Fears were growing last night that a Russian recession could cause growth to stall across Europe and through the world economy.
The EBRD is on Wednesday expected to announce a bearish forecast for regional growth, tainted by geopolitical problems in Russia and Ukraine and hostage to growth in the European Union.
“The current probability of western Europe falling into recession has now risen, from zero at the start of the year to 20% now,” said Marcin Mrowiec, chief economist at Warsaw-based Bank Pekao.
Last week Suma Chakrabarti, EBRD president, warned that the bank’s new forecasts for emerging Europe and North Africa would “not be good news”, and would likely represent a downgrade on the 2.7% it forecast for the region’s 2014 growth that it published in January.
In particular, its outlook for Russian growth, which was 2.5% when last announced, is likely to be badly hit: the IMF cut its Russia forecast to just 0.2% on April 30 , citing “considerable downside risks”, while Russia’s own central bank is expecting just 0.5% growth in 2014.
Economists at global financial information firm IHS warned that further escalation of Moscow’s engagement in Ukraine could cut Russian GDP by 3 percentage points this year, or around $115bn, which would in turn trim Europe-wide growth by 0.15 percentage points. Even Latin American and Asian trading partners would be hit, IHS said.
While Russia will dominate the EBRD’s forecast, it is also clear that any improvement in regional growth will be tied to the pace of recovery in the EU. “The impact of Europe is huge,” said Charles Robertson, global chief economist at Renaissance Capital. “Europe was expected to grow 1% in 2014 and could still do a bit better, so of course Poland, Hungary and Czech have rebounded. But I don’t know if Europe is going to surprise much more on the upside, and if it double dipped, that would be very bad news for CEE.”
Last week the OECD raised its growth forecasts for the Czech Republic to 1.2% in 2014 and 2.4% in 2015 on the back of an export-led recovery, but spoke of “the deep integration of [Czech] manufacturing into the German supply chain”, meaning that “the recovery remains vulnerable to disinflationary or financial market shocks originating in Germany or its main trading partners”.
The OECD’s forecasts, likely to be mirrored by the EBRD’s, showed the sometimes schizophrenic outlook for the region and the range of opinions on its prospects. For example, it commented negatively upon Hungary, leaving its 2014 forecast unchanged at 2% but bringing its 2015 forecast down to 1.6%.
But Tatha Ghose, an economist at Commerzbank, said she was overweight Hungarian sovereign credit and that the bank “expects ratings upgrades in view of powerful multiplier effects being unleashed in the economy at favourable interest and exchange rates”.
Similarly Capital Economics said on yesterday that it expected first quarter GDP data for central and south eastern Europe to show that the region’s economic recovery was strengthening. Six countries — Bulgaria, the Czech Republic, Hungary, Poland, Romania and Slovakia — will publish GDP numbers tomorrow.