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EBRD report : Recovery on track in most emerging economies but risks persist

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The economic recovery remains on track in most of the countries where the European Bank for Reconstruction and Development (EBRD) invests but risks persist from global trade tensions, high corporate debt levels and continued geopolitical instability.

The EBRD’s latest Regional Economic Prospects report says the outlook is broadly stable in the economies in its regions, stretching from central and eastern Europe, to Central Asia and North Africa.

The main exception is Turkey where forecasts have been wound back sharply on the back of a depreciation of the lira, which weighed on investor confidence, and higher interest rates.

The EBRD expects average growth across its economies of 3.2 per cent in 2018 and 2.6 per cent in 2019, after 3.8 per cent in 2017. Predictions for this year and next have been revised downwards from the May outlook by 0.1 and 0.6 percentage points respectively, primarily as a result of the Turkish slowdown.

Excluding Turkey, the projection for the region’s average growth in 2018 has been revised upwards by 0.1 percentage points, reflecting strong economic performance in the first half of the year, and is unchanged for 2019. Spillovers from the expected deceleration in Turkey to other economies in the EBRD regions are expected to be very limited.

The Turkish economy is forecast to expand by 1 per cent in 2019, down from an estimated 3.6 per cent this year and 7.4 per cent in 2017, when it was buoyed by government stimulus.

The report said a widespread escalation of protectionism was a major concern for emerging economies, in light of trade tensions between the United States of America and its major trading partners. 

At the same time, corporate indebtedness had shown no sign of declining, with countries holding high levels of foreign currency-denominated debt especially vulnerable to tighter financing conditions, as had been the case specifically in Turkey.

The security situation in the Middle East and geopolitical tensions also remained a key source of risk for economies in the EBRD regions, the report said. 

The EBRD said growth in central Europe and the Baltic states was projected to remain above potential in 2018 and 2019, averaging 4.3 and 3.5 per cent respectively. Dynamic household consumption and private investment were offsetting the negative impact of a shortage of skilled labour and slower growth of global trade.

The report said the supply of labour was declining in Poland because of ageing, a lower retirement age and a lower participation of women because of higher social benefits.  One counter-balancing factor in Poland was a surge in immigration, mostly from Ukraine and Asia.

Rising trade protectionism was a direct risk for export-oriented economies, particularly in the Slovak Republic and Hungary.

The report said the south-eastern European (SEE) region was showing robust growth, with a modest recovery in FYR Macedonia and Serbia growing at its strongest rate for several years. Confidence and investment were returning to the Greek economy and Cyprus was continuing its strong post-crisis recovery. Bulgaria was also performing well, as is Romania, despite some signs of overheating. Overall, the SEE region is projected to grow at 3.5 per cent in 2018 and 3.2 per cent in 2019. 

The economies of eastern Europe and the Caucasus (EEC) remain on a course of recovery, despite some signs of growth moderation. The EEC region is forecast to grow by 3.1 per cent in 2018 and 3.2 per cent in 2019, as long as there is no intensification of geopolitical and political tensions and the regional economic backdrop remains positive.

The report said approval and implementation of a new standby agreement between Ukraine and the International Monetary Fund would help the country address its near-term external financing needs and to maintain macroeconomic stability throughout the electoral cycle next year.

The Bank expected the Ukrainian economy to grow by 3.5 per cent in 2018 and by 3.0 per cent in 2019, with large foreign exchange debt repayments due in 2018-19 posing a downside risk to the outlook.

Russia’s growth is projected to remain around 1.5 per cent in 2018 and 2019, in line with the estimated medium-term growth potential, as supporting effect of higher oil prices is expected to be offset by the negative economic impact of the sanctions imposed by the USA and the European Union (EU).

Growth is expected to moderate in Central Asia, from 4.8 per cent in 2017 to close 4.6 per cent in 2018 reflecting the need for fiscal consolidation and a sharp fall in gold output in the Kyrgyz Republic. Growth is expected to moderate further in 2019, to 4.2 per cent, in the light of lower expected commodity price growth going forward.

Growth in the southern and eastern Mediterranean (SEMED) region is projected to increase from 3.7 per cent in 2017 to around 4.4 per cent in 2018 and 4.7 per cent in 2019 on higher tourist arrivals, improved external competitiveness following currency depreciations in Egypt and Tunisia and sustained export growth.

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