Across the region, however, while economic activity is improving, growth lags pre-pandemic levels.
Economic growth for the emerging market and developing economies (EMDEs) of the Europe and Central Asia region has been revised up to 2.4 per cent for 2023, says the World Bank’s Economic Update for the region, released this week.
The pickup in growth reflects improved forecasts for war-hit Ukraine and for Central Asia, as well as consumer resiliency in Turkey and better-than-expected growth in Russia because of a surge in government spending on the military and social transfers.
The forecast broadly reflects those of the European Bank for Reconstruction and Development (EBRD), released last week, which showed that growth in Central Asia is outpacing that of emerging Europe.
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Excluding Russia and Ukraine, regional output is expected to grow by three per cent in 2023. Nevertheless, growth remains weak relative to the long-term pre-pandemic averages. Overall, growth in half of the Europe and Central Asia countries is expected to be slower or little changed in 2023 than in 2022.
During 2024-25, growth is expected at 2.6 per cent a year, amid a weak expansion in the European Union—the region’s largest trading partner—high inflation, tighter financial conditions, and spillovers from Russia’s invasion of Ukraine.
A new approach for old risks
“Overlapping shocks from Russia’s invasion of Ukraine, a cost-of-living crisis, and climate risks are creating formidable challenges in Europe and Central Asia,” says Antonella Bassani, World Bank Vice President for the Europe and Central Asia region.
“A new approach will be necessary for countries to revive productivity growth, achieve better economic and social outcomes, improve resilience, and accelerate efforts to decarbonise the economy.”
Downside risks nevertheless cloud the outlook for the EMDEs in Europe and Central Asia.
High inflation may persist amid heightened volatility in global commodity markets and a surge in energy prices. Global financial markets may become more volatile and restrictive due to tightening financing conditions. Global growth for 2020-2024 is weaker than during any five-year period since 1990 and may weaken further.
“Fiscal deficits are broadly unchanged this year despite earlier plans by governments to implement fiscal consolidation after large increases in spending over the last several years due to COVID and the cost-of-living-crisis,” adds Ivailo Izvorski, World Bank Chief Economist for Europe and Central Asia region.
“The rising cost of population aging, higher interest payments, the needed investment for climate mitigation and adaptation, and managing other overlapping crises will keep up the pressure on government budgets.”
Central Asia shines
Ukraine’s economy is likely to grow by 3.5 per cent this year after a contraction of 29.1 per cent in 2022, the year when Russia invaded the country, thanks to more stable electricity supply, increased government spending, ongoing donor support, a better harvest, and the rerouting of some exports through the country’s western borders.
In Central Asia, growth is expected to strengthen to 4.8 per cent this year, and is expected to average at 4.7 per cent for 2024 and 2025, assuming that inflation moderates.
By contrast, growth in the Western Balkans is projected to slow to 2.5 per cent this year, with a projected pick up to 3.3 per cent for 2024 and 2025, reflecting moderation of inflation pressures, a gradual recovery of exports, and increasing public spending on donor-backed infrastructure projects.
In 2023, consumption remained resilient in Albania, Kosovo and Montenegro, buoyed by the recovery in tourism, but weakened in Bosnia and Herzegovina, North Macedonia, and Serbia due to weaker export demand from the EU.
Stronger trade and larger inflows of money and people have continued to support economic activity in some economies, notably in Central Asia and the South Caucasus.
Armenia (6.6 per cent), Georgia (5.9 per cent), and Tajikistan (6.5 per cent) remain the top growth performers in the region for the second year in a row.
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