US monetary tightening to cast shadow from next year
The outlook for economies in central and south eastern Europe is improving on the back of eurozone monetary easing but prospects further to the east of the transition region have worsened, as the impact of Russia’s recession intensifies.
The EBRD’s latest Regional Economic Prospects report predicts overall stagnation in 2015 across all 35 countries covered and meagre expansion of just 1.4 per cent in 2016.
But this outlook masks stark regional differences.
“This is a very diverse picture,” said acting Chief Economist Hans Peter Lankes. “There is definitely scope for optimism especially in countries closely tied to the eurozone. But the Russian recession is cause for concern in many other economies.”
In Central Europe and the Baltics (CEB), forecasts for Poland, Slovenia, the Slovak Republic and Hungary have been revised up, mainly reflecting the stimulus from the eurozone monetary easing that has added to the earlier positive impact of lower oil prices.
The CEB region is expected to see growth of 2.9 per cent in 2015, compared with a January forecast of 2.6 percent. Expansion of 3.0 per cent is seen for 2016.
Economic convergence with more advanced countries is set to continue in earnest, the report said.
Quantitative easing (QE) by the European Central Bank (ECB), the weaker euro and lower oil costs are also benefiting economies in south-eastern Europe. QE has allowed easier monetary conditions in countries with close economic ties to the eurozone.
However, any volatility related to Greece could dampen the outlook. Countries in the southern and eastern Mediterranean have also been aided by cheaper oil and by improving confidence in the region's largest economy, Egypt.
In contrast to the recent launch of monetary easing in the eurozone, a tightening of monetary conditions in the US, now widely expected for early next year, will put increasing pressure on emerging markets that are dependent on capital inflows and have high dollar denominated refinancing needs.
At the same time, the deep recession in the Russian economy is having larger-than expected negative spill over effects on countries with which it has strong economic links.
The impact of the Russian downturn has worsened the outlook for eastern Europe and the Caucasus and for Central Asia.
Russia itself is expected to suffer a significant recession with the economy shrinking by 4.5 percent in 2015 and by close to two per cent in 2016. The country may face a protracted period of slow growth or stagnation. Low oil prices and sanctions have taken their toll on an already weak economy with deep-seated structural problems.
In Ukraine, the economic disruption in the east of the country, the negative impact of the depreciation of the hryvnia, tight economic policies, energy tariffs hikes and a continued contraction of credit are expected to maintain pressures on the economy this year.
GDP is now expected to shrink by 7.5 per cent this year – a worsening of the outlook since January, when a five per cent contraction was forecast.
Assuming that the security situation does not deteriorate, that the IMF programme remains on track and other significant risks do not materialize, Ukraine is likely to register a recovery of around 3 per cent in 2016. Faster and successful reforms and abatement of the geopolitical risks may improve the growth outlook.
Growth in Georgia is expected to decelerate to 2.3 per cent in 2015 and 2.6 per cent in 2016. Belarus remains under major financial stress, with the forecast revised down to show a contraction of 2.5 per cent on current policies and stagnation in 2016 in the absence of any significant economic reforms.
The most tangible impact of the Russian recession is in remittances home which are continuing to decline at an alarming rate.
The return of hundreds of thousands of migrant workers to Tajikistan and Uzbekistan and in significant numbers to the Kyrgyz Republic is proving to be a major economic and social challenge. Growth prospects in Kazakhstan and Turkmenistan are being negatively affected by lower commodity prices.
In Turkey, which last year became the largest single recipient of EBRD investment, growth will remain broadly unchanged at 3 per cent in 2015 and 2016, significantly below the country’s long-term potential.
Turkey is a specific example of a country caught in the cross currents of diverging monetary policies in the Eurozone and the US. Turkey’s competitiveness with the Eurozone would be squeezed while its borrowing costs and pressures for capital outflows would increase as US monetary policy tightens.
Greece, the EBRD’s newest recipient country, has been badly hit by fears that the country may default on its external debt obligations and even exit from the eurozone.
The EBRD’s base case scenario is that Greece will "muddle through", avoiding drastic policy moves and with just enough reforms to start growing and securing the continued support of the international community.
| Actrual | Current | Current | EBRD Forecast in January 2015 | ||
|---|---|---|---|---|---|
| 2014 | 2015 | 2016 | 2015 | Change Jan.-May | |
| Central Europe and the Baltic states | |||||
| Croatia | -0.4 | 0.5 | 0.5 | 0.5 | 0.0 |
| Estonia | 2.1 | 2.2 | 3.0 | 2.2 | 0.0 |
| Hungary | 3.6 | 2.6 | 2.3 | 2.4 | 0.2 |
| Latvia | 2.4 | 2.3 | 3.1 | 3.0 | -0.7 |
| Lithuania | 2.9 | 2.7 | 3.2 | 3.2 | -0.5 |
| Poland | 3.4 | 3.4 | 3.4 | 3.0 | 0.4 |
| Slovak Republic | 2.4 | 2.8 | 3.3 | 2.6 | 0.2 |
| Slovenia | 2.6 | 2.0 | 2.3 | 1.6 | 0.4 |
| Average* | 3.0 | 2.9 | 3.0 | 2.6 | 0.3 |
| South-eastern Europe | |||||
| Albania | 1.9 | 2.5 | 3.0 | 2.5 | 0.0 |
| Bosnia and Herzegovina | 1.3 | 2.5 | 3.0 | 2.7 | -0.2 |
| Bulgaria | 1.7 | 1.0 | 1.5 | 0.8 | 0.2 |
| Cyprus | -2.3 | 0.5 | 1.5 | 0.7 | -0.2 |
| Greece | 0.8 | 0.0 | 2.0 | n/a | |
| FYR Macedonia | 3.8 | 3.5 | 3.7 | 3.5 | 0.0 |
| Kosovo | 1.0 | 2.5 | 3.5 | 3.5 | -1.0 |
| Montenegro | 1.5 | 3.0 | 3.7 | 3.0 | 0.0 |
| Romania | 2.8 | 3.0 | 3.2 | 2.8 | 0.2 |
| Serbia | -1.8 | 0.3 | 1.8 | 0.5 | -0.2 |
| Average* ( excl Cyprus and Greece) | 1.9 | 2.3 | 2.8 | 2.2 | 0.1 |
| Average ( incl Cyprus and Greece) | 1.3 | 1.3 | 2.4 | ||
| Eastern Europe and the Caucasus | |||||
| Armenia | 3.4 | -1.5 | 1.0 | 0.0 | -1.5 |
| Azerbaijan | 2.8 | 1.5 | 1.5 | 1.5 | 0.0 |
| Belarus | 1.6 | -2.5 | 0.0 | -1.5 | -1.0 |
| Georgia | 4.8 | 2.3 | 2.6 | 4.2 | -1.9 |
| Moldova | 4.6 | -2.0 | 1.5 | 0.0 | -2.0 |
| Ukraine | -6.8 | -7.5 | 3.0 | -5.0 | -2.5 |
| Average* | -1.3 | -3.3 | 1.8 | -1.8 | -1.5 |
| Turkey | 2.9 | 3.0 | 3.0 | 3.0 | 0.0 |
| Russia | 0.6 | -4.5 | -1.8 | -4.8 | 0.3 |
| Central Asia | |||||
| Kazakhstan | 4.3 | 1.5 | 2.0 | 1.5 | 0.0 |
| Kyrgyz Republic | 3.6 | 3.0 | 3.1 | 3.2 | -0.2 |
| Mongolia | 7.8 | 4.0 | 3.0 | 3.5 | 0.5 |
| Tajikistan | 6.7 | 3.8 | 3.8 | 4.4 | -0.6 |
| Turkmenistan | 10.3 | 9.5 | 10.0 | 9.7 | -0.2 |
| Uzbekistan | 8.1 | 7.0 | 7.2 | 7.8 | -0.8 |
| Average* | 5.9. | 3.7 | 4.1 | 3.9 | -0.2 |
| Southern and Eastern Mediterranean | |||||
| Egypt | 2.2 | 4.0 | 4.2 | 3.8 | 0.2 |
| Jordan | 3.1 | 3.6 | 3.9 | 3.7 | -0.1 |
| Morocco | 2.1 | 4.6 | 5.0 | 4.6 | 0.0 |
| Tunisia | 2.3 | 2.8 | 3.6 | 3.0 | -0.2 |
| Average | 2.2 | 4.0 | 4.3 | 3.9 | 0.1 |
| Average EBRD region (incl Cyprus and Greece)* | 1.9 | 0.0 | 1.4 | -0.1 | 0.1 |
| Average EBRD region (excl Cyprus and Greece)* | 1.9 | 0.0 | 1.4 | ||
| Average_commodity exporters* | 1.3 | -3.3 | -10 | -3.0 |
0.3
|
| Average_commodity importers | 2.2 | 2.3 | 3.1 | 2.0 | -0.3 |
*EBRD forecasts as of 15 May 2015; in per cent
* Weighted averages. The weights used for the growth rates are WEO estimates of nominal dolar-GDP for 2014.
**Weighted averages do not include Czech republic, for which EBRD no longer produces a forecast.
***EBRD figures and forecasts for Egypt's real GDP reflect the fiscal year, which runs from July to
June. These are also used in the regional average.
****Commodity exporters include: Azerbaijan, Russia, Kazakhstan, Mongolia and Turkmenistan.
