Emerging Europe on tentative recovery path from 2023

Emerging Europe on tentative recovery path from 2023
Only Hungary is heading for a full-year recession, while most other economies are starting to recover. / wiiw
By bne IntelliNews April 27, 2023

The Central, Eastern and Southeast Europe (CESEE) economies have largely digested the economic shock caused by the war in Ukraine, and almost all are expected to continue growing in 2023, albeit at a slower rate than last year, according to the Spring Forecast by the Vienna Institute for International Economic Studies (wiiw). 

For the 23 countries included in its report, wiiw forecasts growth of a modest 1.2% this year, up from 0.8% in 2021. This is set to accelerate to 2.3% in 2024 and 2.7% in 2025. 

"The worst fears have … not materialised. Despite stubbornly high inflation, which is weighing on households and businesses, the mood in the region is slowly brightening,” said Olga Pindyuk, economist at wiiw and lead author of the Spring Forecast. 

“This also has to do with the fact that all the indicators now point to a slow recovery in the euro area and its most important economy, Germany,” she added. 

However, Richard Grieveson, deputy director of wiiw, told a webinar presenting the report on April 26 that while in 2024-25 things will start to get better for region as a whole, “very few countries will get back to the kind of growth rates we saw before the invasion. We will get back to convergence the region will grow faster than the euro area but that will be subdued through to 2025 relative to the growth rates seen in the fairly recent past.” 

Comparisons with 2021 for the whole region are skewed by the 29.1% slump in Ukraine’s GDP in 2021; for most countries in the region growth will be much lower than in 2021, although a full-year recession will be largely avoided, except in Hungary. 

Wiiw economists warned of strong downside risks to its latest forecasts, given the still uncertain international environment. These risks centre around the possibility of a military escalation of the Ukraine conflict or a drastic tightening of monetary policy that could lead to a harder landing. Additionally, next year's US presidential elections could result in an administration in Washington that is less supportive of Ukraine, damaging confidence in the region.

Meanwhile, although energy prices have fallen, the high inflation in the region is still persistent. The growth rate of food prices is not the only problem; core inflation, which excludes energy and food, remains in double digits for most countries. wiiw has adjusted its inflation forecast upwards for most of the countries. On average, inflation in the region is expected to be around 17% in 2023, compared with the euro area's 5.7%.

Southeast Europe forges ahead of Visegrad countries

Wiiw forecasts average growth of 1.2% for the EU member states in the region in 2023. In the Visegrad countries, average growth will only be 0.6%, and Hungary's economy is expected to shrink slightly this year by 0.5%. Hungary is also predicted to have particularly high inflation of 18.5%. 

It is a more positive story in Southeast Europe, the report shows. “The out-performers are predominately in Southeast Europe … they are a mix of non EU members like Kosovo and Albania a real success story of this downturn and to an extent Montenegro, and some EU member states, especially Croatia and Romania,” said Grieveson.  

The EU members of Southeast Europe are anticipated to achieve average growth of 2% this year. The highest is the 3.0% forecast for Romania, which is expected to accelerate to 4.0% then 4.3% in the next two years. 

Kosovo is set to be the fastest growing economy in the wider region in 2023, with forecast growth of 3.6%. This will continue into the next two years with growth of 3.9% predicted in 2024, and 4.1% in 2025. 

Robust growth of 3.5% is also expected in Kazakhstan, accelerating to 4.0% in each of the following years. 

Turkey is predicted to grow at 2.6% in 2023, which will increase in the following two years to 3.4% and 3.8%.

Ukraine’s economy steadies 

Ukraine's economy could recover somewhat this year, but with no immediate prospect of an end to the fighting, growth of just 1.6% is forecast and wiiw warns there are risks to the projection.

According to Pindyuk, despite the massive destruction and displacement of 15% of the population, the Ukrainian economy has shown remarkable resilience.

Looking ahead to 2023, there are reasons for optimism, such as the recent improvement in the business climate, better energy supply with the resumption of electricity exports in April, the grain deal, and international financial aid. Western support will continue to finance the budget deficit, which is projected to reach 27% of GDP this year.

Russia’s wartime economy  

Russia's macroeconomic situation has stabilised, following a GDP decline of 2.1% last year. However, the forecast of stagnation at 0.0% this year is subject to significant uncertainty, wiiw’s report said. 

Russia’s economy suffered a sharp drop in GDP in Q2 2022, but this was not uniform across sector. Grieveson pointed to a “huge structural shift” in the Russian economy. “Sectors related to the war economy are booming, but there are also sectors decimated by the sanctions.” 

These include the automotive industry that slumped by 45% in 2022, as well as retail trade (-12.7%). However, the defence industry and import substitution areas, such as the pharmaceutical industry (+26.5% in 2022) and production of electric motors (+7.9%), are flourishing, according to official Russian statistics. 

“The booming war industry, the adjustment to the sanctions and the reorientation of trade towards Asia will probably prevent a contraction this year,” said Vasily Astrov, Russia country expert at wiiw. 

“But that does not change the fact that the sanctions-related losses from the energy business are costing the Kremlin dear. It is no coincidence that President Putin has now publicly admitted that the sanctions are hurting, and the population has to prepare for more difficult times.” 

Specifically, wiiw forecasts that Russia’s lack of high technology from the West, such as computer chips, will be a significant challenge, as China cannot supply these.