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Economic growth in Europe and Central Asia (ECA) remains the slowest of all developing regions of the world. The ECA region is expected to see almost no growth this year as much of the region suffers a marked slowdown, or outright recession, due the direct and indirect impact of the oil price shock and ongoing geopolitical tensions. The negative effects of these factors are only being partially offset in the other parts of the region that are expected to see stable to moderately improving growth.
Countries highly dependent on oil exports, or on trade and remittances from oil exporting countries, are showing signs of a sharp slowdown, compounded by ongoing geopolitical tensions due to the conflict in Ukraine.
However, EU-Central and South Eastern Europe (EU-CSEE) and the Western Balkans are seeing initial signs of recovery with an increased pickup in net exports as the Eurozone is experiencing a nascent but modest recovery with expansionary monetary policy and declining oil prices serving to boost consumer and business confidence.
Still, while cheaper oil will contribute to growth and downward currency adjustments will help to rebalance demand away from imports and stimulate exports, long-term benefits will depend on improvements in the business climate and ongoing efforts to reduce the debt overhang in many ECA countries.
EU-CSEE countries are expected to see growth remain roughly the same in 2015 as in 2014 – about 2.7 percent – which is a significant improvement from the previous two years when growth was very modest (0.5 percent in 2012 and 1.2 percent in 2013), but it still remains far below potential. Unemployment rates remain stubbornly above 10 percent in many EU-CSEE countries and consumption growth is sluggish.
Economic growth in the Western Balkans is expected to be a modest 1.2 percent in 2015, up from 0.7 percent in 2014 as a pick-up in net exports is expected to offset slowing investment and consumption. The Western Balkans still remain heavily burdened by lack of new credit and non-performing loans are the highest in the ECA region (above 16 percent).
In Turkey, growth is expected to increase modestly from 2.9 percent in 2014 to 3 percent in 2015.
GDP growth in Russia was just 0.6 percent in 2014, compared to 3.5 percent in 2012 and 1.3 percent in 2013. Looking ahead, the baseline scenario calls for a sharp recession, with a projected contraction of 3.8 percent in 2015 and 0.3 percent in 2016. This forecast is based on expectations of an ongoing slump in oil prices (oil prices remaining in the USD 50-60 range) and no immediate resolution of the geopolitical tensions. The flexibility introduced into the exchange rate regime (the ruble has depreciated nearly 40 percent over the last year) has allowed the country to avoid a balance of payments crisis and has facilitated rebalancing of demand and production away from imports and toward domestic products and exports, although the country has had to adjust to substantially lower income.
Overall, the South Caucasus, Eastern Europe, and Central Asia have been hard hit by the downturn in Russia and the oil price shock, directly and indirectly through the fall in oil prices, remittances, and trade. Growth rates in 2015 are expected to be half those seen in 2014 in the South Caucasus and Central Asia, while Eastern Europe, which includes Ukraine, is expected to fall further into recession. In Turkey, growth slowed to 2.9 percent in 2014, but is expected to increase modestly to 3 percent in 2015.
For countries directly and indirectly adversely affected by lower oil prices, GDP tells only a small part of the story when it comes to the sharp decline in spending power available to their citizens. Real domestic income of a country includes real GDP and also remittances received from abroad as well as gains or losses from changes in export and import prices. The effect of the oil price shock and devaluation of the ruble has had a much stronger adverse impact on buying power than what is reflected simply by GDP.
Given the weaker buying power of many households in the region, poverty rates are expected to rise in several countries. This is a reversal of the downward trend toward lower poverty rates across the region. Poor households in oil-exporting countries and remittances-receiving countries are hit by higher import prices due to devaluations, the disappearance of jobs in construction and other non-tradable sectors, and because of fiscal pressures. This highlights the need for a quick adjustment to the new economic reality. Only if countries seize new opportunities in tradable sectors, can the deterioration of poverty rates be stopped.
Exchange rate adjustments, along with prudent monetary policy to keep domestic inflation under control, will help countries regain competitiveness in global markets in the Eastern part of the region. For the EU-CSEE part of the region, projected low oil prices and monetary policy easing in the Eurozone should help to mitigate the impact of low capital inflows and remaining uncertainty, including that arising from high debt levels, vulnerabilities in the banking sectors, geopolitical tensions, and Greece’s current financial turbulence.