bne IntelliNews – Tougher times for emerging Europe
Expectations of a quick end to the war in Ukraine followed by a quick recovery from the economic shock across emerging Europe have proven unfounded. Instead, with no end to the war in sight, spiraling inflation is set to dampen growth across emerging Europe in the second half of 2022 and into 2023, according to the Institute for Studies’ latest set of forecasts. Vienna International Economics (wiiw) .
Growth projections for almost all emerging European countries have been lowered since Russia’s invasion of Ukraine in February, and now range between 4.5% in Slovenia and -38.0% in Ukraine .
wiiw predicts that most of the region will avoid an economic recession this year, but this outlook is subject to considerable downside risks.
Across the region, the most resilient to the crisis are the region’s 11 EU members, where average growth of 3.3% is expected this year.
Growth in the EU aspirants of the Western Balkans is expected to reach a more modest but still positive level of 2.9%, while Turkey is heading for growth of 2.7%.
On the other hand, strong contractions are expected in Russia and Ukraine, as well as in Belarus, Russia’s closest ally, also targeted by Western sanctions. Moldova, located next to Ukraine and part of whose territory is controlled by Russian-backed separatists, is heading for a contraction of 1%.
“The region has shown a truly remarkable resilience in its recovery from the shock of the COVID pandemic, but things are unfortunately changing for the worse,” said Olga Pindyuk, economist at wiiw and lead author of the summer forecast, during a briefing. a webinar to present the results. July 6.
Rise in inflation
Specifically, she said, “inflation has become a major challenge globally” and there is a high level of uncertainty with downside risks continuing to mount.
wiiw has had to revise its inflation forecast for 2022-23 upwards for most countries in the region, as wiiw economists now expect “inflation to be more persistent and last longer than expected.” thought so before,” Pindyuk said.
Inflation was in double digits in all 23 countries included in the wiiw report, from Central Europe to Central Asia, with one exception: Slovenia. While Turkey’s runaway inflation is several times higher than other countries in the region – it is expected to reach around 68% this year – the eastern members of the EU are heading for inflation of around 11 % on average.
Wiiw’s report identifies the war as the root of the seemingly unstoppable rise in food prices: “A major reason for this is the shortage of supply in world markets due to the loss of Ukrainian and Russian agricultural exports. Dwindling fertilizer supplies as a result of the war could limit agricultural production in many countries and further aggravate the food crisis.
However, inflation is not limited to food and energy prices. “Worryingly, core inflation (excluding food and energy) is also picking up in the CESEE region. This suggests that inflation is now increasingly widespread,” the report said.
Against a backdrop of rapidly rising inflation, confidence is already deteriorating among businesses and, to a much greater extent, among consumers.
“Inflation is starting to bite households, eating away at real incomes, and that’s just the beginning. The situation is likely to worsen in the second half of 2022,” Pindyuk said.
“Real wages are falling in some counties and positive growth [in others] is not sustainable because inflation is soaring. This means that a slowdown in consumer spending is ahead. Households [in emerging Europe] are poorer than in Western Europe and a higher proportion of their expenditure is devoted to food and non-alcoholic beverages. The demand for these items is inelastic, so the demand for other things will inevitably decline. At the same time, more and more households will be pushed into poverty,” she added.
Ukraine’s devastated economy
In addition to the loss of life and destruction in Ukraine, the country’s economy has been devastated by the war. Previous forecasts from various institutions initially predicted a rebound in 2023, but as the war drags on into the second half of the year, this is no longer a given; wiiw currently forecasts growth of only 5.0% in 2023 and 13.0% in 2024.
“The war continues to have a devastating effect on Ukraine’s economy, with damage from the destruction of residential and non-residential buildings and infrastructure exceeding 60% of the country’s GDP in 2021,” the report said.
“As Ukraine adjusts to the new reality of war, economic activity is beginning to slowly recover in the manufacturing and service sectors, with more and more businesses resuming operations. Capacity utilization remains 40% lower than before the war began.
Although the timing is unclear, at some point the war will be over and the reconstruction of Ukraine will begin, heralding the start of the country’s recovery.
“We expect – when the war ends and reconstruction begins, private capital will flow in,” Pindyuk said, noting that the IT and agriculture sectors were particularly attractive, as well as renewable energies.
On the other hand, Pindyuk said, “for the parts of Ukraine that may end up under Russia, the future is very bleak, without reconstruction and isolated from the global economy.”
Late reaction in Russia
Russia’s self-inflicted comic contraction is now expected at 7% on the year – softer than expected.
“So far, Russia has coped better with the sanctions than expected in the spring. The sharp drop in imports and still high energy export earnings pushed the ruble to a new five-year high against the euro and the US dollar,” the report said.
“The strong ruble and people’s reluctance to spend are also dampening inflation, which we now see at around 16% in 2022. In the short term, the country has additionally benefited from the EU oil embargo through further increases in the price of oil”.
However, Vasily Astrov, senior economist and Russia expert at wiiw, said more pain awaits Russia. “While it has been possible to slow the slump, the full effect of Western trade sanctions is only gradually becoming apparent,” Astrov commented, pointing to “dramatic” production losses in some industrial sectors due to a lack of western components.
Downside risks abound
Even the increasingly pessimistic forecasts could still be revised downwards because, as Pindyuk pointed out, the downside risks are increasing.
The first of these is the continuation of the war, which is still subject to “enormous uncertainty”, even if it is already clear that it will last much longer than initially thought.
Second, Pindyuk said, “persistently high inflation could trigger a stagflationary hard landing, with prices spiraling out of control and an economic recession.”
As Russia and the West continue to inflict economic damage on each other, Pindyuk believes that a sudden gas supply shutdown cannot be ruled out, which would be particularly damaging for countries in Central and Southern Europe. Southeast which imports almost all of its gas from Russia. A suspension of gas supplies “would imply winter energy rationing and push many countries into recession,” the economist warned.
Fourth, there are inflated property prices, which wiiw considers unsustainable.
Finally, analysts are already anticipating the next US presidential election in 2024, given the importance of the United States for Europe’s security and economic situation.