Much of emerging Europe faces a new balance between low growth and high inflation, according to the fall forecast by the Vienna Institute for International Economic Studies (wiiw), published October 11.
Since its summer forecast, the Wiiw has reduced its growth forecasts for Central Europe, while raising them for the Western Balkans, Turkey, Ukraine and the Commonwealth of Independent States (CIS).
For 2023, the Wiiw has halved its average growth forecast, to 0.6% for the region’s EU members – virtually the same as it predicts for the eurozone (0.5 %). But the Wiiw raised its forecasts for the average growth rate of the Western Balkans to 2.1% and for Turkey to 3.2%.
The institute said that despite their resilience in the face of the economic consequences of Russia’s war in Ukraine, the economies of Central, Eastern and South-Eastern Europe (CESEE) are under increasing pressure.
“The recession in Germany, the deterioration of the international environment, the persistence of high inflation, monetary tightening and inadequate fiscal policy measures are all weighing on the economy,” said Branimir Jovanović, lead author of the forecast.
Growth was held back by household consumption and exports, while public spending and investments provided only modest momentum.
In Central Europe, after an already weak first quarter, the economies of Hungary, Latvia and Estonia continued to decline in the second quarter, while Poland and the Czech Republic slipped towards negative growth.
“In view of a possible recession in the entire eurozone, this negative dynamic could become more pronounced, especially in the Visegrád countries, which are closely linked to the weakening of German industry,” said Jovanovic.
Southeastern EU members Romania (2.5%) and Croatia (2.5%) are faring much better, the report notes, while growth in the Western Balkans is driven by remittances, FDI and tourism. Turkey is expected to grow 3.2% this year and 2.7% next year.
The Ukrainian economy has resisted the Russian invasion better than initially expected, the newspaper claims. He raised his forecast to Growth of 3.6% for 2023, pointing to a 16% increase in agricultural exports from July to August.
For Russia, the Wiiw forecasts that the economy will grow by 2.3% this year, thanks to the boom in the arms industry.
“The huge increase in military spending is fueling an arms boom which, combined with a sharp rise in real wages, due to a severe labor shortage, is pulling the economy up,” he said. said Vasily Astrov, Russia expert at wiiw.
For 2024, the institute downgraded its forecasts for all regions of emerging Europe, with EU member states in the region now expected to grow by 2.5% on average, helped by the funds NextGenerationEU. However, he warns that significant downside risks remain.
“A sharper slowdown in the eurozone, persistent inflation rates, a military escalation in Ukraine or an intensification of the trade war between the EU and China could jeopardize the recovery next year,” Jovanović said.
Inflation has now exceeded its maximum in most countries, says the wiiw, but it will remain high for the foreseeable future.
“We are converging towards a new equilibrium characterized by lower growth and higher inflation than before the pandemic,” Jovanović said.
The driver of inflation is now the price of food, rather than energy, which is creating increasingly serious social problems. Jovanović blamed food companies’ higher profit margins, with food inflation above 10% everywhere despite disinflation in global food prices.
Inflation will be persistent, he says, with core inflation (which excludes food and energy) now exceeding headline inflation in most countries in the region.
Falling inflation and rising wages have led to rising real wages across most of the region, following sharp declines of almost 20% in Czechia and Slovakia between Q4 2021 and Q2 of 2021. This year.
The wiiw warns that if companies, including profits are at a historically high level, if we react to this with further price increases, which could lead to a strengthening of inflation.
The institute emphasizes that given the increase in budget deficits due to managing the effects of the COVID-19 pandemic and the cost of living crisis, as well as rising yields, fiscal policy will not be able to sustain as much growth in the future. This could worsen growing poverty caused by rising food and energy prices.
At the same time, monetary policy will remain restrictive, creating a risk of prolonged recession.
Jovanović said the institute predicts the end of the hike cycle, but that does not mean monetary policy will be accommodative. “The reductions will be minor and rates will be high all next year. Rates won’t go back to 0% anytime soon.
