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Emerging Markets, EBRD Editions, May 14 2014

Chris Wright and Elliot Wilson

The European Bank for Reconstruction and Development is today expected to announce a bearish forecast for regional growth, tainted by geopolitical problems in Russia and Ukraine, and hostage to growth in the European Union. And fears are growing that a Russian recession could cause growth to stall across Europe and through the world economy.

“The current probability of Western Europe falling into recession has now risen, from zero at the start of the year to 20% now,” said Marcin Mrowiec, chief economist at Warsaw-based Bank Pekao, in light of problems in Russia.

On April 29 Suma Chakrabarti, president of the EBRD, warned that the bank’s new forecasts for emerging Europe and North Africa would “not be good news”, and would likely represent a downgrade on the 2.7% it forecast for the region’s 2014 growth when it published its previous forecast in January. In particular, its outlook for Russian growth, which was 2.5% when last announced, is likely to be badly hit: the IMF’s Russia forecast, by comparison, was cut to just 0.2% on April 30, citing “considerable downside risks”, while Russia’s own central bank is expecting just 0.5% growth in 2014. And IHS economists believe further escalation of Moscow’s engagement in Ukraine could cut Russian GDP by 3 percentage points this year, or around $115 billion, which would in turn trim Europe-wide growth by 0.15 percentage points. Even Latin American and Asian trading partners would be impacted, IHS said.

While Russia will dominate the EBRD’s forecast, it is also clear that any improvement in regional growth will be tied to the pace of recovery in the EU. “The impact of Europe is huge,” said Charles Robertson, global chief economist at Renaissance Capital. “Europe was expected to grow 1% in 2014 and could still do a bit better, so of course Poland, Hungary and Czech have rebounded. But I don’t know if Europe is going to surprise much more on the upside, and if it double dipped, that would be very bad news for CEE.”


Last week the Organisation for Economic Cooperation and Development (OECD) raised its growth forecasts for the Czech Republic to 1.2% in 2014 and 2.4% in 2015 on the back of an export-led recovery, but spoke of “the deep integration of [Czech] manufacturing into the German supply chain,” meaning that “the recovery remains vulnerable to disinflationary or financial market shocks originating in Germany or its main trading partners.”


The OECD’s forecasts, likely to be mirrored by the EBRD’s, showed the sometimes schizophrenic outlook for the region and the range of opinions on its prospects. For example, it commented negatively upon Hungary, leaving its 2014 forecast unchanged at 2% but bringing its 2015 forecast down to 1.6%, saying the country would be “hampered by an uncertain business environment related to controversial domestic policies and tight credit conditions.” But Tatha Ghose, an economist at Commerzbank, said she was overweight Hungarian sovereign credit and that the bank “expects ratings upgrades in view of powerful multiplier effects being unleashed in the economy at favourable interest and exchange rates.”


Similarly Capital Economics said yesterday that it expected first quarter GDP data for Central and South Eastern Europe to show that the region’s economic recovery is strengthening (six countries – Bulgaria, the Czech republic, Hungary, Poland, Romania and Slovakia – will publish GDP numbers tomorrow[THURSDAY]). “The recovery appears to be broad-based,” said the firm in a report, adding that “the region’s slump in investment may finally have come to an end.” Yet its chief emerging markets economist Neil Shearing said of Russia: “Recent events have given us even more reason to be pessimistic.”


The brightest expected outlook is Poland, whose expected growth rate has been upgraded by both OECD (to 3% in 2014 and 3.4% in 2015) and the European Commission (3.2% in 2014), backed by buoyant exports, growing domestic demand and improving unemployment alongside modest inflation. The EC expects two Baltic economies, Latvia and Lithuania, to be the region’s leaders, growing 3.8% and 3.3% respectively this year.


The picture will be bleaker closer to Russia. On Monday Moody’s Investors Service said growth would slow in Armenia, Azerbaijan, Moldova and Kazakhstan because of their close economic links to Russia, though it expected stronger growth in Georgia and Belarus.

Chris Wright
Chris Wright
Chris is a journalist specialising in business and financial journalism across Asia, Australia and the Middle East. He is Asia editor for Euromoney magazine and has written for publications including the Financial Times, Institutional Investor, Forbes, Asiamoney, the Australian Financial Review, Discovery Channel Magazine, Qantas: The Australian Way and BRW. He is the author of No More Worlds to Conquer, published by HarperCollins.

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