bne IntelliNews -

The pace of growth will vary across Southeast Europe in the next two years, with robust forecasts for Turkey and Romania lifting the regional average, while Serbia is only expected to emerge from recession in 2016, forecasts the International Monetary Fund (IMF).

In its latest World Economic Outlook issued on April 15, the IMF anticipates an improvement in growth in Southeast Europe, citing factors such as the rebuilding of Bosnia and Herzegovina and Serbia after widespread flooding in 2014, and higher employment elsewhere in the region.

The Emerging and Developing Europe region, which comprises five Southeast European countries - Bulgaria, Croatia, Romania and Serbia - as well as Hungary, Poland and Turkey, is expected to steadily increase GDP growth, from an average of 2.8% in 2014, to 2.9% in 2015 and 3.2% in 2016. This follows a weakening in economic activity in 2014.

However, this growth is largely driven by robust growth forecasts for Turkey and Poland, and to a slightly lesser extent Romania and Hungary.

In fact, the IMF lifted its forecast for Turkey to 3.1% this year, 10 basis points above the October 2014 forecast, as consumption will be boosted by lower energy prices. Stronger growth is also expected in the Euro area, Turkey’s largest export market.

The IMF projects Romania’s GDP growth to strengthen to 2.9% in 2016, from 2.7% in 2015. However, the forecast does not factor in the VAT rate cut for food, due to come into effect in June, or the much broader fiscal reform package planned for January 2016. The planned tax cuts could push growth above the IMF’s forecasts, though IMF officials have warned that they risk widening the fiscal deficit.

In Slovenia, which is included in the Advanced Europe region, growth is expected to gradually moderate from 2.6% in 2014 - when the rebound after two years of recession was driven by higher exports and public spending on EU-funded projects -  to 1.9% in 2016.

Elsewhere in the region, the outlook is less positive. Bulgaria’s GDP growth is expected to decline from 1.7% in 2014 to 1.2% in 2015 - well below the 2% forecast in the IMF’s October outlook - before making a partial recovery to 1.5% in 2016.

Bulgaria’s anaemic growth will be supported by private consumption and continued EU funds absorption, while net exports are expected to be neutral, IMF officials said following a visit to Sofia in March. At the same time, risks to Bulgaria’s outlook have increased. The fund called in March for prompt action to address institutional weaknesses exposed by the collapse of the country’s fourth largest bank Corporate Commercial Bank in 2014, and for the government to return to a prudent budget path.

The IMF forecasts only a modest recovery for Croatia and Serbia by 2016. The Serbian economy is expected to shrink 0.5% this year, following a 1.8% contraction in 2014 when the country was hit by the worst floods in its history. However, the report anticipates a recovery next year when the economy is expected to expand by 1.5%. Croatia also remains an under-performer in the Emerging and Developing Europe group, with its economy expected to grow 0.5% in 2015, before accelerating to 1% next year.

The World Economic Outlook also warns that risks for economies in the region remain tilted to the downside. “A deeper recession in Russia or a slowdown in the euro area poses external demand risks, while sudden increases in the US term premium and US dollar fluctuations could trigger market volatility in countries whose fiscal and external deficits are still sizeable,” the report says.

Conversely, if the impact of the European Central Bank’s quantitative easing has a larger than expected impact on euro area growth and inflation, this could benefit Southeast Europe, as could lower oil prices.

The outlook points out that given subdued external demand and high corporate debt, the “Monetary policy space, where available, should be used to support domestic demand, while countries with weak fiscal positions should shore up sustainability to counter risks of potential market volatility.”

“Supporting domestic demand remains a priority, especially in countries with strong links to the euro area. Many economies need to maintain easy monetary conditions while fiscal buffers are gradually rebuilt,” the report adds.

High unemployment is also a concern in several countries in the region. Bulgaria, Serbia and Croatia have among the highest unemployment projections in Europe. While unemployment will fall in Bulgaria and Croatia by 2016, to reach 10.3% and 16.9% respectively, a steady rise from 19.7 in 2015 to 22.0% in 2016 is forecast for Serbia.

The higher expected jobless rate will likely mirror the ongoing reform of the public sector enterprises, with the government promising to shut down all loss-making state-owned firms that fail to find a buyer by end-2015. The public sector reform and reducing the government's fiscal exposure to state-owned firms were a central part of Serbia's €1.2bn stand-by deal with the IMF signed in late February. The need for reform is confirmed in the latest report, which states that, “elevated public debt and high fiscal deficits highlight the need for fiscal consolidation, including via spending restraint (Hungary, Serbia) and restructuring of key state-owned enterprises (Serbia).