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Europe and Central Asia

Economic activity strengthened in the Europe and Central Asia region in 2013 supported by strengthening external demand. The return to growth in the Euro Area in the second quarter of 2013 supported real side activity in the region, particularly in the Central and Eastern European countries due to strong trade linkages. In Turkey, buoyant domestic demand underpinned acceleration in growth to 4.3 percent in 2013 from 2.2 percent in 2012. Performance among the Commonwealth of Independent States has been mixed. Among energy-exporting countries (Azerbaijan, Kazakhstan, and Uzbekistan), activity has remained strong reflecting relative strength in energy-related commodity prices, expansion of production in extractive sectors, and robust growth in domestic demand. In contrast, among non-energy exporters, weaknesses in key commodity prices cut into incomes and activity, with Belarus, Kyrgyz Republic and Ukraine experiencing the most negative terms of trade impacts. Capital inflows to the region began strong, but weakened after the tapering announcement in the mid-year and heightened volatility thereafter, ending in slight decline by $1.9 billion or 1.6 percent year-on-year. Across the region, the banking sector remains weak, saddled with overhang of nonperforming loans (e.g., Albania, Bulgaria, Kazakhstan, Romania, and Serbia).

The overall outlook for the region is positive, with expected modest recovery into 2014–16. However, outlook remains divergent across countries as they face different mix of external developments, domestic policies, and structural challenges. The pick-up in activity will be most marked in the Central and Eastern European economies, where there is currently the most spare capacity. Despite stronger growth, domestic demand, is expected to remain sluggish due to ongoing banking-sector restructuring and tighter international financial conditions, which will weigh on investment and consumer demand. Ongoing or planned fiscal consolidation in some countries (e.g. Albania, the Former Yugoslav Republic of Macedonia and Serbia), will also serve to partly offset the growth impetus from stronger exports. Growth in Turkey is expected to stabilize around its potential growth rate of about 3.9 percent over the 2014–16 period—well below its pre-crisis rate of 6.8 percent (2002–2007 average). As a significant beneficiary of international capital flows in recent years, Turkey will be most affected by the tighter global financial markets. Among resource rich Commonwealth of Independent States, growth is expected to pick up on the back of the global recovery which should be supportive of increased energy and export demand. Oil prices are projected to remain stable in nominal terms through 2014 before declining marginally in 2015 and 2016. Among non energy-producing Commonwealth of Independent States, growth will be supported by a pick-up in remittances and exports as the global economy strengthens, although weaker non-energy commodity prices are likely to weigh on export revenues and government spending.

While the baseline forecast remains the most likely outcome, the region’s outlook is subject to several downside risks. Protracted recession in the Euro Area is a key downside risk to the outlook especially for countries with stronger trade and financial links with the area. In addition, slower-than-projected growth in China could slow global growth by as much as 0.3 percent and with more marked effects on regional industrial commodity producers (e.g. Belarus and Ukraine). A sharper-than-expected slowdown in Russia would weaken the growth outlook for many Commonwealth of Independent States, especially those that are heavily dependent on Russia for import demand, remittance flows, and foreign investment (e.g., Armenia, the Kyrgyz Republic, Moldova, Tajikistan, and Uzbekistan). Tighter global financial conditions and risk of disorderly adjustment to higher global interest rates once tapering of US monetary policy begins could pose a challenge, particularly for countries with weak banking sectors, high current account deficits financed by portfolio inflows, and high levels of private external debt.

Europe and Central Asia regional forecast
(annual percent change unless indicated otherwise)

Source: World Bank
Notes: e = estimate, f = forecast
* Unless otherwise indicated, regional aggregates are computed for low and middle-income countries in the region and do not include any of the region's high-income countries.
a. Growth rates over intervals are compound weighted averages; average growth contributions, ratios and deflators are calculated as simple averages of the annual weighted averages for the region.
b. GDP at market prices and expenditure components are measured in constant 2010 U.S. dollars.
c. Sub-region aggregate excludes Bosnia and Herzegovina, Kosovo, Montenegro, Serbia, Tajikistan and Turkmenistan. Data limitations prevent the forecasting of GDP components or Balance of Payments details for these countries.
d. Exports and imports of goods and non-factor services (GNFS).
e. Transition countries: CEE and CIS (f + g below).
f. Central and Eastern Europe: Albania, Bosnia and Herzegovina, Bulgaria, Georgia, Kosovo, Lithuania, Macedonia, FYR, Montenegro, Romania, Serbia.
g. Commonwealth of Independent States: Armenia, Azerbaijan, Belarus, Kazakhstan, Kyrgyz Republic, Moldova, Tajikistan, Turkmenistan, Ukraine, Uzbekistan.

Europe and Central Asia country forecasts
(annual percent change unless indicated otherwise)

Source: World Bank
Notes: e = estimate, f = forecast
World Bank forecasts are frequently updated based on new information and changing (global) circumstances. Consequently, projections presented here may differ from those contained in other Bank documents, even if basic assessments of countries’ prospects do not significantly differ at any given moment in time.
* Published forecasts are for only low and middle-income countries in the region, hence no high-income countries are included.
a. GDP growth rates over intervals are compound average; current account balance shares are simple averages over the period.
b. GDP measured in constant 2010 U.S. dollars.

Europe and Central Asia net capital flows
US$ billions

Source: World Bank
Note: e = estimate; f = forecast

See the regional audio slideshow by the author.