EBRD sees Eurozone recovery boosting growth in Central Europe & Baltics

By bne IntelliNews May 14, 2015

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The recovery in the Eurozone, the European Central Bank's quantitative easing programme and low oil prices should help push the economies of Central Europe and the Baltic states towards growth of 3% this year, the European Bank for Reconstruction and Development (EBRD) says in a new report raising its growth outlook on the region. 

The Regional Economic Prospects report, released on May 14, points out however that risks remain, with volatility related to Greece and the Russia/Ukraine crisis still hanging over the region. The EBRD's new forecast of 2.9% growth in 2015 compares with a previous prediction of 2.6% made in January. For 2016, the report expects the region to achieve a 3% expansion overall.

Central Europe and the Baltic's close links the single currency area sees them leading the pack in the EBRD's region of coverage. That mainly reflects "the stimulus from the Eurozone monetary easing that has added to the earlier positive impact of lower oil prices," the report suggests.

Meanwhile, some other economies in the EBRD region, particularly in the former Soviet Union, are likely to feel the drag from the Russian recession.

"This is a very mixed picture," says the EBRD's 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."

Hungary and Poland lead the regional forecasts for 2015, with growth pitched at 3.6% and 3.4% respectively. It's little coincidence that both those countries have recently restarted monetary easing. 

"The monetary conditions in countries with close economic links with the eurozone have eased in the wake of the quantitative easing programme," the report notes. "This has also allowed countries with flexible exchange rates to ease their monetary policies."

However, in line with many, the EBRD expects Hungary to slow sharply next year as the state-led economic drive runs out of steam a little, and banks and investors remain wary of the country under the present government. While Poland should maintain growth at the same pace in 2016, Hungarian growth is seen dropping off to 2.6%.

Meanwhile, those inside the Eurozone will struggle to keep up, even though they should still see robust expansion thanks to increased demand out of the Eurozone for exports. Lithuania leads the group with a forecast of 2.9% growth for this year, followed by Latvia and Slovakia (both on 2.4%). Estonia, which has been struggling due to demographic issues recently, brings up the rear at 2.1%.

Aside from the ongoing issues surrounding Russia on those countries with stronger economic links - the greatest connections are seen in Poland and the Baltics - Greece poses the biggest risk to the region due to the potential instability it could cast on the Eurozone. 

Any volatility related to Greece could dampen the outlook, the EBRD warns. However, it says its 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.

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