wiiw Forecast: Growth Stabilises in the EU Member States of Central and Eastern Europe and the Western Balkans

Fiscal space has widened in several countries, thus granting governments more room in which to implement and support investments.

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THE VIENNA INSTITUTE FOR INTERNATIONAL ECONOMIC STUDIES (WIIW)


GABOR HUNYA

GABOR HUNYA

SENIOR ECONOMIST at THE VIENNA INSTITUTE FOR INTERNATIONAL ECONOMIC STUDIES (WIIW)

Peaks and Troughs in 2015 with lasting impacts


The prospects of growth in the euro area have improved albeit at a slower pace than previously hoped for. It is based on a mix of private and public consumption, as well as investment expansion, supported by a further easing of the European Central Bank’s monetary policy and fiscal relaxation. As a result, demand for products from new member states increased and exports expanded. The recent collapse of all major commodity prices reflects a lack of demand and an oversupply in the respective markets with major impact on both exporters and importers. Net importers of oil and gas have lower energy bills, while netexporters suffer serious losses of revenues.


The EU Member States in Central and Eastern Europe (EU-CEE) group registered its highest rate of economic growth in 2015 since the outbreak of the financial crisis. In 2016-2017 the group will experience some modest growth deceleration on account of the recent consumption boom coming to an end and a temporary decline in EU transfers (Table 1). Growth will be most robust in Romania and Poland, given the solid household consumption in both countries; growth will also recover in the Baltic States that have since digested the Russian shock, yet most other countries will experience some slowdown on account of the lower volume of EU transfers. As for 2018, the EU-CEE countries will pick up some speed thanks to the inflow of new investments and EU transfers.

 

 

Countries in the Western Balkans WB) also picked up speed in 2015 and will thus maintain positive growth rates in 2016 and beyond. They will grow at an average rate of 3%, except for Serbia where growth will be depressed on account of stabilisation. However unimpressive it may be compared to their need for catching-up, the average growth rate in the WB countries (excl. Serbia) will not lag behind that in the EU-CEE countries. Turkey will continue down its modest growth path. It will maintain its fragile stability, despite relatively high inflation and a high current account deficit, while facing 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.


In the CIS, 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 country 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 will the volume of exports to the EU increase.


The divergence of economic performance between the EU-CEE and the Western Balkans plus Turkey on the one hand and Belarus, Kazakhstan and Russia (CIS-3) 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.

 

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