Growth stabilises: investment a major driver, except in countries plagued by recession

22 March 2016

At the recent wiiw press conference, Gabor Hunya presented the new wiiw forecast for 22 countries of Central, East and Southeast Europe for the period 2016–2018

GDP growth in the EU Member States of Central and Eastern Europe (EU-CEE), the Western Balkans (WB) and Turkey will remain stable or even increase. The trend growth path will be around 3%. EU-CEE countries will thus continue to catch up to the EU average, however at low speed.  Russia  and  Ukraine,  on  the  other  hand,  will  show  a  considerably  worse performance: growth will return in 2017 at the earliest. These are the main results of the newly released  medium-term  macroeconomic  forecast  by  the  Vienna  Institute  for  International Economic Studies (wiiw).

In 2015, the EU-CEE group registered the highest rate of economic growth since the outbreak of the financial crisis, 3.4% (see Table 1). In 2016-2017 the group will experience some modest growth deceleration on account of the recent consumption boom subsiding and a temporary decline in EU transfers. As for 2018, the EU-CEE countries will pick up some speed driven by an inflow of new investments  and  transfers.  Uncertainties  concerning  the  global  economy  do  not  allow  us  to predict average growth of more than 3% over the medium term. 

Countries in the Western Balkans also improved their performance in 2015 and will maintain positive growth rates in 2016 and beyond. However unimpressive it may be, compared to their need  for  catching-up,  the  average  growth  rate  in  the  WB countries  (excluding  Serbia)  will  not  lag behind  that  in  the  EU-CEE  countries.  Turkey  will  maintain  a  ‘fragile  stability’  despite  relatively high inflation and a high current account deficit, while coping with increasing challenges emerging, for instance, from the war in Syria, the refugee crisis and the loss of export and tourism revenue owing to the Russian trade sanctions.

Russia and Belarus will face yet another year of recession in 2016. Russia will continue to suffer from  low  oil  prices,  high  inflation,  currency  depreciation,  sanctions  and  fiscal  austerity.  As usual, structural change and institutional reforms will be slow and half-hearted, incapable of offsetting the losses. Ukraine’s economic growth, after the dramatic fall over the past years, will stabilise as the economy will by and large have completed the adjustment process that was triggered by the country decoupling from Russia and the occupied territories. The Russian annexation of the Crimea and the conflict in East-Ukraine look set to last. Export markets lost will not be regained even in the medium term, nor should one expect the volume of exports to the EU to make up for the shortfall quickly. 

The divergence of economic performance between the EU-CEE and the WB plus Turkey on the one hand and the CIS-3 (Russia, Belarus, Kazakhstan) and Ukraine on the other hand will continue in 2016 and beyond. The difference between the two large country groups, however, will not take on more pronounced dimensions as the recent collapse of the major commodity prices may turn into stagnation. 

The leading role attributed to household demand in driving economic growth in the EU-CEE and WB countries will be matched by investments.  A medium-term investment revival is expected in most of the CESEE countries in both the public and private sectors. FDI has already shown some signs of emerging from stagnation in the EU-CEE and WB countries. Credit conditions for private borrowers have improved.  Moreover,  gross  fixed  capital formation  is  responding  to  the transfer  of  EU funds  that  are  bound  to  decline  in  2016,  but  will  recover  later,  once  access  to  EU transfers provided under the 2014-2020 financing framework picks up.

As  fiscal  consolidation  and  more  rapid  economic  growth  have  been  achieved,  fiscal  space has widened in several countries, thus granting governments more room in which to implement and support investments. Even highly indebted countries have managed to adopt a less restrictive fiscal stance. The CIS-3 and Ukraine are outliers in this respect as well; they have started cutting back on expenditures so as to reduce their fiscal deficits.

Exports may increase if external demand recovers, but imports may grow even more rapidly as consumption and investment expand in the EU-CEE and WB economies. Thus, net exports will not be a strong driver of economic growth.  Foreign investors’ income may rise overall, while remittances  and  labour  income  from  abroad  will  remain  important  sources  of  current  account revenues.

Special sections of the Forecast shed light on other topical issues: low oil prices are mainly supply-driven; the Juncker Initiative will not take the place of EU transfers; outmigration and demography are leading to labour shortages in EU-CEE countries; the recent inflow of refugees may, in the medium term, put pressure on existing migrant workers in Austria.