Apart from Russia, only Hungary is likely to sink into recession in Europe

Central, Eastern and South-Eastern Europe (CESEE) still demonstrate its resilience. In Europe, only two countries are facing recession: Hungary and sanctioned Russia, the Vienna Institute for International Economic Research (wiiw) reported in its winter forecast. 

Economic activity has slowed significantly, with GDP growth still expected in most countries in the region in 2023, wrote portfolio.hu. While high inflation is causing serious problems for households and businesses, this is not the first time we have seen impressive resilience in the EU, according to a new winter forecast from the Vienna Institute for International Economic Studies (WIIW).

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Using energy as a weapon has failed

Putin’s strategy of using energy as a weapon has failed, said Richard Grieveson, Deputy Director of WIIW. One reason is that Eastern Europeans have also been able to considerably cut their gas consumption. By 2023, an average growth of 1 percent is forecast for the EU member states in the region, 0.8 percentage points above the growth of the euro area (0.2 percent), which will be stagnant.

The average annual growth in the Visegrád countries will be merely 0.6 percent, and the Hungarian economy will be the only one facing recession, expected to shrink by 1 percent.

Growth in the 23 Central Eastern and South Eastern European countries surveyed by the Institute is expected to be 0.1 percent this year. The south-eastern European EU member states in particular are proving to be resilient enough to largely avoid a full-year recession. The economies of the Western Balkans are also expanding by only 1.8 percent, while Turkey’s is growing by up to 3 percent.

Exceptions from growth: countries hit by recession

The exceptions from growth are Hungary and Russia, whose economies will contract by a further 3 percent this year after shrinking by 2.5 percent last year.

Hungary’s unemployment rate in 2022 was 3.6 percent. This year it could also rise slightly, with the jobless rate estimated at 4.5 percent. What will increase even more sharply this year is inflation.

“According to WIIW, annual inflation in this country could be as high as 16 percent, which could even bring a double-digit average for 2024, with a 10 percent price increase expected.”

Even war-torn Ukraine is expected to recover

Ukraine’s economy is projected to recover within a certain time. The country is expected to grow by 3 percent after a 30 percent contraction in 2022 but still faces significant challenges and uncertainties due to the ongoing war and the destruction of critical infrastructure. Also, the widespread damage and power outages have increased production costs and affected economic activity in the last quarter of 2022. To get back on track, the country has to achieve a budget deficit of 20 percent of GDP, but this will require substantial financial support from the West.

Oil sanctions are taking a toll

The economic downturn in Russia gathered momentum in the last quarter of 2022. Although for the year as a whole, the GDP contraction was only 2.5 percent, lower than the minus 3.5 percent forecast. The institute believes that oil sanctions are having an effective impact on Russia.

The fall in oil prices will significantly reduce tax revenues, 40 percent of which come from the energy sector. The EU’s oil embargo and price restrictions on Russian oil have forced the country to sell its oil at a huge discount. The price of Urals – the most important Russian crude – fell to USD 47 per barrel, which is 43 percent lower than Brent in the North Sea.

“The sanctions imposed on 5 December are the most effective yet,”

says Vasily Astrov, Russia expert at WIIW. The loss of revenue will be financed from the higher – but still bearable – budget deficit. The forecast of the institution contrasts with the latest update from the International Monetary Fund (IMF), which revised Russia’s GDP forecast for 2023 up to 0.3 percent growth from the previous 2.1 percent recession.

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Source: portfolio.hu