GDP growth in the Europe and Central Asia region is shaping up to reach 2.2 percent in 2017, the strongest growth in six years. Almost all parts of the region show stronger growth than earlier expected, reflecting a strengthening of industrial production and exports in recent months.
The region’s export growth continues to exceed growth of export volumes in the rest of the world. Central Europe and the Western Balkans continue to register solid GDP growth, while Russia and Belarus have come out of recession. Only Azerbaijan, the country that was hardest hit by the fall in oil prices and that responded with some delay, is expected to remain in recession this year.
The improved growth outlook comes with a normalization of inflation, lower unemployment rates and in many countries moderate fiscal deficits. In the European Union, average inflation approaches 2 percent this year, after close to zero percent inflation a year ago.
In Russia and Kazakhstan, inflation has significantly dropped from double-digit rates after the fall in oil prices. This confirms that the recent low inflation in oil-importing countries and high inflation in oil-exporting countries merely reflected one-time adjustments in relative import prices.
In several countries, unemployment rates have fallen below pre-2008 levels, while labor participation rates are above pre-crisis levels. The average fiscal deficit this year is 1.6 percent of GDP, down from 5 percent in 2009.
Despite this robust cyclical performance, however, daunting structural challenges have come to the surface. In many countries, the share of full-time permanent jobs in total employment has declined. The banking sector remains fragile in many countries also, and weaknesses have become more exposed in countries that directly or indirectly depend on commodity exports. Moreover, the financial sectors in the region are struggling to absorb new technologies and meet new demand for risky capital.
Regional economic and political cohesion is being tested. After the European banking crises, the enthusiasm for deeper and broader integration has waned in the western part of the region. Meanwhile, the expected economic benefits of the Eurasian Economic Union have been somewhat diminished by the fall in oil prices.
The eastern part of the region has still not fully adjusted to the change in relative prices and the dramatic fall in income triggered by the drop in oil prices. The unavoidable decline in private consumption has been steep.
Last updated October 2017