The economic powerhouse of the EBRD region, central Europe and the Baltic States, needs to embark on a productivity revolution to close an output gap with its more advanced neighbours, a senior bank economist told Emerging Markets on Wednesday.
The EBRD raised its 2016 growth forecast for the sub-region, which stretches from Latvia in the north to Croatia in the south, to 3.1% from the 2.9% it pencilled in in November last year.
This was in stark contrast to its decision to trim its outlook for the EBRD region as a whole to 1.4% from 1.6% in its regional economic prospects report, published on Wednesday.
However, that cut was entirely driven by big downgrades to its new countries of operation in North Africa and to central Asia states poleaxed by oil prices.
Despite the upgrade to central Europe and the Baltics (CEB), the EBRD’s lead economist for the region said it was still a long way from achieving convergence with more advanced economies.
Alexander Lehmann said innovation would be needed to support growth. “Very strong and sustained capital inflows from western Europe have supported off-trend growth in central Europe yet even in Poland capital endowment remains half that of advanced eurozone countries,” he said.
Lehmann said the outperformance in CEB had been largely on the back of very strong growth in domestic consumption and real incomes. “It reflects the fact that these countries are generally dependent on commodity imports,” he said. “They also avoided the austerity measures seen in many eurozone countries in the wake of the financial crisis.”
He said closing the gap further would require home-grown improvements in productivity. “The process of just copying foreign technology has limited further potential to stimulate growth, particularly given the demographic ageing across the region.”
The EBRD’s report also pointed out that CEB — along with other neighbouring developing regions — had benefited from accommodative monetary policy in the eurozone.
POLITICAL RISK
The most significant upgrade in the report was for Poland, which saw its GDP forecast for 2016 increased by 0.3pp to 3.6%. Growth is also expected to remain strong in 2017, at 3.4%.
Lehmann warned, however, that the changing political environment in Poland could impact the economy over the longer term. “It is a significant risk.”
Since coming to power in October last year, the nationalist Law and Justice Party has taken measures to extend its control over various sectors of the economy, including a sweeping clear-out of top management at Poland’s state-controlled companies.
It has also been accused by opposition politicians and European authorities of attempting to remove key democratic checks and balances, most notably in relation to the country’s constitutional court.