11 November 2013

Regional Economic Prospects in EBRD Countries of Operations - Weak growth despite eurozone pick-up

The recovery in advanced economies, including the eurozone, has taken hold, although growth in emerging markets has slowed. On balance, the outlook for growth in the transition region has weakened further.

The region is now expected to grow at 2.0 per cent in 2013 compared with 2.7 per cent in 2012. The recovery in 2014 is also expected to be more modest than the May forecast suggested, with growth picking up only to 2.8 per cent. The current slowdown in the region is only partly cyclical. Many of its causes are structural, reflecting lower growth potential, limited sources of finance for investment and unfinished structural reforms, as highlighted in the forthcoming EBRD Transition Report 2013 entitled “Stuck in Transition?”

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Outlook

GDP growth in the transition region is projected to slow down from 2.7 per cent in 2012 to 2.0 per cent in 2013. It is then expected to recover modestly to 2.8 per cent in 2014. The forecast represents a further downward revision relative to EBRD's May forecast for 2013, which stood at 2.2 per cent. The forecast for 2014 has been also revised down by 0.4 percentage points. The revisions are largely driven by the worsening outlook for Russia and its knock-on effects in the EEC region and elsewhere. The deeper-than-expected slowdown in Poland and Egypt’s weak outlook also contribute to the overall deceleration.

The region will continue to operate in a weak (albeit slowly improving) external environment driven by the ongoing eurozone stress and economic deceleration in major emerging markets. The projection assumes a baseline scenario of continued slow and uneven recovery in the eurozone:

• Recent data suggest that the single currency area may be exiting recession, even though it is likely to record negative growth in 2013 as a whole. Various earlier policy decisions have reduced the probability of a further substantial deterioration of the crisis.
• On the other hand, this effect may be largely offset by the continued deceleration in major emerging markets. Growth in China slowed down to 7.7 per cent year-on-year in the first three quarters of 2013 and is widely expected to decelerate further as the authorities put an increased emphasis on rebalancing of the economy away from strong reliance on investment and net exports and towards domestic consumption.

Under such a scenario, the eurozone recession may have already bottomed out and the negative impact of the eurozone crisis on the transition region should continue to decrease in magnitude through the export channel, remittances channel as well as its impact on cross-border lending. The more stable markets already appear to have contributed to stronger investor confidence in the new EU Member States during the episode of sell-off of emerging market assets in May-July of this year...

Risks to the outlook

The economic outlook in the region remains highly dependent on the developments in the eurozone. The downside external scenario has remained largely unchanged since October 2011, but is now perceived to be less likely. In this scenario, the crisis would engulf larger members of the single currency area, resulting in insolvencies of several major banks in Europe. In response to these events, parent banks would accelerate withdrawal of funding form the region, exacerbating the credit crunch and triggering recession in much of the emerging Europe.

While this scenario appears less likely, the risks of faster deceleration in China, and in large emerging markets more generally, have increased. The growth rate of the Chinese economy decelerated from 8-10 per cent over the past decade to 7.7 per cent in the first three quarters of 2013 and concerns are growing about rapid expansion of bank and non-bank credit since 2009 and the underlying quality of assets of financial institutions. A marked deterioration of the situation in the eurozone or a hard landing in China would likely result in prolonged market turmoil and significant negative spill-overs for the global economy, leading to a lower growth in advanced and emerging economies, as well as a drop in commodity prices.

In addition, risks of a fiscal impasse in the United States remain. While the government shutdown in October was limited to two-and-a-half weeks and the debt ceiling has been temporarily lifted, the bill signed on 17 October only covers a few months until February 2014 and fundamental disagreements over the extent and composition of fiscal adjustment remain to be resolved. A new impasse could have a profound effect on world’s financial markets given the special role US Treasuries play internationally.

Full report

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See also: Poland's economy set for recovery - EBRD-raises country forecast for 2014 slightly

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