There is a “high” risk that emerging Europe will plunge back into recession over the coming year especially if the euro crisis took a further turn for the worse triggering a fresh global financial crisis and economic downturn, the EBRD warned yesterday.
The bank used its latest economic forecasts for the region to nudge up its growth projection from its January outlook, but said it continued to work on the assumption that Greece stayed in the eurozone.
It has upgraded GDP predictions for a number of countries in the region since January. The EBRD nudged up its 2012 growth forecast for the 29-country emerging Europe and central Asia region to 3.2% from 3.1% in its January outlook.
The confidence comes despite political instability in Greece and open discussions by politicians of an exit that caused fresh volatility on the continent’s financial markets.
“We don’t have an exit in mind,” the Bank’s chief economist Erik Berglof said yesterday when unveiling its latest forecasts for the region.
He said there was a lot of willingness in Europe to help Greece and insisted there was “still hope that there will be a solution for Greece”. He acknowledged, however, that “more disastrous scenarios” existed and that downside risks have increased.
The bank said that overall emerging Europe continued to be buffeted by the crisis in the eurozone despite improved economic fundamentals. “The risk that emerging Europe as a whole will re-enter recession within the next 12 months is viewed as high.
“The eurozone crisis poses further downside risks to the outlook, as any worsening of the situation beyond the baseline assumptions could have serious negative consequences for growth across the entire transition region
“A further worsening of the eurozone crisis or an oil supply shock are both possible and pose significant downside risks for the region as a whole,” it said. “In addition, domestic risks have risen in some countries.
Regions closest to the eurozone and with the strongest links to that region will suffer most. The new data show the bank increased GDP forecasts for some countries. It now sees Poland growing 2.7% this year, an increase of 0.4% over its January figures, for example - although the overall rate of growth for the region will be down on 2011 levels.
Growth in the wider area of EBRD operations which now includes the four new Middle East and North African countries reach 3.1% this year compared to 4.6% last year before ticking back up next year to 3.7%.
The EBRD provided upgrades for other key countries just as private banks have been slashing theirs. EBRD predictions for Hungary moved to -1% from -1.5% in January while Romania was moved up to 1.2% from 0.8%. Predictions for Russia were unchanged at 4.2%.
Berglof pointed to some signs of improvement in recent months. Capital outflows in the third quarter of last year were dramatic but have leveled off this year and foreign direct investment has been holding up, he notes. Portfolio flows may also be gradually returning to the region, he says.
One of the biggest difficulties facing markets is deleveraging. It has been taking place at a slower pace than last year, but is still very much impacting credit in the region, said Berglof.