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A recovery this year in the regions where the EBRD invests is expected to be slow, despite improvements in the world’s most advanced economies, including in the United States and the Eurozone.

The EBRD’s economists see growth in the transition region of a modest 2.7 per cent in 2014, virtually unchanged from the November forecast, and after expansion of 2.0 per cent in 2013.

The EBRD’s latest Regional Economic Prospects report said emerging economies were still suffering from capital outflows that were likely to persist in light of the expected gradual tightening of US monetary policy.

For the first time since 2011 net private capital flows turned negative for the EBRD region as a whole in the third quarter.

“For sustained recovery to take hold, countries in the region need to resume structural reforms and tackle the persistent legacies of the crisis, including high rates of non-performing loans and long-term unemployment,” the report said.

“There are increasingly positive signs in the world economy, especially in the most advanced countries. But the EBRD’s own region is not yet out of the woods and still faces many challenges,” added EBRD Chief Economist Erik Berglof.

“How countries react with policy changes now will determine how their economies respond to further bank deleveraging and adjustments to U.S. monetary policy,” he said.

The latest report also said that cross-border deleveraging appeared to have intensified again, most rapidly in several central Europe and Baltic countries (CEB) and in south-eastern Europe (SEE), a factor that was delaying a resumption of credit growth.

The report did point to a welcome increase in local currency lending in a number of CEB and SEE countries, including Hungary, Poland, Bulgaria and FYR Macedonia. In these countries the availability of foreign currency credit had been hit by the deleveraging process, while local currency credit had moderately grown.

Looking ahead, the report expected only a gradual improvement in external factors affecting the transition region, with a slow and uneven recovery in the Eurozone and a general deceleration in larger emerging markets partly offset by the stronger outlook in the United States and Japan.

It said growth in countries most closely integrated with the Euro area would remain modest even as the negative impact of the Eurozone crisis diminished. In addition to uncertainties linked to the Eurozone, other risks to the outlook include the possibility of a faster deceleration in large emerging markets, especially China.

The report said long-term unemployment rates in CEB and SEE were on average three to four percentage points higher than before the crisis. In line with global trends, inflation rates continued declining in most countries, although Egypt continued to buck this trend.

Overall, the CEB region will probably grow at 2.2 per cent this year, twice as fast as in the previous two years and reflecting the fact that a recovery is finally taking hold in Croatia and gaining momentum in Hungary, Poland and the Slovak Republic. At the same time, growth remains well below potential and Slovenia is expected to remain in recession on the back of high corporate indebtedness and the need for further bank recapitalisation.

Recovery in SEE will continue but growth rates will remain modest overall, at just 2.1 per cent after 2.0 percent in 2013. Several countries in the region face big fiscal challenges, as the combination of weak growth and the failure to rein in public expenditure has led to rising fiscal deficits and public debt levels.

Growth in Russia will only partially recover in 2014, to 2.5 per cent from 1.3 per cent last year. Commodity prices are no longer supporting growth and are limiting the scope for fiscal policy adjustment. Structural reforms and improvements in the overall business environment are needed to boost investment and lift Russia’s growth above 2.5 per cent a year, the government’s new projected long-term growth rate.

In Eastern Europe and the Caucasus, growth will strengthen to 2.0 from 1.2 per cent. Ukraine is expected to post small growth after virtually no growth in 2012 and a 0.8 per cent contraction in 2013.

Growth in Central Asia will remain relatively strong owing to a number of large natural resource projects in Kazakhstan, Mongolia and Turkmenistan. Growth is expected to decelerate somewhat in the Kyrgyz Republic and Tajikistan on account of weaker demand and lower expected growth of remittances from Russia.

Growth in Turkey is likely to moderate somewhat to 3.3 per cent in 2014, from 3.7 per cent, reflecting monetary tightening and an increase in financing costs linked to higher political risks which are pulling growth back. Nevertheless, domestic demand is still expected to grow, albeit at a slower pace, and net exports may benefit from a recent depreciation of the currency.

The economies of the southern and eastern Mediterranean region, where the EBRD is now investing in four countries, are likely to grow slightly faster in 2014 at 3.0 per cent in 2014 after 2.7 per cent last year.  But the outlook is subject to a high degree of uncertainty as all countries in the region remain vulnerable to external shocks.

Source* EBRD