Growth in EBRD regions trimmed as economies adjust to new realities

This article is brought to you in association with EBRD.

• Output in the EBRD regions for 2024 revised down by 0.2 percentage points to 2.8 per cent
• Disinflation continues, with inflation down to 5.8 per cent
• Real wages resume rapid growth, almost catching up with pre-Covid trend levels and boosting household consumption

The European Bank for Reconstruction and Development (EBRD) has revised slightly downwards its expectations of growth across the regions where it invests. Its latest Regional Economic Prospects report gives a growth figure for 2024 of 2.8 per cent, 0.2 percentage points down on its previous forecast in May 2024.

The Bank – which works in central, eastern and south-eastern Europe, Central Asia and the southern and eastern Mediterranean (SEMED) region – cites varying performance trajectories across its economies. In 2025, it expects growth of 3.5 per cent, 0.1 percentage point below the previous projection.

The report, entitled “Along the adjustment path”, gives several reasons for the downward revisions. Economic activity has been slower than expected in Central Asia, where mining activities in Kazakhstan and Uzbekistan have stagnated. South-eastern European Union (EU) states have been impacted by spillovers from a weaker outlook in advanced Europe.

Meanwhile, economies in the southern and eastern Mediterranean (SEMED) region are feeling the effects of a severe drought and the ongoing conflict in Gaza and Lebanon.

The growth forecast for Ukraine remains unchanged at 3 per cent for 2024, but has been revised down by 1.3 percentage points to 4.7 per cent for 2025, due to damage to its electricity infrastructure inflicted by Russian attacks weighing on production.

On the upside, the EBRD’s new regional outlook highlights falling regional inflation. This had dropped from a peak of 17.5 per cent in October 2022 to 5.8 per cent by July 2024. However, inflation remains 1.6 percentage points higher than its pre-pandemic average. This pattern is broadly similar to that observed in advanced economies.

As inflation has declined, real wages have resumed rapid growth, almost catching up with pre-Covid trend levels. This has boosted household consumption.

Nonetheless, in some cases, disinflation has been slow. Cumulative inflation in six economies — Türkiye, Egypt, Moldova, Hungary, Kazakhstan and Ukraine — has exceeded 30 per cent since February 2022, adding to cost-of-living pressures.

The report highlights the ways the EBRD countries are adjusting to new geopolitical and geoeconomic realities.

“Our economies are steadily adjusting to evolving global dynamics,” said Beata Javorcik, the EBRD’s Chief Economist.

“Although we have made a slight downward revision to our growth forecast, the easing of inflation and recovery in real wages offer encouraging signs. Ongoing vigilance will be required as economies adapt to challenges related to renewed inflationary pressures, energy security, trade and financing conditions along their adjustment paths.”

Oil and gas prices have stabilised and are currently around the average levels seen between 2017 and 2021. At the same time, gas in Europe remains relatively expensive, trading at almost five times the US price, and some economies in the EBRD regions are paying significantly higher average import prices for gas than Germany.

The new report examines not only aggregate oil and gas prices, but also the specific costs for individual countries. The analysis reveals notable differences: for example, Armenia is still paying the same low price for natural gas as in 2021 due to its existing contract, while Ukraine, Slovenia, Croatia and North Macedonia are paying significantly more.

The composition of energy imports has notably shifted from Russian pipeline gas to alternatives such as Norwegian gas and liquified natural gas (LNG) from the United States of America and Norway, facilitated by new and expanded terminals in Croatia, Greece, Jordan and Lithuania.

In addition, EBRD EU and Western Balkans economies have reduced their dependence on Russian oil from approximately 60 per cent at the start of Russia’s full scale war against Ukraine to around 30 per cent. At the same time, a number of economies in emerging Europe remain dependent on imports of gas and oil from Russia.

Recent shifts in global trade patterns have seen China’s role as a trading partner in the EBRD regions stay robust. For countries like Armenia, the Kyrgyz Republic and Kazakhstan, China’s share of imports rose from 14 per cent in 2021 to 25 per cent in 2023, largely replacing Russian imports.

While China’s share of their exports grew slightly, overall trade volumes in these three countries surged, with exports and imports increasing by 37 per cent and 64 per cent, respectively.

In EU economies within the EBRD regions, where China’s share of imports has remained stable, China has been a particularly important provider of green technologies. Offering lower prices, China supplies a significant portion of solar batteries, wind turbines, lithium-ion batteries and electric vehicles to central and south-eastern Europe.

More recently, EBRD EU economies’ battery imports declined as domestic production increased on the back of foreign direct investment (FDI) from China in sectors related to the green transition. These have been substantial in Hungary and Morocco, while greenfield FDI inflows into Russia have virtually disappeared.

Regional growth projections

In central Europe and the Baltic states, growth is expected to pick up from 0.2 per cent in 2023 to 2.3 per cent in 2024 and 3.2 per cent in 2025, driven by continued resilience in labour markets.

Output in the south-eastern EU is forecast to slow from 2 per cent in 2023 to 1.9 per cent in 2024, with a rebound to 2.6 per cent in 2025. This year’s downward revision is due to weak industrial production and lower outsourcing demand. 

The Western Balkans will see growth accelerate from 2.5 per cent in 2023 to 3.4 per cent in 2024 and 3.7 per cent in 2025, driven by a strong tourism season in Albania, increased investment in Serbia and robust consumption growth in Montenegro.

Central Asia’s growth is forecast to moderate from 5.7 per cent in 2023 to 5.1 per cent in 2024, due to stagnation in mining activities in Kazakhstan and Uzbekistan, before picking up to 5.9 per cent in 2025.

Growth in eastern Europe and the Caucasus is expected to ease from 4.4 per cent in 2023 to 3.7 per cent in 2024, then accelerate to 4.1 per cent in 2025. Ukraine’s GDP is forecast to remain unchanged in 2024, but has been revised down for 2025 as the destruction of electricity infrastructure is expected to put a strain on production.

Türkiye’s growth is expected to slow from 5.1 per cent in 2023 to 2.7 per cent in 2024, with a slight increase to 3 per cent in 2025, amid tighter monetary policy.

In the southern and eastern Mediterranean, growth is projected to pick up slightly from 2.7 per cent in 2023 to 2.8 per cent in 2024 and 3.9 per cent in 2025. This is a downward revision relative to the previous forecast for 2024, due to a slower-than-expected recovery in investment, the ongoing conflict in Gaza and Lebanon, and energy shortages.

Russia‘s growth accelerated from 3.6 per cent in 2023 to 4.7 per cent in the first half of 2024, driven by an estimated 10 per cent rise in oil export prices and strong trade with non-sanctioning economies. Military spending has also been high in the context of the ongoing full-scale invasion of Ukraine. However, growth is projected to slow to 3.6 per cent in 2024 and 1.5 per cent in 2025, reflecting labour constraints.

Since April 2022 and following the invasion of Ukraine, both Russia and Belarus have had their access to the EBRD’s resources formally suspended.