The economies of the EBRD region are expected to contract on average by about 5 per cent in 2009 after growth of over 4 per cent in 2008 and almost 7 per cent in 2007, according to latest forecasts from the EBRD’s Office of the Chief Economist.
The global economic crisis, which initially had an immediate impact on the financial sector, is now severely affecting the corporate sector, leading to large declines in output in late 2008 and in the first quarter of this year. It has also started to depress domestic consumption.
"There are downside risks to these predictions. But now there is also upside potential. Our underlying outlook assumes continued external engagement, particularly from the western parents of banks in the region," said EBRD Chief Economist Erik Berglof.
EBRD forecasts see the economies of central Europe and the Baltics slowing by about 3 per cent, after growth of 3.4 per cent in 2008, as double digit declines in the Baltic countries and a severe recession in Hungary are partly offset by about flat growth in Poland, which is expected to benefit from comparatively stable domestic demand.
The recession has also caught up with the economies of south-eastern Europe (SEE), many of which were still growing strongly the second half of last year. After a large output decline in the fourth quarter, the Romanian economy is expected to continue contracting over the course of this year, with a total output decline of 4 per cent relative to 2008. In other SEE countries, somewhat milder contractions are expected, with a similar regional average as in central Europe and the Baltics.
In eastern Europe and the Caucasus, the ongoing contraction is even sharper, due in part to more fragile financial systems and in part to greater dependence on commodities, which have suffered severe price and volume declines since the middle of last year. Ukraine in particular has experienced a triple blow, with much lower steel export prices and volumes, higher energy import prices, and a sharp reduction in external financing. We expect real GDP in Ukraine to be around 10 per cent lower in 2009 compared to 2008.
Russia has suffered large output declines in the final months of 2008 and the beginning of this year. Based on government estimates suggesting an extraordinarily severe year-on-year GDP reduction in the first quarter, the EBRD is now projecting an annual contraction of 7.5 per cent in 2009, as a large decline in the first half of the year is in part offset by a rebound in the second half, driven by the government’s fiscal stimulus package. This forecast is exceptionally uncertain, and may be revised once final Q1 GDP numbers are published.
We are also projecting a large year-on-year GDP decline for Turkey in 2009, driven mostly by a very large decline in output in the last quarter of 2008, which continued in the first quarter of this year
The financially less integrated countries of central Asia are holding up better, with lower but still positive growth expected in most countries. The main exception is Kazakhstan, which is suffering a banking crisis and for which we are projecting a 2009 output decline of about 2 per cent.
Common to most of these forecasts is the view that the two worst quarters, in terms of quarter-on-quarter output declines, are behind us at this point. We still predict continuing output declines in most economies for the remainder of this year, but at far milder rates. In addition, some economies – particularly those with large fiscal stimulus packages – are expected to temporarily rebound in the second half. However, growth is generally expected to be flat or very weak in the first half of next year, as credit growth remains curtailed by high non-performing loans and bank deleveraging, and external demand remains weak.
A sustainable, gradual recovery is assumed to set in only the second half of 2010, in line with slowly improving external conditions. For the region as a whole, 2010 growth is assumed to be in the order of 1.4 percent, with growth of 1.3 percent seen in eastern Europe and the Caucasus, 3 percent in central Asia, but weaker growth in central Europe and the Baltic states of 0.2 percent and 0.4 percent in south-eastern Europe. Growth in Russia in 2010 is seen at 2.5 percent.
There are both downside and upside risks to this outlook.
On the downside, the peak in non-performing loans, which have been on the rise in the last few months, is still ahead of us, as is the peak in unemployment. As both rise, this could not only accelerate the pace of the credit contraction but also exert significant stress on banking systems. This will be difficult to tackle without additional external support, including from the international parent banks of local subsidiaries. If the requisite external financing is not forthcoming, this could result in a number of banking and currency crises, setting off a second wave of sharp output declines a few quarters from now.
On the upside, the pace of output declines has generally slowed in recent months, and there have even been month-on-month increases in industrial production in some countries. At the same time, confidence indicators have begun to turn around in most countries where they are available, and financial markets have begun to recover both globally and regionally. If these effects take hold, they could lead to a virtuous circle of improving confidence, higher asset values, and domestic spending and recovering external demand, which could partly or wholly offset the adverse effects of higher non-performing loans on credit availability and economic activity.