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In the first half of 2018, average growth in the EBRD regions remained unchanged from 2017, at 3.8 per cent. The composition of growth has shifted, with a higher contribution of private consumption and lower, but significant, contributions from investment and exports.
Growth is expected to average 3.2 per cent in 2018 and 2.6 per cent in 2019. This represents a downward revision of 0.1 percentage points in 2018 and 0.6 percentage points in 2019 compared with the May 2018 forecast, primarily on account of slower expected growth in Turkey, where a sharp deceleration in the second half of the year is expected to bring the 2018 growth rate down to 3.6 per cent, as the weak lira and interest rate hikes negatively impact private consumption and investment. A growth rate of around 1 per cent is expected in 2019.
Excluding Turkey, the projection for the region’s average growth in 2018 has been revised upwards by 0.1 percentage points, reflecting strong economic performance in the first half of the year, and is unchanged for 2019. Spillovers from the expected deceleration in Turkey to other economies in the EBRD regions are expected to be very limited.
Three major trends have affected the external economic environment for the EBRD regions: tightening of financing conditions for emerging markets; escalating trade conflicts; and higher oil prices.
The recent increase in average interest rates faced by emerging markets is the fifth largest in the last 20 years, yet interest rates remain low in historical perspective, comparable to those prevailing during 2003-07 and 2013-15. As a result, the moderate tightening of financing conditions has so far primarily affected capital flows to economies with underlying weaknesses, notably Argentina and Turkey. In addition, countries with high stocks of external debt and domestic debt denominated in foreign currency are more vulnerable to further tightening of financing conditions for emerging markets.
If trade conflicts remain confined mainly to bilateral China-US trade, economies in the EBRD regions will be relatively little affected, as most of the region’s trade takes place within or with the European Union. For some countries in the region, a reduction in bilateral trade between US and China may open new opportunities to increase exports of finished goods to the American or Chinese markets.
In contrast, a scenario in which trade tensions escalate globally and international supply chains become severely disrupted entails high risks for the region’s economies that are strongly integrated into global value chains. The economies’ ability to flexibly reconfigure supply chains will likely depend on the extent of innovation capabilities, quality of management and the size of domestic markets. In the past, growth in domestic value added of exports in the EBRD regions has been more innovation-light than in other emerging markets. In particular, it has been accompanied by smaller increases in patenting activity.
Oil price increases provided a boost to growth in Russia, Central Asia and Azerbaijan and underpinned continued recovery in remittances from Russia to Central Asia, Moldova and the Caucasus. At the same time, growth in Central Asia is expected to moderate to around 4.6 per cent in 2018, reflecting the need for fiscal consolidation, and further to 4.2 per cent in 2019 in light of lower growth in mining output. Growth in Russia is projected to remain around 1.5 per cent.
Growth in central and south-eastern Europe is projected to gradually moderate in 2018-19 from high levels seen in 2017, reflecting shortages of skilled labour. Growth in Eastern Europe and the Caucasus is projected to increase to 3.1 per cent in 2018 and 3.2 per cent in 2019 as the recovery in Ukraine gains momentum. Growth in the southern and eastern Mediterranean is projected to increase from 3.8 per cent in 2017 to around 4.4 per cent in 2018 and 4.7 per cent in 2019 on higher tourist arrivals and improved external competitiveness in Egypt and Tunisia.
Escalation of trade conflicts is a major risk to the outlook. Other risks include disruption to cross-border supply chains in the case of a no-deal Brexit, high levels of corporate indebtedness and geopolitical instability.