Cautious Upturn in Emerging Europe Haunted by the Spectre of Uncertainty

Read the Life in Transition special report


Mario Holzner

About Mario Holzner

Mario Holzner is Deputy Director of wiiw. His research focuses on macroeconomic analysis, financial markets and income distribution and inequality. Mario Holzner is also a lecturer in applied econometrics at the University of Vienna, Department of Economics. He obtained his PhD at the Vienna University of Economics and Business in 2005.

For the economies of emerging Europe, the international economic environment appears generally positive. In 2017-2018, GDP growth in the Euro area is expected to hover at around 1.7 per cent. The international financial markets have stabilised and the current economic mood is improving. Because of the global recovery, the US Fed is expected to increase interest rates further in 2017, while oil prices are likely to rise. In the EU, disbursements from the payments’ cycle of the European Structural and Investment Funds are only just beginning, indicating higher co-financed investments in the Central and Eastern European EU member states (EU-CEE) from this year onwards.

Over recent quarters, GDP growth throughout almost the entire region has stabilised in positive territory. The only exception is Belarus, where growth is still in negative territory (albeit less so than was the case in 2015). The country is going through a painful adjustment process that was triggered by accumulated macroeconomic imbalances and its excessive dependence on Russia.

Our current forecasts for GDP growth for 2017-2019, point to growth of around three per cent for most of the region, with a slightly upward trend. The EU-CEE sub-region and the Western Balkan economies, in particular, should manage to reach average GDP growth rates of up to three per cent and in some countries, such as Hungary, Romania, Slovakia, Albania and Kosovo, the levels may be even higher.

In Turkey, where growth has slowed down markedly, in 2016, to below two per cent (down from around six per cent in prior years) on account of the domestic, political turmoil and deterioration in foreign relations, we also expect growth to be closer to three per cent by the end of the forecast horizon.

The CIS-3 economies of Belarus, Russia and Kazakhstan will record increasing GDP growth rates, rising from more than one per cent in 2017 to over two per cent in 2019, given the higher oil prices. Over the same forecast period, economic growth in Ukraine is projected to accelerate gradually to three per cent by 2018-2019, barring all-out warfare in Donbas and the termination of the IMF programme.

Private consumption and increasing investment will continue to be the main drivers of growth over the forecast horizon. After the investment slump in 2016, which was attributable to the switch from the previous to the current, EU (co-)financing period, investment in the EU-CEE economies will recover in the years ahead. Meanwhile the mood among consumers is improving and, because of changing spending patterns in the EU-CEE sub-region, this trend should prove durable. Tightening labour markets are conducive to major wage increases.

Despite the general rise in unit labour costs, competitiveness does not seem to be endangered. Most of the latest industrial production figures for the CESEE countries are encouraging; they point to an ongoing improvement in industry structure and, in several cases, to re-industrialisation. Longer-term FDI trends hold particular promise for the Western Balkans. In Romania and Slovakia the prospects for future FDI increases are also quite good, especially in the automotive sector. Although the size of the labour force in the CESEE countries is more or less stagnant, a marked improvement in the level of education is evident, as a younger and better educated generation enters the work force. This hints at a potential, general increase in labour quality across the region’s economies.

Nevertheless, the heightened uncertainties following the UK referendum on Brexit, in June 2016, and the US presidential elections, in November 2016, have cast a cloud over the improved economic conditions noted above. It is quite conceivable that a number of worrying scenarios could ultimately make our forecasts appear upbeat and overoptimistic.

For the EU-CEE sub-region, such a degree of uncertainty constitutes a major challenge, and the consequences could be both material and negative. Thanks to US President Trump, a rise in global protectionism is possible, which would harm industry in the EU-CEE countries, both directly and indirectly via the region’s close integration with Germany. Mr Trump has also questioned post-war European security arrangements, in consequence causing consternation in some EU-CEE countries.

Meanwhile, the growing irritation with the EU-CEE sub-region among some older EU Member States, and the fallout from Brexit, could possibly pose a threat to west-east fiscal transfers and the free movement of labour in their current forms. In a broader context, the evidence of an EU-wide loss of faith in the EU project and its associated values and institutions will have important consequences. This uncertainty may well act as an impediment to growth in the EU-CEE in the near future. More importantly, it could cast doubt on the prospects of longer-term EU-CEE political and economic convergence.

Uncertainties in the Western Balkans are mostly linked to developments in the EU and the USA, as well as, albeit to a lesser extent, to developments in Russia and Turkey. The region is increasingly counting on the EU market and political stability in the EU, with its promise of membership, however distant. In terms of security, the region is not self-governing; NATO plays a vital stabilising role, hence any uncertainty about the US’s commitment to supporting the region could have major consequences. Moreover, any confrontational interventions by Russia combined with uncertainties as to developments in Turkey could prove quite disruptive, were the influence of the EU and USA to decline.

Increasing uncertainties in the CIS region and Ukraine are mostly related to future commodity price developments (most importantly oil prices) and heightened geopolitical tensions. The current mood of uncertainty, concerning the future dynamics of oil prices is associated primarily with supply-side factors (namely the outcome of the OPEC deal and the resilience of shale oil producers). It has been one of the key concerns for the CIS countries that are dependent on petroleum exports. The election of Donald Trump has added to the uncertainties affecting the CIS region and Ukraine. The possibility of a Trump-Putin deal and a lack of EU unity may result in the West lending less support to Ukraine, which of itself may also lead to political destabilisation.

At the same time, a potential end to the sanctions would have a mildly positive impact on the Russian economy. The ever-deepening lack of EU unity, along with the slow progress towards reforms that have been aggravated by macroeconomic issues and geopolitical strains, may jeopardise the implementation of the Association Agreements with the EU in the signatory countries: Georgia, Moldova and Ukraine.

However, seen from a currently optimistic perspective, the emerging Europe region as a whole is back on a convergence track with an average growth differential of 1.2 percentage points vis-à-vis the Euro area, over the forecast horizon.



The views expressed in this opinion editorial are the author’s own and do not necessarily reflect Emerging Europe’s editorial policy.


Innovation Brings Great Opportunities to the Belarusian Economy

Belarus Is Where the New Silk Road Heads For Europe

Brexit Is a Great Opportunity to Attract Foreign Investors to Belarus

Emerging Europe and the EBRD host the Outlook on Belarus conference in London

FocusEconomics: Belarusian Economy to Grow in Q4 2016 and Onwards

Winning the Fight for Female Talent in Central and Eastern Europe

pwc women

An Independent Judicial System is Essential to Attract FDI

legal system CEE

Belarus and Singapore Share the Same Factors for Economic Success

Encouraging SME’s Development Will Help Build Belarusian Economy

Belarus: Changing Old Ideas And Mixing With the New in Belarus’ Export Market

Harris Georgiades: Cyprus’s Restored Business Environment Offers Investment Opportunities

Emerging Europe EBRD Sea port city of Larnaca, Cyprus. This picture was taken through the window of the plane.

Italy and Belarus: A Relationship Based on Complementarities and History

Innovation Is the Key Growth Driver

innovation ebrd

The Next Four Months Crucial For the Belarus-EU Relations

Belarus is the most creative EEU country

Veni, Vidi, Vici, Or My Personal Experience of Doing Business in Belarus

Fear of Hostilities Holds Back Bosnia and Herzegovina’s FDI Performance

ebrd bosnia emerging europe

EU Membership Offers Real Prospects of Social Progress Gains

Beautiful view on cute backyard in sunny day, fresh green grass

Small Businesses – the Backbone of the Egyptian Economy

women egypt emerging europe

Albania’s Agribusiness Support Facility – With a Little Help From Your Friends

View of the central square with the monument of Skanderbeg in the Albanian capital Tirana

Belarus Has To Make an Extra Effort To Change Investors’ Perceptions

Business Opportunities in Belarus Encourage Outside Interest

Greener and More Resilient: Energy Sector Reforms in Serbia for the Benefit of All

Belgrade, Serbia - confluence of the Danube and Sava rivers

The Belarusian Financial Sector: An Industry in the Process of Restructuring

Belarus: On the Way to a Market Economy?

Leszek Balcerowicz: Ukraine Can Learn from Poland’s Economic History

OECD: Belarus Has to Find Its Own Belarusian Model to Emerge

The Fight Against Corruption in Europe’s Emerging Economies


Belarus Is Making the First Steps onto the International Finance Floor

Georgia on My Mind – Where Beauty Meets Business

georgia ebrd emerging europe

CEE NPL Resolutions – Now and Then

NPL central and eastern europe

Belarus-Turkey Investment Forum to increase investment and trade between the two countries

Belarusian Economy on a Diet to Change its Financial Outlook

Winds of Change for Belarus’ Reinsurance Industry?

Belarus is Bringing Opportunities for European Companies

Great Stone

Emerging Europe Live: Life in Belarus As Seen by Foreigners

Emerging Europe Makes Great Strides in Improving Business Regulation for Entrepreneurs

Skopje Macedonia

Georgia’s Hospitality Sector Is Starting to Develop

georgia hospitality

High-Tech Park in Minsk is growing rapidly

The Great Stone Industrial Park — Making Doing Business Easy in Minsk

New investors interested in Belarus’ Great Stone Industrial Park

World Bank’s Doing Business Report 2016 Resume For Emerging Europe

Emerging Europe Has Already ‘Emerged’ for the Most and it’s a Transition to Be Proud Of

Günter Verheugen: Populist Politics and Euroscepticism Will Have an Impact on CEE

eu guenter verheugen

Not All Quiet on the Eastern Front

Improving the Business Environment Is Vital for Moldova’s Government

ebrd moldova

Are Labour Shortages Driving Economic Growth?

Germany Is Not Letting Belarus’ Small Downturns Put it off Looking for Investment Opportunities

The essence of the Customs Union is protectionism

Bringing Belarus’ Cultural Past to Life for Belarusians and the World

Kazakhstan is Beginning to Explore Belt and Road Opportunities

Astana Kazakhstan

Strengthening the Resilience of the Economy of Bosnia and Herzegovina

Montenegro EBRD annual meeting

PandaDoc — Rolling Sales Procedures Together So Everyone Succeeds

The EBRD Helps Jordan’s Infrastructure to Accommodate an Influx of Refugees

ebrd jordan refugees

Switched on Heads of Expansion Are Developing their Own Business Rankings, Adjusted to Their Companies’ Realities

global expansion

Foreign Investors: Belarus Offers Opportunities But Further Improvements Are Needed

Lithuania’s Focus on SME Growth and the EBRD’s Role

View on Vilnus

Montenegro: Joining up Agriculture and Tourism

montenegro ebrd emerging europe

The Belarusian real estate market is on the up

Emerging Europe Live: CEE — The Outsourcing Destination

HTP: Belarus’ Engineers Are Leading a Cool Revolution

Belarus 2020: Turning the Vicious Circle Into an Upward Spiral

Will the New Five-day Visa-free Regime Encourage More Visitors to Belarus?

Belarus’s Election Tests the EU’s Global Strategy

Falling Student Numbers and Declining R&D Result From Lack of Funds

Will we Ever Overcome the Innovation Deficit in CEE?

Europe IT Map

Moldova: a Regional Economic Platform Vision

Aerial Landscape View Of Chisinau, Moldova

Smart, reliable and promising

The Belarusian Economy: The Challenges of Stalled Reforms

The EU’s Benign Neglect Of Eastern Europe

The Dragon is Knocking at our Doors

china serbia silk road

Innovation and Consolidation — Key Trends in Polish Banking

The Belarusian Banking Sector Moving Towards Modernisation Despite Some Challenges

Sir Suma Chakrabarti: The Opportunities of Challenge

suma chakrabarti ebrd

Belarusian Economic Recovery May Downgrade Intended Reforms for Competitiveness

Divided Economy That May Unite (Or Draw Apart)

Growth is Greater Across Emerging Europe, Despite Risks and Global Challenges

ebrd gdp

Belarus: The Importance Of Diversification

Poland Government’s Development Plan and the EBRD’s Role

Warsaw EBRD annual meeting

Globalisation Needs to Work, Not Only for the Few but for the Most and in Demonstrable Ways

Global Spread

Belarus: Navigating the geopolitical storm

Invest in Belarus: looking beyond politics to the future

Breaking trade barriers with CIS has never been easier

Ukraine’s Banking Sector Reconstruction Brings Asset Sales and Opportunities in Equal Measure

Gavel and Ukrainian hryvnias on a wooden table

The Bucharest Stock Exchange Has Started the Year on a Promising Note

stock exchange bucharest

Will European Business and Institutions Bolster the New Trends That Have Appeared in Belarus?

Germany and Belarus: Thinking Globally Acting Locally

Lower Imbalances Should Support more Inclusive Growth Going Forward

Mixed currency notes

The Shopping Experience Is Set To Go Global in Belarus from 2017 Onwards

Cyprus: The Green Economy Shows the Way Forward

Cyprus coastline view, turquoise sea, white beaches

‘No’ To a Monetary Union With Russia

Legal Reforms are Improving the Existing Problematic Situation in the Ukrainian Agro Market

ukraine agriculture

Ukrainian Agribusiness — a Jewel in a Crown

Wheat ukraine agriculture ebrd

Transition in Government and the Economy Remains Vital in CEE

Cloudy skies above the Hungarian Parliament Building Budapest.

Belarusian Tech Companies Lead a Global Technological Advance in Outsourcing and Product Development

Belarus Has Set an Example for Others to Follow

Central And Eastern Europe At the World Property Market

EBRD Annual Meeting 2017 — EBRD President’s Press Conference

High Dollarisation the Largest Challenge for Georgia’s National Bank

Belarus Is One of the Top Outsourcing Destinations of 2016

Sergei Guriev: Emerging Europe Countries are Happy Alike and Unhappy in Their Own Ways

PRAGUE, CZECH REPUBLIC - 21 JUNE 2014: People on the streets of Prague, Czech Republic. Prague is one of the most visited city in Europe with over 5 million visitors every year.

The EU Is Encouraging Belarus to Join the World Trade Organisation

“e-Belarus”: Embracing the Internet and its Possibilities

The Deep Roots of Currency Crises in the Former Soviet Union

The Cyprus Dispute: Recognising the Changing Rules of the Conflict

cyprus emerging europe ebrd

The Proof of a Country’s Readiness to Attract Foreign Investors Lies in the Development of the Insurance Market

Foreigners choose Minsk and Gomel as Belarus’ most attractive FDI destinations

Young Well-Paid IT Specialists Are Making Belarus Known Internationally

Belarus Is Ready to Begin With Venture Capital Investments

Long-time Neighbours Need to Share Awareness, Plus Trade & Investment

EBRD Annual Meeting 2017 — EBRD Chief Economist’s Press Briefing

EBRD Annual Meeting 2017 — Board of Directors’ Opening Session

Lukashenka seeks to avoid commitment to Russia’s geostrategic goals

The UK and Belarus: A Partnership to Introduce the Real Belarus to Europe

Why Is Belarus Tech Booming?

Belarus US Business Relations Thrive as Conditions Improve

UniCredit Focusses on Organic Growth in Central and Eastern Europe

unicredit ebrd

Leave a Reply

Your email address will not be published. Required fields are marked *