Rising energy prices will pile more price pressure on consumers in emerging Europe, Central Asia and north Africa, the European Bank for Reconstruction and Development (EBRD) warned on Wednesday, while also trimming its 2023 growth forecast for the region.
The bank kept its estimate for growth for Türkiye, the single biggest recipient of EBRD funds, for 2023, yet upgraded its view for this year.
Inflation in the EBRD’s region, which covers some 40 economies stretching from Kazakhstan to Hungary and Tunisia, reached an average of 16.5% in July, a level last seen in 1998, based on the bank’s latest Regional Economic Prospects report.
Gas prices in Europe are running 2.5 times higher compared with 2021 levels amid reduced supplies from Russia and some disruptions in shipments from Ukraine. Inflationary pressures are expected to increase further with producer prices running ahead of consumer prices.
"Households still haven’t faced the full extent (of) the impact of energy costs rising, as governments have been cushioning this burden," EBRD chief economist Beata Javorcik told Reuters. "More pain is to come."
Poland, Croatia and Montenegro are some of the countries implementing energy subsidies ranging from tax cuts to one-off payments to mitigate the impact of Russia’s war in Ukraine on energy prices.
Gas consumption would need to be "curtailed sharply in the short term" if supplies from Russia to Europe are completely cut off, the EBRD said, although the bank’s base case scenario was modeled on "significant disruptions."
While food has been an important inflation driver in the EBRD region, Javorcik did not expect this to spark social unrest, pointing to wheat prices returning to levels last seen before Russia invaded Ukraine on Feb. 24, based on the report.
Regional growth losing steam
The bank estimated economies across the region will grow 2.3% in 2022 – 120 basis points above its May forecast – thanks to a stronger first half of the year when households spent savings accumulated during COVID-19 lockdowns despite a fall in real wages.
"It’s no secret that sanctions on energy have not been that effective," the chief economist said.
Ukraine’s gross domestic product (GDP) was forecast to contract 30% in 2022, unchanged from EBRD’s prior estimate, before growing by 8% in 2023. The bank had in May forecast a much stronger 25% rebound for next year.
The Russian economy is set to shrink 5% instead of the 10% forecast previously. The sanctions-hit economy is seen shrinking 3% next year, downgraded from zero growth.
"In general, we believe that sanctions will bite going forward," added Javorcik.
Yet, the bank remains mindful that many EBRD nations are "highly" dependent on gas for their energy needs.
"These are very worrying times for the EBRD regions and many advanced economies," Javorcik told Agence France-Presse (AFP). "As we head toward winter, the economic cost of Russia’s war against Ukraine is becoming clearer with every day that passes."
Reduced Russian gas supply prompted the bank to trim 2023 growth projections to 3% from a prior forecast of 4.7%.
"Negative factors related to high energy prices, the Ukraine war, inflation and the anticipated slowdown in western Europe, make the prospects for next year bleaker," Javorcik said.
The report noted that 88% of central banks in the EBRD region raised interest rates between May 2021 and July 2022.
Javorcik said "some room for hikes may be left" in response to inflationary pressures, but much will depend on the uncertainty over energy supplies and an economic slowdown already in place.
"Inflation may not have peaked in the EBRD regions as in many countries the increase in producer costs and high natural gas prices have not yet been fully reflected in consumer prices," noted Javorcik.
Analysts are increasingly predicting a global recession for 2023 as central banks ramp up interest rates to cool decades-high inflation.
Stronger pace in Türkiye
Global downturn risks such as geopolitical tensions and aggressive monetary tightening in developed countries also risk affecting Türkiye’s growth, the EBRD said.
It upgraded its 2022 growth forecast for Türkiye to 4.5% from 2% for 2022 on the back of a more robust-than-expected domestic demand and a modest recovery in exports.
The economy expanded by a better-than-expected 7.6% year-over-year in the second quarter on strong domestic demand and exports. The rate made Türkiye the second-fastest growing economy in the G-20.
EBRD’s estimate for next year’s growth was confirmed at 3.5%, driven by household and public spending ahead of planned elections.
The report highlighted Turkish banks as one of the economy’s strengths as they remain well-capitalized with a headline nonperforming loan ratio of below 3%.
While economic activity remained relatively robust, the report said the depreciating Turkish lira and soaring inflation remain key vulnerabilities.
Türkiye’s annual inflation topped 80% in August, a fresh 24-year high.
The widening current account deficit and short-term external debt, which it said stands at $180 billion, also remain significant concerns in terms of reserves, which currently stand at around $15 billion.
Türkiye remains one of the bank’s largest markets, with more than $16.8 billion invested in over 380 projects, mostly in the private sector.
Founded in 1991 to help former Soviet bloc countries switch to free-market economies, the EBRD has since extended its reach to include nations in the Middle East and North Africa.