EBRD2024: EBRD expects Emerging Europe growth boost in 2024, but slightly lowers forecast

EBRD2024: EBRD expects Emerging Europe growth boost in 2024, but slightly lowers forecast
Growth is expected to accelerate across the EBRD's region of operations 2024 as inflation falls. / EBRD
By Clare Nuttall in Yerevan May 15, 2024

The European Bank for Reconstruction and Development (EBRD) forecasts growth across its region of operations, comprising Emerging Europe, Central Asia and the Southern and Eastern Mediterranean (SEMED), at 3.0% in 2024, up from 2.5% in 2023, as outlined in its latest Regional Economic Prospects report released on May 15.

The growth forecast, however, falls slightly below last September’s projections, with a downward revision of 0.2 percentage points (pp). This revision is partly attributed to the weak performance in early 2024, particularly evident in Central Europe and the Baltic states, reflecting Germany’s economic stagnation, the development bank said.

“Last year was very difficult for some Central European and Baltic countries. This year is going to be better, but some of the figures in Q1 were less strong than we expected, hence the downgrade,” commented EBRD chief economist Beata Javorcik in an interview with bne IntelliNews in Yerevan. 

“In the Southern and Eastern Mediterranean we have spillovers from the war in Gaza and slower-than-expected progress in Egypt on some of the big government investment projects,” Javorcik added. 

Meanwhile, Central Asia's growth stemming from intermediated trade is expected to taper off, resulting in more modest growth prospects.

Inflation declines 

Despite facing headwinds from global geopolitical tensions, including trade restrictions, the EBRD remains optimistic about the economic trajectory of its regions, projecting a further uptick in growth to 3.6% in 2025.

Titled "Taming Inflation”, the report points to a moderation in inflationary pressures compared to last year, when the region as a whole experienced an economic slowdown attributed to high energy prices stemming from the conflict in Ukraine and the aftermath of the COVID-19 pandemic.

However, Javorcik pointed out that despite the disinflation, in some countries in the region inflation remains high.

Regional differences 

Despite the slow start to 2024, in Central Europe and the Baltic states, growth is anticipated to gradually improve, with projections for 2024 at 2.2% and an expected acceleration to 3.1% in 2025.

Growth is set to reach as high as 3.5% in Estonia, Hungary and Poland, despite downgrades for several countries compared to the September 2023 forecast. The steepest downgrades across the EBRD’s region of operations are for Estonia (down by 1.7 pp), followed by Czechia (-1.6pp). 

In the Southeast European EU member countries — Bulgaria, Greece and Romania — GDP growth is projected to increase from 2.0% in 2023 to 2.8% in 2024, supported by accommodative fiscal policies and robust real wage growth.

Growth in the Western Balkans is expected to rise to 3.3% in 2024 from 2.5% last year, with Kosovo set to be the fastest growing economy in the Western Balkans region in both 2024 and 2025. Its forecast for 4.0% growth remains unchanged. 

Across the wider region, Central Asia will achieve the strongest growth, although it is anticipated to dip slightly from 5.7% in 2023 to 5.4% in 2024, with a rebound expected in 2025 to 5.9%.

The Caucasus will see more moderate growth of 4.1% in 2024, settling closer to 3.5% in 2025. Armenia stands out with 6.2% growth expected this year, an upward revision of 1.7pp compared to September 2023. 

This is linked partly to the influx of Russians since the invasion of Ukraine, which had a particularly large impact on Armenia. 

“When the Ukraine war started, the Caucasus countries and Central Asia saw an influx of Russian capital, companies and Russians. The influx to Armenia was equivalent to 2.5% of the population. This is paying dividends,” said Javorcik. 

Armenia’s population was further boosted by the arrival of around 100,000 ethnic Armenians from Nagorno Karabakh after the war with Azerbaijan. 

Ukraine’s output expansion is likely to be constrained in 2024 due to significant damage to electricity infrastructure. Growth is expected at 3.0% in 2024, rising to an expected 6.0% next year. Javorcik noted that under current circumstances it is “incredibly hard” to make predictions for Ukraine. 

"The good news is the passing of the funding bill for Ukraine by the US Congress, and the Black Sea shipping route is now open. The negative is the heavy bombings in March and April that destroyed about 60% of Ukraine’s electricity generation capacity,” she said. 

Turkey’s economy is projected to decelerate from 4.5% growth in 2023 to 2.7% in 2024, with a slight uptick to 3.0% in 2025, reflecting expectations of stricter monetary and fiscal policies.

Revised growth forecasts for the SEMED region anticipate an acceleration from 2.6% in 2023 to 3.4% in 2024, albeit with some downward revisions due to delays in public investment projects and ongoing conflicts.

Changing trade patterns 

The report also highlights how geopolitical tensions are reshaping trade patterns, with rapid fragmentation observed in trade. 

So-called “connector economies” — a term coined by the International Monetary Fund (IMF) for countries that serve as bridges between the eastern and western blocs – have emerged as significant recipients of foreign direct investment (FDI), positioning themselves to reap benefits from this increasing fragmentation.

“There are multiple things happening. On the one hand, we see firms reorganising global supply chains to increase their resilience,” said Javorcik.  

“Then with the sanctions and rise of intermediated trade and trade diversions around Russia, there has been a dramatic drop in Western exports [to Russia], and an increase of exports from Turkey, China, and intermediated trade coming via Central Asia. Yet another aspect is geopolitics driving FDI flows.” 

In 2023, there was a marked surge in inward FDI from China into the EBRD regions. At the same time, investments from Russia into Central Asia have been on the rise, particularly in logistics services. 

Another trend is the increase in defence spending.Since February 2022, there has been an uptick in the arms trade relative to the imports and exports of EU economies within the EBRD regions, with the share increasing from 0.1% pre-Ukraine war to 0.3-0.5%.