EBRD lifts emerging Europe forecasts but warns of threats ahead

EBRD lifts emerging Europe forecasts but warns of threats ahead
By bne IntelliNews November 4, 2021

The European Bank for Reconstruction and Development (EBRD) has increased its projection for growth in 2021 across the regions where it operates to 5.5%, an upward revision of 1.3 percentage points (pp) compared to its June forecast. 

The development bank said in its latest Regional Economic Prospects report released on November 4 that the revision follows a strong performance in the first half of the year, but it warned at the same time of “serious threats” ahead, among them inflation, rising commodity prices, tight labour markets and supply chain disruption. 

Output across the EBRD regions grew by 6.3% year on year in the first half of 2021, following a contraction of 2.4% in 2020. In 2022, growth is anticipated to moderate to 3.8%, 0.1 pp lower than forecast in June. 

“Mobility recovered earlier than in other parts of the world, while industrial production and retail sales rebounded. Exports of goods and services increased despite temporary supply chain disruptions. Remittances also grew in the second quarter of 2021, in some cases surpassing 2019 levels. Tourist arrivals exceeded expectations, but remained significantly below their 2019 levels in most EBRD economies,” the report commented. 

The EBRD noted that its forecasts are “subject to high uncertainty, reflecting risks associated with the future path of COVID-19, possible worsening of external conditions and weaker growth in trading partners”.

Other concerns include that wider inflationary concerns “may bring forward policy tightening in advanced economies, making debt burdens more expensive to service,” the report warned. “Travel restrictions and lingering fears of contagion continue to weigh on the outlook for the tourism sector. While bankruptcies have so far remained contained, further vulnerabilities may surface once policy support is reduced,” it added.

The EBRD’s chief economist Beata Javorcik to describe the ongoing recovery as “bittersweet”. 

“This is a bittersweet recovery. The first half of 2021 brought a robust rebound. But we are now seeing growing cause for concern. While high commodity prices benefit exporters, they weigh heavily on the trade balances of importers. The supply of affordable energy as we enter the winter period is becoming a serious worry, especially since governments’ headroom is limited,” said Javorcik, according to a press release from the EBRD. 

“High prices of natural gas, oil and other commodities weigh on the trade balances of energy importers, in particular in the southern and eastern Mediterranean. They may also test the public’s resolve for greening and put pressure on governments to step in to mitigate the burden of higher energy expenses on low-income households,” the report elaborated. 

“High energy prices, supply chain disruptions and in some cases currency depreciations have also pushed inflation up. In some economies, tight labour markets have added to inflationary pressures, with a strong rebound in vacancies in lower-medium skilled occupations such as drivers or craftsmen and strong wage growth.”

Rising inflation

The report cited rising inflation across the region, which includes Central and Eastern Europe, Central Asia and Southern and Eastern Mediterranean countries. Across this region, inflation exceeded its end-2019 levels by 3 pp in September. Several of the region’s central banks have already raised policy interest rates.

“In some EBRD economies tight labour markets added to inflationary pressures with a strong rebound in vacancies in lower-medium skilled occupations. In other economies, considerable slack in labour markets remains,” the report said. On average, unemployment increased by 1.4 pp between February and August 2020.

The current high oil and gas prices have benefitted commodity exporters such as Azerbaijan, Kazakhstan and Russia. Yet many countries in the region are commodity importers, which have seen higher prices weigh on their trade balances. 

The EBRD also identified fiscal vulnerabilities resulting from the large stimulus packages rolled out during the pandemic crisis. Public debt across the EBRD regions has increased by an average of 13 pp of GDP since end-2019, the report said, adding: “While borrowing costs remain below their pre-crisis levels in most economies, they have risen sharply in some countries."

Moreover, a number of countries in the region, including much of Central, Eastern and Southeast Europe, are experiencing a new wave of the pandemic, hastened by low vaccination rates. 

Fast and slow movers 

Three tourism-dependent Southeast European economies Albania, Croatia and Montenegro are heading for some of the fastest growth rates across the emerging Europe region this year, of 8.0%, 8.0% and 12.3% respectively, after experiencing some of the deepest contractions last year. 

Robust growth is also anticipated in Turkey, whose economy has been one of the region’s strongest performers since the start of the crisis. It is expected to grow by 9% in 2021 and 3.5% in 2022. According to the EBRD, this is supported by a post-lockdown rebound in domestic demand and strong exports benefiting from currency depreciation, though it warned of risks related to macroeconomic stability. 

The bank did, however, point to the “stubbornly high” inflation in Turkey, where the decision to cut policy rates by 300 basis points since September “caught investors off-guard, as did the decision to sack three members of the monetary policy committee in October, including two deputy governors”. In general, a “lack of policy transparency, alongside the fragile external position, makes Turkey vulnerable to changes in global investor sentiment,” the report said. Nonetheless, high frequency indicators suggest that activity remained robust in the third quarter of 2021.

At the other extreme, Belarus’ economy is predicted to expand by just 2.0% this year. GDP growth in Belarus reached 3.5% y/y in the first half of 2021, largely driven by growth of exports and revived household consumption, despite the slowing growth of industrial production since May 2021. This was due to the ending of base effects and possibly some early impact from international sanctions, the EBRD said. The development bank expects growth to decelerate in the second half of the year, to come in at just 2.0% for the full year. 

“Economic sanctions and targeting of the export-focused potash and petroleum industries as well as sanctions-related supply shortages are expected to hit the economy later in 2021 and throughout 2022,” the report said. “At the same time, a strong commodities-based recovery in Russia, its main trading partner, could have a positive impact on Belarusian exports.”

The Kyrgyz Republic is the other slow mover. The Central Asian country posted growth of just 0.1% y/y in the first three quarters of 2021, and is headed for 2.5% for the full year. The top contributor to Kyrgyzstan’s economy, the Kumtor gold mine, was seized from Canada’s Centerra Gold by the Kyrgyz government in May. 

“The recovery is being held back by a drop in gold production and exports despite Jerooy, the country’s second-largest gold mining project, moving to production in March 2021,” the report said. “Excluding the Kumtor gold mine, real GDP grew by 17.7% y/y in the first three quarters of 2021, driven by growth in retail trade, transport and communication. Expansion in services was enabled by strong growth in remittances (up 21% y/y in US dollar terms in the first eight months of 2021) and the easing of lockdown measures.”

Supply chain issues affect CEE

The Central Europe and the Baltic states (CEB) region is forecast to grow by 5.2% in 2021 and 4.7% in 2022, despite the impact of supply chain disruptions on some economies. This follows average growth of 5.1% in the first half of 2021. 

“Most countries managed to recover to pre- pandemic levels, with Estonia and Lithuania already achieving this in the first quarter of 2021. At the same time, due to their persevering price competitiveness, CEB exporters in several countries, including Lithuania and Poland, achieved substantial hikes in export market shares of both goods and services,” the report said. 

“Nevertheless, elevated energy prices and shortages of components, chips and raw materials have already affected countries with significant shares of manufacturing in GDP, especially the Czech Republic, Slovenia, the Slovak Republic and Hungary. These disruptions in supply chains will likely weigh on the region’s export performance in the short term.”

Estonia is set to be the CEB region’s top performer, achieving 8.5% growth in H1 and heading for 9% for the full year. Consumption was spurred on by the withdrawal of the second pension pillar in September 2021, which caused disposable incomes to jump by nearly €1bn. Lithuania has also weathered the crisis well, experiencing the mildest recession in the EU in 2020. 

Poland, the region’s largest economy, achieved growth of 4.6% y/y in the first half of 2021, which the EBRD said was “underpinned by strong household consumption, still elevated government expenditures and some improvements in investments”. Exports rebounded quickly, the report said. However, the bank warned of the risk associated with a delayed disbursement of the EU’s Recovery and Resilience Facility (RRF) funds.

Strong growth of 6.4% is expected in the Western Balkans this year, moderating to 4% in 2022. “The region saw significant upward revisions, reflecting better-than-expected performance in the first half of the year, including in the tourism sector, as well as strong export demand from the EU market,” the report said. 

This growth is driven by the pent-up demand enabled by growing remittances and wages as well as continued recovery in external demand, according to the EBRD.

The Southeast European Union region, comprising Bulgaria, Greece and Romania, is expected to experience GDP growth of 6.7% in 2021 and 4.3% in 2022. Romania’s economy grew by a robust 7.0% in the first half of 2021, allowing it to exceed pre-pandemic levels in adjusted terms by the end of June. However, as the EBRD points out, economic risks have lately increased Romania is embroiled in a deep political crisis, and is also struggling with a severe fourth wave of the pandemic. 

Russia back to pre-pandemic level

Russia suffered a relatively small contraction in 2020, and the EBRD forecasts output will grow by 4.3% this year amid the ongoing broad-based recovery, before falling back to 3% in 2022. The main driver will be public spending programmes facilitated by higher commodity revenues.

The Russian economy already returned to its pre-pandemic level by the second quarter of 2021. “Mining activity was strong, and retail sales recovered rapidly following the easing of virus-related restrictions, driven by tighter labour market conditions and rapid retail credit growth. Although there were some signs of slowing in the mining sector at the start of the third quarter, retail sales have remained robust and higher OPEC+ oil production quotas should support mining output in the coming months,” commented the report. 

It also noted a shift in priorities of the Russian authorities towards growth and social welfare, with “well-targeted” social expenditure measures reintroduced ahead of September’s DUMA elections. The authorities have also sought to protect the public from inflation with food price caps and export restrictions and duties. 

Across the EBRD’s Eastern Europe and the Caucasus region comprising the three South Caucasus countries plus Belarus, Ukraine and Moldova output is anticipated to grow by 3.6% in 2021 and 2.9% in 2022. In Azerbaijan in particular, rising oil and gas prices have resulted in a stronger than expected recovery. 

Ukraine’s economy continued its decline in the first quarter of 2021, only reviving modestly in the second quarter wth growth of 5.7% y/y. This was attributed to driven by double-digit growth of household consumption and investment, and supported by a strong rise in the prices of major export products like cereals and iron. A strong harvest and further normalisation of business activities is set to support the recovery in the second half of the year.

Growth in the Central Asia region is forecast at 4.9% this year and 4.8% in 2022, with higher commodity prices and recovering remittances the main contributing factors.

The region’s largest economy, Kazakhstan, expanded by 3.0% in the first eight months of 2021, and the economy is forecast to grow by 3.6% in 2021 and 3.8% in 2022. "Growth will be led by stronger external demand and continued fiscal stimulus measures supporting domestic consumption. Downside risks relate to the COVID-19 pandemic continuing to disrupt trade and economic activities,” the EBRD noted. 

Uzbekistan reported real GDP growth of 6.9% y/y in the first three quarters of 2021, as agriculture, industry and particularly services all grew strongly. 

The EBRD is also active in the Southern and Eastern Mediterranean, where output is expected to grow by 4.2% in 2021, accelerating to 4.4% in 2022.