The European Bank for Reconstruction and Development (EBRD) has cut its economic growth forecast for the regions it operates in, as the war in Ukraine drags on and continues to put inflationary pressures on the global economy.
In its latest Regional Economic Prospects report, published in May, the EBRD said it expects economic output in the regions in which it operates to grow by 1.1% in 2022, a 0.6 percentage point downward revision compared with its forecast in March and a 3.1 percentage point downward revision from November 2021. Last year, economic output in the EBRD regions increased by 6.7% after contracting by 2.5% in 2020.
The EBRD’s downward revision is mostly driven by a greater-than-expected economic impact from the war in Ukraine, with the country’s gross domestic product (GDP) expected to contract by 30% in 2022. The war has also led to fast-rising prices of food and commodities; average inflation in the EBRD’s regions reached 11.9% in March 2022, close to a level last seen at the end of 2008.
Speaking to fDi Intelligence, a sister publication of The Banker, at the EBRD’s 2022 Annual Meeting Business Forum in Morocco in May, EBRD chief economist Beata Javorcik said: “The war in Ukraine has interrupted the post-Covid-19 recovery in our countries of operations, and worsened the economic outlook in all but two economies that we follow.
“Overall, relative to our November forecast, we expect economic growth to be three percentage points lower. And still, these forecasts are based on fairly optimistic assumptions of the war ending sometimes towards the end of the summer and reconstruction in Ukraine beginning towards the end of the year, and there being no interruptions to gas supplies to Europe. Under a more pessimistic scenario, with interruption of gas supplies to Europe, we are expecting in aggregate all the gains from the post-Covid recovery being erased this year and the GDP of our regions not bouncing back to its pre-Covid level until late next year.”
Food security is what concerns the EBRD the most, particularly in north Africa, a region that relies heavily on wheat imports.
“They are particularly affected, because if you look at the composition of their consumption basket, food accounts for more than a third of it,” said Ms Javorcik. “So that puts policy-makers in a very difficult situation. In order to avoid political instability, they continue subsidising food prices. But that comes at the cost of straining public finances at the time where public finances are already under pressure after Covid-19, in an environment of high interest rates and in an environment where there may be balance of payment challenges in countries that are facing chronic current account deficits.”
In addition to the high prices of food and commodities, some economies in the EBRD regions are also seeing negative effects through trade, tourism and migration remittance links to Russia.
The EBRD expects growth in its regions to recover to 4.7% in 2023, down by 0.3 percentage points from its March estimate, but that is subject to downside risks should the war in Ukraine escalate or exports of gas or other commodities from Russia become more restricted.
