By Clive Leviev-Sawyer of the Sofia Globe
Economic growth in the EU member states from the former communist bloc is expected to nearly double from 1.4 per cent in 2013 to 2.6 per cent this year, the World Bank said in its latest report on the region.
The area, which the international lender calls EU11, includes all the countries that joined the EU since 2004, with the exception of the Mediterranean island nations of Cyprus and Malta – the Baltic States, Poland, the Czech Republic, Slovakia, Slovenia, Croatia, Romania and Bulgaria.
“The initial reliance on net export growth, with rising demand from the rest of the EU, is gradually giving way to more balanced growth as domestic demand picks-up, notably in Romania, Slovakia and Poland,” the World Bank said.
First quarter data in 2014 confirmed ongoing economic recovery, with Poland, Hungary and the Czech Republic leading the way, while growth in the Baltic States and the four EU countries in the Balkans lost some momentum, according to the report.
Croatia remains the only country among the EU11 expected to remain in recession in 2014, making it six consecutive years of economic decline, because falling domestic demand, in part stemming from the need for further fiscal consolidation, continues to outweigh export growth.
While investment is expected to pick up, having declined for the past two years, the recovery is expected to be gradual, with growth not reaching pre-crisis rates for some time, the report said.
Inflation rates are expected to remain below targets during 2014, with some countries already experiencing deflation (Bulgaria is one such country), but as global commodity prices stabilise, activity increases and output gaps diminish, inflation is expected to gradually rise.
In terms of lending growth, both the demand and supply of credit appear constrained by existing corporate liquidity, low investment rates, continued external deleveraging and high rates of non-performing loans, the World Bank said.
“Domestic demand looks set to become the main engine of growth across EU11 as confidence in the global recovery grows. Consumption, both private and public, is set to accelerate markedly in 2014 as the purchasing power of households increases amid improved labor market conditions,” the World Bank said.
All countries in EU11 are expected to grow faster in 2014 than 2013, with the exception of Latvia, where domestic demand growth is expected to moderate, and Romania, where growth will slow marginally, as the temporary increase in exports from the good harvest dissipates.
Among the four Balkan states in the area covered by the report, Romania’s economy is expected to grow by 2.8 per cent this year, followed by Bulgaria with 1.7 per cent and Slovenia with 0.6 per cent. Croatia’s economy is expected to shrink by 0.5 per cent.
By comparison, the euro zone is expected to grow by only 1.1 per cent in 2014.
The ongoing geopolitical tensions over Ukraine will affect the EU11 region, which is more integrated with both Russia and Ukraine than the rest of the EU due to both geographical proximity and existing supply chains.
Given limited direct exposures to both Russia and Ukraine, the impact of geopolitical tensions on EU11 region is modest, the World Bank said, but the impact on the fragile recovery in Western Europe is an additional risk factor for EU11 growth prospects.