Given the enormous destruction and the fact that 15 per cent of the population has fled the country, the relative resilience of the Ukrainian economy is particularly impressive. In Russia meanwhile, sanctions are working – albeit slowly.
Most of the economies of Central, Eastern and Southeastern Europe (CESEE) seem to have largely digested the economic shock caused by the Ukraine war.
Although economic activity has weakened considerably compared to last year – which was marked not least by catch-up effects following the coronavirus pandemic – almost all of them will continue to grow in 2023, despite the war.
This is the finding of the new Spring Forecast from the Vienna Institute for International Economic Studies (wiiw).
“The worst fears have thus not materialised. Despite stubbornly high inflation, which is of course weighing on households and businesses, the mood in the region is slowly brightening,” says Olga Pindyuk, economist at wiiw and lead author of the Spring Forecast.
“This also has to do with the fact that all the indicators now point to a slow recovery in the euro area and its most important economy, Germany,” adds Pindyuk.
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For 2023, wiiw forecasts average growth of 1.2 per cent for the EU member states in the region. They are thus likely to grow at more than double the pace of the euro area (0.5 per cent). The EU members of Southeastern Europe, in particular, are showing comparatively strong growth, whereas in the Visegrád countries average growth will only be 0.6 per cent, and Hungary’s economy is expected to shrink slightly this year (by 0.5 per cent).
Economic performance elsewhere in the region’s EU states will be uneven: Romania and Croatia are expected to grow by three per cent and 2.5 per cent, respectively, while the Baltic states, Czechia and Slovakia will expand at below one per cent.
The economies of the Western Balkans meanwhile will grow by an average of two per cent, with Kosovo forecast to see the highest growth anywhere in emerging Europe in 2023, at 3.6 per cent.
Russia has also stabilised macroeconomically, following last year’s GDP decline of 2.1 per cent. However, this year’s forecast of stagnation (zero per cent) is subject to major uncertainty. Ukraine’s economy could recover somewhat this year to see growth of 1.6 per cent, following its devastating slump of 2022 (-29.1 per cent), although here also there are significant risks to the projection.
Even though the economic situation is starting to look up for CESEE as a whole, major downside risks
“First, the drastic tightening of monetary policy could lead to a harder landing. Second, there is still the possibility of a military escalation of the Ukraine war, for example through the use of tactical nuclear weapons,” says Pindyuk.
In addition, next year’s US presidential elections could result in an administration in Washington that is less supportive of Ukraine – and that would also damage confidence in the region.
Ukraine: More resilient than expected
At -29.1 per cent, Ukraine’s 2022 GDP slump was less severe than initially feared. “Without Russia’s systematic bombardment of the energy infrastructure, which cost between 1.9 per cent and 3.6 per cent in economic output in 2022, the decline would have been somewhat smaller,” says Pindyuk, who is also Ukraine country expert at wiiw.
Given the enormous destruction and the fact that 15 per cent of the population has fled the country, the relative resilience of the Ukrainian economy is impressive. For 2023, wiiw expects fragile growth of 1.6 per cent – though that will depend on the future course of the war.
A more positive business climate, better energy supply – since April, Ukraine has again been exporting electricity – the grain export deal and international financial aid are all reasons for optimism. The budget deficit of 27 per cent of GDP forecast for this year will continue to be financed largely by massive Western support.
Sanctions against Russia are working, albeit slowly
After a sharp drop in GDP in the second quarter of 2022, Russia’s economy stabilised. Ultimately, this led to a fall in GDP of 2.1 per cent last year. For 2023, wiiw now forecasts stagnation (zero per cent). Although import-dependent sectors such as the automotive industry (2002: -45 per cent) and retail trade (2022: -12.7 per cent) have suffered hugely from the sanctions, the defence industry and certain areas of import substitution are flourishing.
The pharmaceutical industry, for example, expanded by 26.5 per cent in 2022, and the production of electric motors, generators and transformers was up 7.9 per cent. These data come from official Russian sources and should be interpreted with caution.
“The booming war industry, the adjustment to the sanctions and the reorientation of trade towards Asia will probably prevent a contraction this year,” says Vasily Astrov, Russia country expert at wiiw.
“But that does not change the fact that the sanctions-related losses from the energy business are costing the Kremlin dear. It is no coincidence that President Vladimir Putin has now publicly admitted that the sanctions are hurting, and the population has to prepare for more difficult times.”
In the first quarter of 2023, key budget revenues from oil and gas sales fell by 45 per cent, while expenditure rose by 34 per cent.
“However, the resulting budget deficit should be bearable this year,” says Astrov. In the longer term, Russia will have to cope above all with the lack of high technology from the West – such as computer chips – since China cannot supply these either.
Inflation remains stubbornly high
Although the high inflation in the region is now declining again in the wake of falling energy prices, it is proving more stubborn than expected.
It is not only food prices that are continuing to grow at double-digit rates: with few exceptions, core inflation (excluding energy and food) also remains in double figures.
Compared to its Winter Forecast, wiiw has therefore again revised upwards its forecast for inflation for most of the countries observed.
On average, the figure will be around 17 per cent in the region in 2023, compared to 5.7 per cent in the euro area. In Central Eastern Europe, Hungary is likely to suffer from particularly high inflation (18.5 per cent) this year.
In 2024-2025 wiiw anticipates an overall acceleration of economic growth across the region, primarily on the back of a recovery in private consumption.
Investment is also expected to recover, but its contribution to economic growth will generally be quite modest, apart from in Croatia, Romania and North Macedonia: in those countries it will grow on a par with household final consumption, supported to a large extent by FDI inflows and (in the case of the first two countries) by EU funds.
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