The European Bank for Reconstruction and Development (EBRD) forecasts robust economic growth in Central Asia, the Caucasus and Turkey for 2023, counterbalanced by a weaker performance in Central and Southeast Europe.
In 2023, growth in the EBRD regions, which also include the southern and eastern Mediterranean (Semed) region, is projected to decelerate to 2.4%, down from the 3.3% recorded in 2022, according to the bank’s latest Regional Economic Prospects report released early on September 27.
However, there is more optimism for 2024, with growth expected to rebound to 3.2% as inflation gradually subsides. These statistics represent a slight adjustment from the May forecast, with a 0.2 percentage point (pp) upward revision for 2023 and a 0.2pp downward revision for 2024.
Beata Javorcik, the chief economist at the EBRD, points to divergent growth trends within the region. The strong economic performance of Central Asian nations contrasts with the relatively weaker growth observed in Central European and Baltic states. These disparities can be attributed to variations in energy prices, inflation levels and evolving trade patterns.
In Central Europe and the Baltic states the projected growth for 2023 is a modest 0.5%. This is a significant decline from the robust 3.9% growth recorded in 2022, though a gradual recovery expected in 2024, when growth is set to revive to 2.5%.
“We kept this year’s forecast for Central Europe unchanged since May, but we see prospects for 2024 weakening. This is related to weakness in Western Europe, particularly in Germany, which is hitting our countries hard because of the reliance on exports,” said Javorcik in an interview with bne IntelliNews.
“Even though prices of natural gas are back to the pre-war level they are four times as high as prices in the US. That means that competitiveness of Western Europe, including Germany, is going to be eroded. The slowdown in China is not helping given the fact that China is an important market for Germany. On top of that we have eroding competitiveness in some Central European countries,” Javorcik added.
Moreover, as Javorcik pointed out, Central European countries rely heavily on the automotive industry, which is undergoing a change away from combustion engines to electric vehicles.
Broken down by country, the EBRD has revised downwards its forecasts for four Central European economies this year, Estonia, Hungary, Lithuania and Slovakia. However, for 2024, it has lowered its forecasts for virtually every country in the region, with the steepest downgrades of 0.8pp for Estonia and Slovakia.
In the southeastern European Union, comprising Bulgaria, Greece and Romania, a less favourable external environment coupled with the impact of rising inflation is anticipated to result in a growth rate of 2% for 2023, with a slight improvement to 2.8% forecast for 2024.
In the Western Balkans there was a decline in trade with Eurozone partners at the outset of 2023, however, the resilience of the tourism sector partially offset this. GDP is expected to grow by 2% in 2023, with a more robust expansion projected at 3.4% in 2024.
During the winter of 2022-23, Emerging Europe experienced a significant drop in gas consumption of over 20%, the EBRD report points out. This was primarily due to decreased gas supply from Russia, resulting in considerably higher energy prices. Although oil and gas prices have now returned to levels below those seen before the Ukraine conflict, they continue to exert downward pressure on the region's economic growth.
As energy prices rise, European industry has gradually moved away from gas-intensive sectors such as construction materials, chemicals, base metals and paper and towards less carbon-intensive sectors, such as electrical equipment, car manufacturing and pharmaceuticals.
This has affected the overall industrial output in the region, and contributed to slower-than-expected economic growth.
However, according to Javorcik, the change is not expected to be permanent. “What we see in the data is a temporary shift. There has not been a movement of labour away from gas intensive industries to other industries. Firms appear to be holding onto workers in expectation of better times, which is exacerbating tightness in the labour markets,” she said.
Strong growth in Central Asia and Turkey
Further east, the economies of Eastern Europe and the Caucasus have been grappling with the profound impact of the conflict in Ukraine. The economic outlook for the region anticipates a GDP growth rate of 1.9% for 2023, with an upswing to 3.1% projected for 2024.
In Ukraine, the forecast is for a GDP growth rate of 1% for 2023, followed by a modest rebound to 3% growth in 2024.
By contrast, Central Asia is poised for robust growth, with a forecast rate of 5.7% in 2023 and an acceleration to 5.9% in 2024. Key growth drivers in this region include government spending, heightened demand from China for commodities, increased trade interactions and exports to Russia, as well as remittances and the relocation of companies from Russia. The fastest growth is expected in Mongolia and Tajikistan over the next two years.
Most of the EBRD's forecasts for the region are unchanged since May, although the development bank has raised its 2023 and 2024 forecasts for Kazakhstan and lowered them for Kyrgyzstan.
In Turkey, growth is anticipated at 3.5% in 2023, with a subsequent moderation to 3% in 2024. The upward revision of 1pp in the forecast is attributed to pre-election fiscal stimulus. However, it is anticipated that growth will taper off in the latter half of the year.
In the Semed region, output is expected to expand by 3.7% in 2023, followed by a 3.9% growth in 2024. The downward revisions from earlier forecasts stem from delays in implementing structural reforms and heightened fiscal and external vulnerabilities. The latest forecasts do not yet take into account the impact of the earthquake in Morocco.