0.0 0.0 -3.2
Turkmenistan 6.3 5.9 6.2 6.0 5.5 0.0 0.0 0.5
Uzbekistan 5.7 1.9 7.4 4.0 5.0 0.0 0.0 -2.0
                 
Southern and eastern Mediterranean  4.1 -1.9 6.0 2.5 4.8 0.0 0.1 -1.8
Egypt 5.7 1.5 7.2 3.1 6.0 0.0 0.0 -1.9
Jordan 2.0 -1.6 2.2 1.9 2.5 0.0 0.0 -0.3
Lebanon -6.9

-25.9

-10.0 1.0 3.0 0.0 3.0 -2.0
Morocco 2.6 -6.3 7.4 1.2 3.0 0.0 0.0 -2.0
Tunisia 1.3 -8.6 3.5 2.0 2.5 -0.7 0.0 -1.3
                 
Memo Egypt (fiscal year to June) 5.6 3.6 3.3 5.7 5.0 0.0 0.0 0.8
Memo: EEC excl. Ukraine 3.9 -5.6 7.7 3.3 3.4 -0.2 0.1 -0.8  

Memo: Belarus

1.2 -0.9 2.3 -4.0 0.0 -1.0 0.0 -4.2
Memo: Russia 1.3 -3.0 4.8 -10.0 0.0 0.0 0.0 -13.0
   

 

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