Stalling Economic Growth in Emerging Europe and Central Asia

Benefiting from the Eurozone link

EU-Central and South Eastern Europe (EU-CSEE) countries are expected to see growth remain roughly the same in 2015 as in 2014 – about 2.7 percent – which is a significant improvement from the previous two years when growth was very modest (0.5 percent in 2012 and 1.2 percent in 2013), but it still remains far below potential. Unemployment rates remain stubbornly above 10 percent in many EU-CSEE countries and consumption growth is sluggish.

Economic growth in the Western Balkans is expected to be a modest 1.2 percent in 2015, up from 0.7 percent in 2014 as a pick-up in net exports is expected to offset slowing investment and consumption. The Western Balkans still remain heavily burdened by the lack of new credit, and non-performing loans are the highest in the ECA region (above 16 percent).

In Turkey, growth slowed to 2.9 percent in 2014, but is expected to increase modestly to 3 percent in 2015.

Overall, these countries close to the Eurozone are seeing a pick-up in consumer and business confidence with reduced fears of deflation with quantitative monetary policy easing, a fall in oil prices, initial signs of a pick-up in industrial production, and, at least to date, limited spillover from the financial turbulence in Greece and uncertainty over Ukraine.

Going forward

Given the weaker buying power of many households in the region, poverty rates are expected to rise in several countries. This is a reversal of the downward trend toward lower poverty rates across the region. Poor households in oil-exporting countries and remittances-receiving countries are hit by higher import prices due to devaluations, the disappearance of jobs in construction and other non-tradable sectors, and because of fiscal pressures. This highlights the need for a quick adjustment to the new economic reality. Only if countries seize new opportunities in tradable sectors, can the deterioration of poverty rates be stopped.

Exchange rate adjustments, along with prudent monetary policy to keep domestic inflation under control, will help countries regain competitiveness in global markets in the Eastern part of the region. For the EU-CSEE part of the region, projected low oil prices and monetary policy easing in the Eurozone should continue to help to mitigate the impact of low capital inflows and remaining uncertainty, including that arising from high debt levels, vulnerabilities in the banking sectors, geopolitical tensions, and Greece’s current financial turbulence.

“The bottom line is that countries are performing the rebalancing act to the ‘new normal’ in which they have to seize new opportunities to expand export sectors,” said Hans Timmer, Chief Economist in the World Bank’s Europe and Central Asia region. “This is very much true for oil-exporting countries, but also for countries in the western part of the region that have experienced depreciations and low capital inflows. Ongoing reforms to improve the business climate are key to permit expansion in these sectors. Moreover, steady financial sector and macro management is critical, particularly in dollarized economies. Postponement of the adjustments needed for the rebalancing can be very costly and may backfire.”