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Economic growth in eastern EBRD regions outpacing that of emerging European countries

The economies of Central Asia, the Caucasus and Turkey are expected to maintain high growth rates in 2023, offsetting weaker performance in emerging Europe, according to the latest report from the European Bank for Reconstruction and Development (EBRD).

In Central Asia and parts of the Caucasus region, stronger economic performance is associated with increased trade and high levels of remittances from Russia. At the same time, in emerging Europe, slower growth in economic development is associated with high energy prices, rising inflation and slow growth in developed European countries.

According to the EBRD’s overall regional forecast, growth will slow to 2.4 per cent in 2023 from 3.3 per cent in 2022. However, growth is expected to increase to 3.2 per cent due to the predicted decline in inflation.

“Our economists see a diverging pattern of growth among the EBRD regions. The robust growth of the economies of Central Asia and the weaker performance of those in central Europe and the Baltic states reflect the different consequences of energy prices, inflation and shifting patterns of trade.”

Recent economic forecasts are influenced by a number of trends. Firstly, the reduction in gas supplies from Russia has led to a significant increase in energy prices. As a result, gas consumption in developing Europe fell by more than 20 per cent in the winter of 2022-2023.

Second, European industry has shifted away from gas-intensive sectors such as building materials, chemicals, basic metals and paper. European countries are increasing production in less carbon-intensive sectors such as electrical equipment, automotive and pharmaceuticals.

For example, the production of basic metals in Poland decreased by 18 per cent year on year, while the production of electrical equipment increased by 21 per cent.

Overall industrial production in Europe was lower than expected, resulting in slower economic growth. Nevertheless, companies managed to save jobs, ensuring the stability of the labour market.

Nominal wages have risen rapidly in many countries amid high inflation, according to the EBRD. In the Baltic States and Hungary, for instance, wage increases outpaced productivity growth, reducing competitiveness.

Regional forecasts

In Central Europe and the Baltic States, where high food and energy prices have tightened household budgets and small and medium-sized enterprises have limited access to investment financing, growth rates are expected to average 0.5 per cent in 2023 compared with 3.9% in 2022 and increase to 2.5% in 2024.

A weaker external environment and the impact of inflation in EBRD economies in the South East European Union countries is expected to lead to growth of 2 per cent in 2023 and its acceleration to 2.8 per cent in 2024.

In the Western Balkans, the effect of weaker trade with Eurozone partners in early 2023 was partially offset by the strong performance of the tourism sector in the region’s service-oriented countries. Gross domestic product (GDP) is projected to grow by 2 per cent in 2023 and reach 3.4 per cent in 2024.

The EBRD also forecasts strong economic growth in Central Asia: at 5.7 per cent in 2023 and 5.9 per cent in 2024. Growth is linked to China’s demand for commodities, intermediated trade and exports to Russia, remittances and relocation of companies from Russia.

The economies of Eastern Europe and the Caucasus are adjusting to the shocks caused by the war in Ukraine. The forecast assumes GDP growth of 1.9 per cent in 2023 and growth to 3.1 per cent in 2024.

Ukraine’s GDP is expected to grow by 1 per cent in 2023, reflecting a sharp year-on-year contraction in the first quarter. An increase of 3 per cent is expected in 2024.

Growth in Turkey is projected at 3.5 per cent in 2023 and 3 per cent in 2024.

Forecasts in the southern and eastern Mediterranean regions do not include the potential impact of the September 2023 earthquake in Morocco, as it remains difficult at this stage to assess the impact on overall economic activity. However, output in this region is expected to grow by 3.7 per cent in 2023 and 3.9 per cent in 2024.

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