Growth in EBRD regions to pick up despite geopolitical pressures

WATCH LAUNCH OF THE REGIONAL ECONOMIC PROSPECTS LIVE

• Growth in the EBRD regions to pick up to 3.0 per cent in 2024, inflation down to 6.3 per cent
• Geopolitical tensions disrupting trade and investment; increased defence spending
• Boosted income convergence in eight EBRD countries after 20 years in the EU

The European Bank for Reconstruction and Development (EBRD) expects output in its regions to grow by 3.0 per cent in 2024, up from 2.5 per cent in 2023, despite challenges stemming from global geopolitical tensions, including growing limitations on trade, according to its latest Regional Economic Prospects report published today.

Growth in the Bank’s regions is projected to pick up further in 2025, to 3.6 per cent.

The new report, entitled “Taming inflation”, showcases an easing of inflationary pressures relative to last year, which was marked by economic slowdown due to high energy prices resulting from the war on Ukraine and post-Covid recovery.

While growth is expected to accelerate, the forecast is slightly below last September’s projections, with a downward revision of 0.2 percentage points. This is partly due to slower-than-expected growth in early 2024 across central Europe and the Baltic states, echoing Germany’s sluggish economic performance. Southern and eastern Mediterranean economies face weak growth as a result of the spillovers from the war in Gaza and reduced fiscal stimulus in Egypt, while Central Asia’s growth contributions from intermediated trade are levelling off, and are expected to be more modest in the future.

As energy and food prices moderated since 2022, inflation in the EBRD regions fell to an average of 6.3 per cent in March 2024 from a peak of 17.5 per cent in October 2022. While this drop was quicker than expected a year ago, inflation remains two percentage points above pre-pandemic levels. This pattern mirrors trends in advanced economies, where inflation has declined but remains above central banks’ targets. The forecast notes slower disinflation in EBRD countries with larger budget deficits and weaker macroeconomic frameworks.

“While disinflation has been faster than expected, inflation in some of our countries remains high,” said Beata Javorcik, the EBRD’s Chief Economist.

“The outlook is subject to significant risks, particularly from the escalation of geopolitical tensions and its unwanted economic effects. While the current shifts in trade and investment relationships may benefit some individual economies, let’s not forget that globally, geopolitical fragmentation leads to inefficiencies and higher volatility.”

The report describes how geopolitical tensions are impacting the Bank’s economies, leading to rapid fragmentation in trade and increased defence spending, while eroding the peace dividend – the economic benefit resulting from a reduction in defence expenditure and a subsequent reinvestment of funds in the civilian economy.

Since February 2022, arms trade as a share of imports and exports of the European Union (EU) economies in the EBRD regions increased from 0.1 per cent to 0.3-0.5 per cent. Countries are increasingly trading certain goods only with certain partners. “Bridging” economies which trade with both eastern and western blocs have been large recipients of foreign direct investment (FDI) and stand to benefit from fragmentation.

Inward FDI from China to the EBRD regions picked up sharply in 2023. Similarly, investment from Russia to Central Asia has been rising, particularly in logistics services.

Geopolitical pressures are also reflected in the elevated borrowing costs observed in the EBRD countries in the EU. The median yield on five-year government bonds increased by three percentage points from early 2022 to April 2024 across the Bank’s regions.

May 2024 marks the 20th anniversary of the EU accession of eight economies where the EBRD invests: Czechia, Estonia, Hungary, Latvia, Lithuania, Poland, the Slovak Republic and Slovenia.

Over the past two decades, these countries have experienced significant growth in their per capita incomes, transitioning from being only about a quarter as affluent as Germany in 2003 to achieving half its GDP per capita by 2023. 

This was faster than the speed with which other emerging markets at similar levels of development were converging with advanced economies. The swift convergence can be largely attributed to the “EU accession bonus”, which was facilitated by rapid growth of exports relative to GDP as these economies integrated more deeply with the European and global supply chains.

Regional growth projections

Growth outlook in central Europe and the Baltic states is expected to gradually improve, with 2024 projections being at 2.2 per cent and accelerating further to 3.1 per cent in 2025. Yet, growth forecasts in several economies have been revised down since September 2023 due to weak economic activity in recent months.

In the EBRD countries in the south-eastern EU, GDP growth is projected to pick up from 2.0 per cent in 2023 to 2.8 per cent in 2024, supported by accommodative fiscal stances and robust real wage growth.

Similarly, the Western Balkans region expects growth to increase to 3.3 per cent in 2024 from 2.5 per cent last year.

Central Asia is expected to face a slight decline in growth from 5.7 per cent in 2023 to 5.4 per cent in 2024, as intermediated trade with Russia appears to have reached a plateau, while spring floods weigh on Kazakhstan’s growth prospects. However, a rebound is expected in 2025, to 5.9 per cent.

Growth in the Caucasus is forecast to be moderate at 4.1 per cent in 2024 before settling closer to 3.5 per cent in 2025, a level in line with estimates of medium-term potential growth.

Ukraine’s output expansion is expected to be held back in 2024 due to significant recent damage to electricity infrastructure. 

The economy of Türkiye is projected to slow from 4.5 per cent growth in 2023 to 2.7 per cent in 2024, followed by a slight uptick to 3.0 per cent in 2025. The latter outlook reflects expectations of stricter monetary and fiscal policies in the face of persistently high inflation.

In the southern and eastern Mediterranean region, revised growth forecasts foresee an acceleration from 2.6 per cent in 2023 to 3.4 per cent in 2024. The downward revision compared with the previous forecast is due to delays in the implementation of large public investment projects in Egypt and the war in Gaza. The conflict’s negative effects on tourism in Jordan and Lebanon may prove to be lasting.

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Table 1. Real GDP growth, in per cent per annum