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EBRD Revises Up Emerging Europe Growth Forecast

EBRD Revises Up Emerging Europe Growth ForecastEBRD Revises Up Emerging Europe Growth Forecast

The European Bank for Reconstruction and Development has revised up economic forecasts for 2018 as a broad-based recovery continues across its regions, bolstered by stronger investment activity and higher exports. 

After suffering acutely during the global financial crisis, countries where the EBRD invests initially struggled to get back on a path to growth. But recovery took hold in earnest during 2017, Emerging Europe reported.

With expansion now seen in every one of the EBRD’s economies this year and next, the bank’s new Regional Economic Prospects report is predicting average growth of 3.3% in 2018, an upward revision of 0.3 percentage points from the forecast last November. It expects growth of 3.2% for 2019.

The report said economic momentum remained strong but that growth might now have peaked. The 2018 and 2019 predictions represent a slowdown from 3.8% in 2017, reflecting lower rates of productivity growth in advanced and emerging economies compared with levels seen before the 2008-09 crisis, as well as adverse demographic trends.

The EBRD’s chief economist, Sergei Guriev, said the lower productivity growth reflected the fact that most EBRD economies had exhausted the growth levers that had delivered rapid expansion until the onset of the crisis.

“In order to develop new sources of growth, these countries need to carry out structural reforms of product, capital and labor markets,” said Guriev. “They need to improve governance, promote integration into the global economy, and invest in human capital and sustainable infrastructure.”

“The good news is that the current recovery provides a solid window of opportunity for such reforms,” he added. 

The EBRD tracks economic trends in 37 economies across three continents, from Estonia to Egypt and from Morocco to Mongolia.

The EBRD report said its forecast was subject to several risks. A substantial rise in corporate debt levels was a source of concern as the resilience of the corporate sector to a significant tightening of global financing conditions was as yet untested.

It also said that while high EBRD stock market levels—which had broadly traced US valuations not seen since the run-up to the 1929 stock market crash or at the height of the dotcom bubble in 2000—were a sign of optimism, there was a risk of a sizeable downward correction if the mood changed.

Growth in Central Europe and the Baltic states is expected to moderate gradually, from 4.3% in 2017 to 3.8% in 2018 and 3.3% in 2019, as skilled labor shortages constrain medium-term growth potential in Central Europe.

In South-Eastern Europe, growth momentum is also expected to ease but remain strong overall, with average growth declining from 4.1% in 2017 to 3.6% in 2018 and 3.5% in 2019.

Growth in Romania is expected to gradually moderate from close to 7% in 2017, when it was boosted by expansionary fiscal policy and rising wages. A return is now seen to more sustainable levels of 4.6% in 2018 and 4.2% in 2019.

In Eastern Europe and the Caucasus growth is seen accelerating from 2.3% in 2017 to 3% in 2018 and 3.3% in 2019, mainly reflecting continued recovery in Ukraine. Growth in Azerbaijan is also expected to pick up gradually as oil output stabilizes.

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