Outlook and risks

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Macroeconomic overview

Growth in the transition region is expected to slow from 2.7 per cent in 2012 to 2 per cent in 2013 as a whole. This reflects the continued deceleration – of the Russian economy in particular – in the first half of the year. However, coinciding with the return to growth of the eurozone, early signs of recovery had begun to emerge by mid-2013.

CEB and SEE countries have seen gradual export growth and a pickup in consumer and investor confidence. On a quarterly basis, Hungary, Croatia and Ukraine are expected to exit their recessions by the end of the year, although the latter two will still see contractions in annual terms. The majority of CEB, SEE and EEC countries will record weak growth – below 2 per cent – in 2013. Exceptions include Latvia and Lithuania, where gains in competitiveness continue to support a faster rate of expansion, and Azerbaijan, which has benefited from an increase in oil production. Growth also remains higher in Turkey and parts of the SEMED region, as well as in Central Asian countries, which continue to see significantly faster growth, ranging from 5 to 13 per cent.

In 2014, the region is expected to face a moderately improved, but still weak, external environment. Recovery in the eurozone is likely to be slow and uneven, and may be offset by the continued deceleration of major emerging economies. Market volatility in recent months has shown that the possible tightening of monetary policy in the United States could have significant consequences for the more vulnerable economies – including some countries in the transition region.

As a result of the gradual improvement of external demand – and in some countries, domestic demand – regional growth is projected to accelerate modestly in 2014, to 2.8 per cent. While better than the previous two years, this would mark the first time since the mid-1990s that the transition region had grown by less than 3 per cent in three consecutive years.

The recovery is expected to gain momentum slowly in most CEB and SEE countries, with only Slovenia remaining in recession. Supported by more accommodative fiscal policy, including increased spending on public infrastructure projects, Russian growth is expected to increase from 1.3 per cent in 2013 to 2.5 per cent in 2014. This partial recovery will benefit countries in the EEC region and Central Asia, whose economies have been negatively affected by weak Russian demand and slow remittance growth. In the absence of renewed political turmoil, the SEMED region is also expected to see somewhat faster growth in the coming year.

Downside risks to this outlook stem mainly from external sources. The most significant risk to growth in the CEB and SEE regions remains a return to crisis in the eurozone. In the worst scenario, a eurozone crisis would engulf larger members of the single currency area, leading to the insolvencies of several major banks in Europe. In response to such events, parent banks would accelerate withdrawal of funding from the region, exacerbating the contraction of credit and triggering recession in much of eastern Europe.

While the likelihood of this scenario has receded in recent quarters, other risks have increased. A faster deceleration of growth in China, or emerging markets more generally, would have substantial negative spillovers for the global economy. As yet unresolved disagreements over the extent and composition of fiscal adjustment in the United States pose a further risk. Given the global importance of US Treasury securities, a fiscal impasse could have a profound effect on world financial markets.

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