Ukraine’s economy is starting to recover

However, after an already weak first quarter, growth in other important countries in the emerging Europe region slipped into negative territory in the second quarter.

Ukraine’s economy has weathered the Russian invasion better than initially anticipated, according to the new Autumn Forecast by the Vienna Institute for International Economic Studies (wiiw).

For 2023, wiiw is therefore raising its growth forecast to 3.6 per cent of GDP. Despite the Russian Black Sea blockade and the bombardment of grain storage facilities on the Danube river following the end of the Black Sea grain deal, exports of agricultural products rose by 16 per cent from July to August.

But the risks are increasing. “The import ban slapped on Ukrainian grain by Poland and Hungary is a serious indication of the EU’s growing split on further Ukraine aid,” says Olga Pindyuk, Ukraine expert at wiiw.

“But given the high cost of the war, which will result in a budget deficit for Ukraine of 27 per cent of GDP in 2023, any cut in Western aid would be devastating for the country,” warns Pindyuk.

However, despite their previous resilience to the economic consequences of Russia’s war in Ukraine, other economies of Central, Eastern and Southeastern Europe (CESEE) are coming under increasing pressure, wiiw claims.

“The recession in Germany, a deteriorating international environment, persistently high inflation, monetary tightening and inadequate fiscal policy measures are all weighing on the economy,” says Branimir Jovanović, economist at wiiw and lead author of the Autumn Forecast.

Negative territory

After an already weak first quarter, growth in some important countries of the region slipped into negative territory in the second quarter: as well as Hungary, by the middle of the year Poland and Czechia, for example, had also contracted.

“In view of a possible recession across the entire euro area, this negative dynamic could gain momentum, especially in the Visegrád countries, which are closely intertwined with the weakening German industry,” says Jovanović.

For 2023, wiiw forecasts growth of 0.6 per cent on average for the region’s EU members – similar to the low growth in the euro area (0.5 per cent). This is half the growth rate forecast in the summer.

“The traditional growth advantage of the Eastern Central Europeans over Western Europe is thus likely to vanish in many countries, at least temporarily,” claims Jovanović.

However, the Southeastern European EU members Romania (2.5 per cent) and Croatia (2.5 per cent) are doing much better: inflows from the EU’s Covid-19 reconstruction fund NextGenerationEU are supporting growth there. The six states of the Western Balkans should grow by 2.1 per cent on average.

There is light at the end of the tunnel in 2024 for the region’s EU members: wiiw forecasts that next year they will see growth of 2.5 per cent on average, as growth picks up slowly, supported by NextGenerationEU funds.

However, there remain significant downside risks. “A sharper downturn in the euro area, stubbornly high inflation rates, military escalation in Ukraine or an intensified trade war between the EU and China could jeopardise the recovery next year,” warns Jovanović.

In the medium term, there is thus also the possibility of a stagflation scenario, where the region would barely grow at all, yet at the same time would suffer from high inflation.

Despite stubbornly high inflation, real wages are rising in large swathes of the region

Even though inflation has passed its peak in practically all the countries observed, it is likely to remain high for the foreseeable future.

The main driver of inflation is rising food prices, which are creating ever-greater social problems. However, core inflation (excluding food and energy) now exceeds headline inflation in most countries of the region.

While corporate profits are at a historically high level, real wages are also picking up for the first time in a while. If companies were to respond to this with further price rises, that could lead to an entrenchment of inflation, wiiw warns.

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