Regional Economic Prospects: Russia and Greece begin recovery; Ukraine, Moldova back to growth; Brexit sends capital eastwards. Growth across the EBRD region is expected to pick up in 2016 and 2017 despite continued major risks, according to the Bank’s latest economic forecasts published today.
Depressed commodity prices and security concerns are putting a brake on growth in some countries while geopolitical tensions and weakness of global trade continue to weigh on others. Meanwhile, the British vote to exit the European Union, while raising questions about the impact on growth in the eurozone, has had a positive short-term effect on capital flows to emerging markets.
The EBRD region, which stretches from southern and eastern Mediterranean countries to eastern Europe and Central Asia, is forecast to grow, on average, at 1.6 per cent this year (an upward revision of 0.2 percentage points since the previous EBRD forecast in May) and 2.5 per cent next year, compared with 0.5 per cent growth in 2015.
The GDP growth forecast for each country and regional averages are given in a table at the end of this press release. The full Regional Economic Prospects report, which includes macroeconomic snapshots and outlooks for each country, will be available on ebrd.com at 13:30 GMT 3 November 2016. The outlook is explained by EBRD Chief Economist, Sergei Guriev, in videos in English and Russian which will appear on the EBRD’s YouTube channel.
Outlook
Russia and Greece are emerging from recession. Both economies shrank in the first half of the year, so there is still no growth in average numbers for 2016, but estimates indicate that Greece has just passed the turning point and Russia is close to it. Russia’s economy will still contract on average this year but gradual recovery is expected to take hold in the second half of 2016 and continue into 2017. Greece will move from last year’s recession to zero growth for 2016, and then to positive growth in 2017.
South-eastern Europe as a whole is on the rise. Greece is turning around thanks to a good season for tourism, and the return of business confidence. Serbia and Romania are pushing up the growth average. Cyprus is continuing the upward trend of 2015. FYR Macedonia has been negatively affected by a political crisis.
Turkey will grow at a slower pace in 2016 than in 2015. After a turbulent summer, which saw ratings downgrades and a drop in equity markets after the failed coup, a pick-up in consumption and tourism (provided that security concerns subside) is expected to prop up growth, but rising oil prices and regional tensions remain a risk.
Ukraine and Moldova are back in the black. Ukraine returned to growth in the first half of 2016, after the economy shrank by a total of 16 per cent in the previous two years. Non-performing loans (NPLs) remain an acute problem in Ukraine. Moldova’s modest growth is backed by household consumption.
Recessions in Azerbaijan, hit by oil prices, and Belarus, which is suffering from the recession in Russia for the second year, will mean an average contraction in eastern Europe and the Caucasus in 2016. But the pace of decline is slowing, and national currencies have somewhat stabilised. Both Azerbaijan and Belarus are expected to return to growth in 2017.
Central Europe and the Baltic states see continuing but slowing growth and a drop in investment. The region benefits most from lower energy prices and the accommodative monetary policies of the eurozone.
The report sees a mixed picture in Russia. Some sectors like agribusiness and chemicals have benefited from currency depreciation but the long-term import substitution effects are uncertain. Capital outflows are subsiding and international borrowing is on the rise. But domestic demand and corporate investments continued contracting in 2016. Monetary policy is focusing on combating inflation, and fiscal policy on containing the budget deficit.
Central Asia is slowing down. The region, where some countries depend on commodities and others on remittances from commodity-rich neighbours, is continuing to feel the impact of lower commodity prices, exacerbated by shaky investor confidence. Remittances from Russia have stabilised in local currency terms, but not in US dollar terms. NPLs have shot up in Tajikistan. Growth there may pick up thanks to higher oil prices and major projects in the extractive sector.
Egypt, Morocco, Jordan and Tunisia – the southern and eastern Mediterranean region of the EBRD – will see average growth in 2016 marginally improved. But while economic performance is stronger in Egypt, growth rates in Morocco, Jordan and Tunisia have been revised downwards. A decline in tourism due to security concerns is a common factor in these otherwise disparate economies.
See detailed regional forecasts, as well as a snapshot of each country’s macroeconomic performance and outlook, are available under embargo HERE. The publicly available report will appear on ebrd.com at 13:30 GMT 3 November 2016.
Oil price
A modest recovery of oil prices from the lows seen in the first quarter of 2016 have contributed to a stronger outlook in Russia. Yet energy and commodity prices remain low by recent standards, which is benefiting the new EU members.
Currencies of major oil producers in the region continue to move in line with oil prices.
Brexit
In the short term, the Brexit vote has boosted capital inflow into the EBRD region as investors have revised downwards their expectations of interest rate hikes in advanced markets and turned to emerging market economies in search of higher yields.
The UK’s trade with and investment in the EBRD region as a whole is relatively low, so any medium-term impact of Britain’s decision to leave the EU is mainly expected to be indirect. However, while indirect, it may be significant if a slowdown in the UK affects growth in the eurozone. Also, many nationals of eastern EU member states live and work in Britain, especially those from Lithuania and Latvia who account for up to 4 per cent of their home countries’ total populations. Whether they stay, rejoin the workforce back home or move to another EU economy depends on the exact nature of Brexit.
The UK’s exit from the EU may also result in reductions to the EU structural funds and pre-accession funds.