Economic activity in the emerging and developing economies of the Europe and Central Asia region is likely to slow this year as a weaker global economy, tight monetary policy, slowdown in China and lower commodity prices weigh on the region’s growth outlook, according the latest World Bank Economic Update for the region, published on April 11.
Regional growth is likely to slow to 2.8 per cent this year, following substantial strengthening to 3.3 per cent in 2023 as the economies of both Russia and war-hit Ukraine returned to growth and because of a more robust recovery in Central Asia.
However, excluding Russia and Ukraine, growth in the region is projected to remain little changed at 3.1 per cent in 2024, as strong rebounds in Central Europe and the Western Balkans help to offset slower growth elsewhere.
Headwinds to the outlook are multiple. A slower-than-expected recovery in key trading partners, especially in the euro area, restrictive monetary policies, and an exacerbation of geopolitical developments could further dampen growth across the region.
“Countries of Europe and Central Asia continue to confront multiple crises, exacerbated by a challenging global growth environment,” says Antonella Bassani, World Bank Vice President for the Europe and Central Asia region. “Reviving productivity growth by stimulating business dynamism and improving resilience against the risks from climate change can help protect the region’s people and accelerate economic growth.”
Sluggish growth will further delay the region’s recovery from recent shocks, including Russia’s invasion of Ukraine, which remains ongoing, the pandemic, and the 2022 cost-of-living crisis.
Inflation has fallen faster than expected in the emerging markets and developing economies of Europe and Central Asia, largely due to steep declines in global energy and food prices. The median annual consumer price inflation in the region fell to 4.2 per cent by February 2024 from 15 per cent at the start of 2023. Nevertheless, the 2022 cost-of-living crisis continues to affect households despite increases in real incomes last year.
Ukraine
In Ukraine, the pace of recovery is projected to slow to 3.2 per cent this year from 4.8 per cent in 2023, reflecting a smaller harvest and persistent labour shortage. Last year’s economic expansion was supported by a record high harvest, rerouting of exports to bypass the Black Sea, a sharp drop in inflation, and a more stable electricity supply.
The country’s economic outlook remains conditional on donor support and the duration of Russia’s invasion. According to recent estimates by the World Bank and partner institutions, the cost of reconstruction and recovery in Ukraine has grown to 486 billion US dollars, which is more than two times the size of Ukraine’s pre-war economy in 2021.
Central Europe & the Western Balkans
Weaker external and domestic demand dampened growth in Central Europe and the Western Balkans. In Central Europe, growth slowed sharply to an estimated 0.9 per cent in 2023 from five per cent the year before as the higher cost of living tempered household consumption and a sharp slowdown in the euro area hurt exports.
Growth in the Western Balkans dropped to an estimated 2.6 per cent last year from 3.4 per cent in 2022 because of weaker growth in consumption and exports and despite a robust rebound in tourism and a pickup in construction in some countries.
This year, growth in Central Europe and the Western Balkans is expected to strengthen primarily owing to more robust domestic consumption and a gradual recovery of exports. Growth in Central Europe is likely to pick up to three per cent this year from an estimated 0.9 per cent in 2023, led by a strong recove ry in Poland, which is expected to start benefiting from the release of funds from the European Union’s Recovery and Resilience Facility as the government makes progress on reforms. Minimum wage increases, tight labour markets, and declining inflation are expected to sustain real wage growth boosting private consumption.
Growth in the Western Balkans meanwhile is projected to increase to 3.2 per cent this year, reflecting a recovery in domestic demand and a boost from investment.
South Caucasus & Central Asia
Lower commodity prices, weak recovery in China, and the fading effects of remittances are expected to cool growth in Central Asia and the South Caucasus.
In Central Asia, growth is expected to fall to 4.1 per cent this year from an estimated 5.5 per cent in 2023, with all countries experiencing a slowdown. The region will continue to significantly outperform Europe, however. Lower oil prices and stagnant oil output are likely to slow growth in Kazakhstan to 3.4 per cent in 2024 from 5.1 per cent last year. Tajikistan, at 6.5 per cent, is forecast to see the highest growth of any of the emerging and developing economies of Europe and Central Asia.
The countries in the South Caucasus are projected to grow by 3.5 per cent this year, down from 3.8 per cent in 2023. Growth is set to ease in Armenia and Georgia reflecting heightened geopolitical risks, moderating exports, and the fading boost to growth from the large inflows of migrants and capital from Russia. Growth in Azerbaijan is likely to be stronger as the downturn in the oil industry eases, oil revenues continue to support investment, and amid progress on structural reforms to diversify the economy and reduce the state’s involvement in business.
Unleashing the private sector
The report includes a special focus chapter on unleashing the power of the private sector. It notes that economic development in the region has been a story of transition from plan to market economies, broad and deep structural reforms, and the emergence of private initiative, the main driver of growth and prosperity.
However, “the private sector in several countries in the region faces barriers, which hamper its ability to expand and innovate,” says Ivailo Izvorski, World Bank Chief Economist for Europe and Central Asia region. “Boosting business dynamism will require addressing several challenges, including upgrading the competition environment, reducing state involvement in the economy, improving the quality of education, and strengthening the availability of finance for firms.”
Efforts to foster competition and free markets should focus on reducing barriers to entry and facilitate exit for unproductive firms. The substantial presence of state-owned enterprises is also a major constraint to levelling the playing field for private enterprises.
Private firms are also faced with an inadequately educated workforce and large skills gaps, which are major constraints to growth. High emigration rates of young and skilled workers do not help in the short term. A better educated workforce is associated with higher productivity and can lead to more innovation.
Bank lending to the private sector is relatively low and has not increased in the past decade. The lending also tends to be more short-term. To improve productivity growth and innovation, firms need access to long-term finance.
Photo by Anton Rybakov on Unsplash.
