Euro-Region Slowdown, Ukraine are Risks to East Europe, IMF Says

Eastern Europe faces “significant downside risks” to its growth prospects from a more prolonged euro-area slowdown than anticipated and the Ukraine-Russia conflict escalating, the International Monetary Fund said.

Gross domestic product growth in emerging Europe including Turkey will average 1.2 percent in 2014, down from 1.8 percent in 2013, the IMF said in a report published today. The region will expand 1.7 percent next year, the fund said. It lowered the projections from 1.6 percent and 2.5 percent given in an April report.

Eastern Europe’s recovery is in danger as Russia, the region’s largest economy and main energy supplier, is punished by the European Union and the U.S. over Ukraine. The euro-area economy continues to deteriorate after growth stalled last quarter, with the IMF estimating as much as a 40 percent risk of a third recession since 2008.

“The near-term outlook is subject to significant downside risks, including an intensification or prolongation of geopolitical tensions, a protracted period of weak growth in the euro area,” according to the report. “The negative spillovers from these shocks on growth could be significant given the region’s close ties with Russia and the euro area.”

The 2015 forecast assumes that geopolitical tensions gradually ease and sanctions and counter-sanctions are lifted or expire over the coming year, the fund said.

Ukraine Conflict

The estimated impact of the conflict between Russia and Ukraine is largest on those two countries, followed by Belarus and Moldova, due to slowdown in Russia, and the Baltics, due to Russia’s ban on food imports, the IMF said. For central Europe the impact will be limited as those countries may be able to redirect banned exports.

Inflation trajectories in the region have diverged. Declining world food and energy prices and spillovers from low inflation in the the euro area have put inflation on a downtrend across central Europe, the Balkans and the Baltic states, while Turkey, Russia, Ukraine and former Soviet Union states have suffered the impact of high domestic food prices and exchange rate depreciation.

A ban on certain food imports from the U.S. and EU in August, in response to sanctions on Russia, have added to Russian inflation pressures. These counter-sanctions are expected to raise inflation in Russia by as much as 1.5 percentage points, the fund said.

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