Reduced supplies of gas from Russia and mounting inflation worldwide will slow economic growth further next year in the regions where the European Bank for Reconstruction and Development (EBRD) works, the Bank forecast.
The projections, contained in the EBRD’s latest Regional Economic Prospects report, are subject to major downside risk should Russia’s war on Ukraine escalate or the volume of its gas exports decline even more.
The Bank now forecasts gross domestic product (GDP) growth across its regions of 3 per cent in 2023, a downward revision of 1.7 per cent from its most recent report in May.
However, an upward revision to predicted growth this year is likely to deliver a gentler slowdown in real terms, with output next year a mere 0.5 per cent lower than forecast earlier this summer.
Output in the EBRD regions is now expected to grow by 2.3 per cent in 2022 after consumers in emerging Europe went on a post-pandemic spending spree in the first half of the year.
This temporarily boosted consumption, despite a fall in real wages, and led to a sharp widening of current-account deficits across central Europe.
EBRD Chief Economist Beata Javorcik said: “These are very worrying times for the EBRD regions and many advanced economies. As we head towards winter, the economic cost of Russia’s war against Ukraine is growing clearer with every day that passes. 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.”
The new Regional Economic Prospects report, entitled A cold winter ahead?, paints a stark portrait of the impact of the war on the EBRD regions’ energy markets, inflation and economies.
Since late February, gas prices in Europe have averaged around 2.5 times their 2021 level (in inflation-adjusted terms). For many countries in the EBRD regions, higher gas prices imply increases in gas import bills equivalent to as much as 4-5 per cent of GDP, as economies are highly dependent on gas in their energy mix.
Gas accounts for the bulk of derived heat production in the EBRD regions. In some economies, gas is also an important source of electricity production. Even where electricity is not derived directly from gas, electricity and gas prices tend to move in parallel.
Average inflation in the EBRD regions reached 16.5 per cent in July, a level last seen in 1998. Energy and food usually account for a higher share of the consumption of poorer households, which are experiencing even higher effective rates of inflation. Real wage growth has turned negative, on average, with greater falls in real incomes in south-eastern Europe.
However, there are still wide variations in the impact of the war on different regions and countries. Russia’s war on Ukraine will cause the latter’s economy to shrink by 30 per cent this year, the Bank forecasts, a projection unchanged since May.
For 2023, the EBRD has lowered its forecast to a rebound of just 8 per cent from the more robust 25 per cent growth forecast in the last report. The expectation back in May was that substantial recovery work would already be underway next year.