Central Europe and the Baltic states are set to see continuing but slowing growth and a drop in investment, the European Bank for Reconstruction and Development (EBRD) predicts in its latest economic forecasts released on November 3. The region benefits most from lower energy prices and the accommodative monetary policies of the Eurozone.
Growth across the EBRD region is expected to pick up in 2016 and 2017 despite continued major risks, the international institution suggests. 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, the report notes. 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.
Following GDP growth of 3.4% in 2015, the Central European and Baltic (CEB) region saw some deceleration in economic expansion, to 2.6%, in the first half of 2016. While the tightening labour markets have helped strengthen household consumption, investment is a real concern, dropping 4.6% in the first half, held back not just by the slump in EU funds, but also the effect on private investment of policy risk in Poland or financing issues in the likes of Latvia.
The EBRD’s growth expectations for this year have been revised downward to 2.7%, while in 2017 growth should pick up slightly, to 3%. Risks related to the UK leaving the EU, which may materialise through significant trade links with the Eurozone, may weigh on these developments, the lender warns.
Hungary’s economic growth decelerated to 3.1% in 2015 and has seen a further slowdown – to 2% - in the first half of 2016. This was driven by a 15% annual drop in investments by mid-2016, largely due to weak EU fund inflows. Meanwhile, private consumption strengthened further this year, supported by an increase in real wages and improving market conditions.
Investment activity is expected to gain momentum from next year, due to government fiscal stimuli, accelerated disbursement of EU funds and an increase in FDI inflows, partially linked to factory expansion projects of Audi and Mercedes. The EBRD’s growth projection for this year has been slightly lowered to 2% - from 2.1% forecasted in May – while the expectations for next year remained unchanged at 2.4%.
In Poland, economic growth is expected to pick up speed from 2017 after disappointing in 2016. Owing mainly to shrinking investment, GDP growth is expected at just 3% in 2016, before accelerating to 3.2% in 2017.
Faster economic expansion in the coming year will owe mainly to accelerating public investments co-financed by the European Union. Uncertainty regarding sectoral taxes and sweeping changes in the management of state-owned enterprises management should subside.
The main driver of growth in 2016 – private consumption supported by fast-growing real wages, record-low unemployment, and new child cash benefits – will remain a key driver in 2017 as well. Net exports and investment pose a risk to that outlook, the report cautions.
Slovakia registered the highest GDP growth in the CEB region at 3.6% in the first half of 2016. In contrast to its regional neighbours, investment growth in Slovakia remained positive, which was partially driven by robust private sector investment, such as the starting of projects in the automotive industry.
Strong household consumption is expected to remain the key engine of growth, supported by rising disposable incomes and improvements in the labour market. Public investment is expected to accelerate only from next year, though it is conditioned on the rate of EU funds absorption, which saw some delays during the execution of the past budget. Growth expectations for this year and next remain unchanged at 3.2%.
The EBRD’s projections of economic growth in the Baltic states were all revised from previous forecasts. Lithuania is thought likely to grow the fastest in 2016, with GDP expanding 2.6%, albeit a revision from 3% compared with the May forecast. Latvia is expected to grow 2.2%, a major reduction from 3.1%, while the Estonian growth is now predicted at just 1.6%, down from 2.4%.
While GDP is forecast to gain momentum in 2017, the EBRD has also cut projections by 0.2pp for each Baltic economy next year. Latvia is expected to grow 3.1%, while Lithuanian GDP should expand 2.9% and Estonia’s by 2.4%.
“The anticipated faster Eurozone recovery and a greater number of investments co-financed by the EU will likely provide an additional boost,” the EBRD notes.
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