IMF sees Russia over worst of economic slump, central Europe’s prospects uncertain

Chocolate Factory and Statue of Peter the Great, Moscow, Russia (reibai, CC BY)

The worst of the economic slump in Russia may be over the IMF has said, but it warned of possible euro-zone stagnation and shifting politics that could make Central and Eastern Europe's prospects increasingly uncertain.

The IMF’s twice-yearly regional outlook for Central and Southeastern Europe (CSE) noted the rise of populist parties in some countries – as well as weak global growth and aging populations – were all accentuating the strains.

The Fund said that growth in the central channel from Poland to Turkey would remain as healthy as 3-4 per cent this year, whereas Russia and most of its former Soviet neighbors would stay in recession.

“But it is likely to be a period where the balance shifts, with the former group likely to see a slight slowdown going into next year and Russia et al perking up with a return to growth,” it noted. “Although there is a strong cyclical rebound in CSE countries, risks have increased,” the IMF said.

The euro-zone economy grinding to a halt isn’t the base-case scenario after its slightly better than expected start to the year, but that it remained “a clear risk,” Mahmood Pradhan, the deputy head of the Fund’s European department, said.

Pradhan said the IMF’s economists were looking into how much of a negative impact there could be if restrictions were put on the EU’s borderless travel arrangement, Schengen, to try and control the flood of Syrian and other refugees. “With these higher risks, supportive monetary policy combined with medium-term fiscal consolidation remains valid policy advice for many economies in the region,” the report added.

Pradhan also gave the Fund’s first public thumbs up to Ukraine’s new government, saying early noises that it plans to stick to reform efforts were “very encouraging”.

“The region faces more pronounced downside risks,” said Anna Ilyina chief of the IMF’s emerging economies division, who pointed to Turkey as another country where political uncertainty had increased. “If this slower growth is to become the new normal then convergence to income levels of advanced Europe is going to be much, much slower.”

Falling productivity, low investment, and high migration are withholding central, eastern and southern European economies from returning to their pre-crisis potential, the International Monetary Fund warned.

In its economic outlook for the region, the fund said that the region’s economies are no longer catching up with their advanced counterparts at the desired rate, as they were before the 2008 financial crisis. “If this becomes the new normal, convergence [with advanced economies] will be much slower,” Ilyina wrote.

Unfavourable global conditions, such as mediocre growth in Europe’s advanced economies, are weighing on the productivity of economies in the region.

Ilyina noted that the region’s emerging economies are also not enjoying the same demographic dividends as their counterparts elsewhere, as substantial emigration has seen the flight of both skilled and unskilled labor.

Working-age populations are shrinking, and at a quicker rate than the EU average.

Another factor at play is decline in investment since the 2008 crisis, which have failed to recover largely due to crisis legacies including non-performing loans and low domestic savings rates.

While Ilyina said there is “no single, simple formula” to boost convergence, some structural reforms appear able to bring about substantial growth benefits.

In order to retain labour and attract labour from elsewhere, the fund recommended measures to increase participation among females and older people, reduce structural unemployment and skill mismatches, and raise life expectancy.

The Fund also noted political risks, including uncertainty in Ukraine and Poland and political populism, as well as risks from the refugee crisis.

Nevertheless, it anticipates higher growth in 2016 in the majority of countries, including the Baltics (2.8 per cent), EU countries in southeastern Europe (3.5 per cent), non-EU countries in southeastern Europe (2.7 per cent) and Ukraine and Belarus (0.2 per cent). Russia, meanwhile, will see an improvement on last year, with the economy expected to remain in recession at -1.8 per cent until 2017, when the IMF anticipates a return to 0.8 per cent growth.

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