More gloom ahead as EBRD cuts 2023 growth forecasts

More gloom ahead as EBRD cuts 2023 growth forecasts
By bne IntelliNews February 16, 2023

The European Bank for Reconstruction and Development (EBRD) has cut its 2023 GDP growth forecasts for most Emerging Europe countries. The latest Regional Economic Prospects report from the bank forecasts average growth of just 2.1% across its countries of operation, down from the 3.0% projected in September. 

Growth forecasts have been lowered for more than half of the 36 economies in Emerging Europe, Central Asia and the  southern and eastern Mediterranean (Semed) in which the EBRD operates, with few upward adjustments made.

“The EBRD’s economies are still suffering from a mix of high gas prices and inflation, with the latter likely to take longer to fall than markets expect,” said Beata Javorcik, the EBRD’s chief economist, in a press release published on February 16.

“Optimism about the rate of recovery and growth after the crises of recent years, notably the war in Ukraine, is, in our view, misplaced. That is why we are calling this end-of-winter update to our forecasts ‘Not out of the woods yet’,” Javorcik added. 

The picture is somewhat brighter in 2024, when the bank's regions are expected to experience growth of 3.3%.

According to the EBRD, between January and September 2022, output is estimated to have grown by 3.2% compared to the previous year, with a projected year-end growth of approximately 2.4%. This is slower than the growth observed in 2021, which can be attributed to the impact of Russia's war on Ukraine and the waning momentum of the post-covid recovery. 

However, growth exceeded expectations due to increased spending by consumers in Emerging Europe, who used their private savings accumulated during the pandemic, the bank added. 

Inflation soared through most of 2022, only beginning to slow at the end of the year. In December, the average inflation rate in the EBRD regions decreased to 16.5%, following its peak at 17.5% in October. This inflation rate was last observed at the conclusion of the transition recession in 1998, the EBRD pointed out.

Gas prices have are now largely back to pre-war levels, which the EBRD attributed to the return of liquefied natural gas supplies and deliveries from Norway and Algeria, along with reduced consumption caused by the mild winter and higher prices.

However, despite the apparent stabilisation of gas prices, they remain very high. In real terms, they are comparable to the levels observed during the 1980s, the bank said. 

The report suggests that eliminating inefficient gas usage is likely to have a positive impact on Europe's competitiveness in the long run. However, in the short term, high gas prices continue to pose problems. In some Central and Southeast European economies, government subsidies for energy are estimated to account for an average of 3.6% of GDP.

Growth forecasts slashed

The steepest downward revision to the 2023 forecast was made for Ukraine; according to the bank's latest forecast, Ukraine's GDP is expected to increase by just 1% this year, a significant decrease from the 8% predicted in September 2022. The bank anticipates somewhat higher growth of 3% in 2024.

Russia, where the EBRD no longer invests, is expected to see a contraction of 3.0% this year. Belarus’ economy is forecast to contract by 1.0%. 

Substantial downward revisions were made for Hungary and Lithuania in Central Europe. Hungary is the only Central European economy expected to experience a contraction, of 0.2%, which is a 1.7 percentage point downgrade compared to the previous forecast. Lithuania’s GDP is forecast to remain flat, which is 1.5 pp down on the previous forecast. Latvia’s economy is also expected to contract, by 0.2%. 

Overall, the bank predicts that output in Central Europe and the Baltic states will increase by 0.6% in 2023. While the region's economies demonstrated greater resilience than expected in 2022, lower purchasing power, weakened external demand from advanced European nations and increased financing costs are expected to hinder growth this year. 

Although growth is expected to recover to 2.7% in 2024, it will still fall short of medium-term potential due to the continuing high energy prices and the short-term expenses of the green transition.

Growth rates in the southeastern European Union dropped dramatically in the second half of 2022. A growth rate of 1.5% is anticipated for 2023, with the possibility of growth rebounding to 3.1% in 2024.

The Western Balkans also experienced slower economic growth in 2022, but household spending remained robust. Growth is expected to decelerate to 2.2% in 2023 due to weak external demand, persistent inflation, and tighter financing conditions.

However, growth is expected to be positive across Southeast Europe except in Moldova, where the EBRD cut its forecast to a contraction of 1.3%; it previously expected no growth. 

Earthquakes to drag down Turkey's growth 

The EBRD prepared its forecasts for Turkey before the earthquakes earlier in February. Even before that, the country’s GDP growth declined significantly in 2022 and is projected to decrease further to 3% in both 2023 and 2024. This decrease is attributed to increasing external financing demands and political instability, which create significant economic vulnerabilities.

The effect of the earthquakes on Turkey's overall economic activity in 2023 is anticipated to be limited to 1% of GDP, the EBRD said. While the damage to supply chains and infrastructure will likely offset some of the reconstruction efforts, the boost from the latter during the later months of the year is expected to somewhat compensate for the losses.

The region’s fastest growing economies are those in Central Asia, where growth is set to be as high as 8.0% in Tajikistan, 7.0% in Kyrgyzstan and Mongolia, and 6.5% in Turkmenistan and Uzbekistan. 

Across the region, GDP is expected to grow by 4.9% in 2023, a slight upward revision from September reflecting the boost from high oil and gas prices for commodity exporters, increased inflows of labour, capital and remittances and a rise in intermediated trade.