Stronger growth in Poland and Hungary lifts outlook for central Europe, EBRD says

Stronger growth in Poland and Hungary lifts outlook for central Europe, EBRD says

The FINANCIAL -- The EBRD has revised up its forecasts for economic growth in central Europe for this year following strong growth in the first half, particularly in Poland and Hungary. In its latest economic outlook report, the EBRD said the positive shift was primarily a result of reinvigorated domestic demand in the region. However, it warned that there could be a negative impact from a Russian ban on EU food imports.

Any impact on the eurozone economy from the deterioration in relations with Russia would also feed through to central Europe, according to EBRD.

The EBRD lifted the forecast for Poland’s growth to 3.0 per cent in 2014 from a forecast of 2.8 per cent in May, following sharply higher exports and stronger industrial production in the first half of the year. The food ban will weigh somewhat on Polish growth, although food exports to Russia only account for 0.2 per cent of GDP.

The outlook for Hungary, where the effect from sanctions has been even more limited, was upgraded to growth of 2.8 per cent for 2014, from the May prediction of 1.6 per cent, according to EBRD.

However, the report noted that, in addition to being driven by exports, the Hungarian economy had been supported by a number of effects that were only temporary, including public infrastructure spending funded through EU grants and administrative price cuts as well as mortgage debt relief that had been provided at a cost to the banks.

The EBRD said the three Baltic States have been more directly impacted by the sanctions and the significant slowdown in Russia.

In addition to agricultural firms with large export exposure to Russia, transport firms shipping goods between European countries and Russia may also be severely affected, according to EBRD.

In Slovenia, the restructuring of corporate sector that is necessary to sustain long-term growth has been somewhat slower than expected but it is likely to accelerate once the new government is formed in September.

Nevertheless, the forecast for Slovenia this year has been revised up to 0.7 per cent from 0 per cent, following better than expected growth in the first and second quarters and a robust export performance.

The EBRD left its forecast of a 0.5 per cent contraction in the Croatian economy this year unchanged.

Separately the EBRD report highlighted the potential positive knock on effects of an effective policy of quantitative easing (QE) in the Eurozone for emerging European countries, according to EBRD.

“The case for quantitative easing has become compelling to support the still fragile recovery in the Eurozone, to which much of the (Central Europe and Baltic and south eastern European) regions are strongly linked. An effective Eurozone QE may help lessen the risk of setbacks in the recovery of those regions,” the report said.