Only Hungary and Russia heading for recession in 2023 as Emerging Europe shows its resilience

Only Hungary and Russia heading for recession in 2023 as Emerging Europe shows its resilience
wiiw expects only Russia and Hungary (pictured) to experience an economic contraction in 2023.
By Clare Nuttall in Glasgow February 1, 2023

The economies of Central, Eastern, and Southeast Europe (CESEE) are showing resilience despite the conflict in Ukraine that caused a significant slowdown in economic activity, said the Vienna Institute for International Economic Studies (wiiw) in its Winter Forecast

Across 23 countries from Central, Eastern, and Southeast Europe assessed by the institute, growth is expected to come in at just 0.1% this year. 

However, wiiw noted that while growth will be significantly lower than in 2022 in almost all countries, only Russia, where GDP is expected to shrink by 3%, and Hungary (-1%), will experience a full-year contraction.  

“While high inflation poses major problems for households and businesses, not for the first time we are seeing impressive resilience in the region,” said Richard Grieveson, deputy director of wiiw and lead author of the Winter Forecast. 

“Putin’s strategy of using energy as a weapon has failed, not least because the Eastern Europeans have also been able to significantly reduce their gas consumption,” Grieveson argued. 

wiiw believes that most countries of the region have “probably already digested” most of the economic shock caused by the Ukraine war, provided Russia does not escalate the conflict further. 

“Provided that does not happen, growth in Eastern Europe should pick up again from the second half of the year … But the biggest factor of uncertainty remains the war in Ukraine,” said Grieveson, according to a press release from wiiw on January 30. 

The report also forecasts that inflation has most likely already peaked for most countries after inflation rates reached their highest levels in around 15 years — or in some cases since the 1990s — in 2022. 

The institute forecasts average growth of 1% for the EU member states in the region. This growth is 0.8% higher compared to the euro area, which is expected to have a growth rate of only 0.2%. 

There is a north-south divide among the EU members in the region, points out wiiw, as the economies of the Southeast European EU members are “proving quite resilient”, while the Visegrad countries will have an average growth of 0.6%. 

Outside the EU, the Western Balkans will grow by 1.8%, while Turkey's economy will have a stronger growth rate of 3%.

Ukraine’s economy is expected to recover slightly and grow by a modest 3% after the 30% contraction in 2022. Despite the improvement, the country still faces significant challenges and uncertainties due to the ongoing war and destruction of critical infrastructure, warns wiiw. 

Russia's bombing campaign has caused widespread damage and power cuts, raising production costs and affecting economic activity in the last quarter of 2022. As a result, Ukraine's financing needs are expected to increase, with a projected budget deficit of 20% of GDP, said wiiw. This will require significant financial support from the West.

In Russia, wiiw believes that oil sanctions are working. The economic downturn in Russia gained momentum in the last quarter of 2022, though for the full year there was a GDP decline of only 2.5%, lower than the forecast of -3.5%. 

In 2023, GDP is expected to decline further, mainly as a result of the partial mobilisation and reduced gas exports to Europe, along with new oil sanctions imposed by the West. 

The EU oil embargo and price cap on Russian oil have forced the country to sell its oil at a huge discount. The price of Urals, Russia's most important crude oil grade, dropped to USD 47 per barrel in the first four weeks after the measures took effect, representing a discount of 43% compared to North Sea Brent. This reduction in oil prices significantly lowers tax revenues, with 40% of the revenue coming from the energy sector where export duties on oil play a major role.

‘The sanctions put in place on 5 December are the most effective imposed so far,’ says Vasily Astrov, Russia expert at wiiw, though he added that he believes they will have little impact on Putin’s ability to finance the war for now, as the gap will be financed through higher — but still bearable — budget deficits. 

wiiw's forecast contrasts with the latest update from the International Monetary Fund (IMF), which improved Russia’s GDP outlook for 2023 from 2.1% recession previously to 0.3% growth.