Business is booming.

EBRD warns high inflation in central and eastern Europe will linger

Painful memories of hyperinflation in the 1990s mean steep price rises are set to endure for longer than many expect in central and eastern Europe, the chief economist of the European Bank for Reconstruction and Development has warned.

The lender said in its latest economic forecasts, published on Thursday, that the economies of central Europe and the Baltic states would grow by an average of just 0.6 per cent this year. Growth would also remain weak in eastern Europe, at just 1.6 per cent, and in south east European EU members, at 1.5 per cent.

Countries in the region have been among the worst affected by the economic impact of Russia’s invasion of Ukraine, with price rises way above the EU average. High inflation, and central banks’ attempts to combat it with big interest rate increases, have weighed on growth.

However, many economists expect inflation to fall sharply this year on the back of the recent slump in global energy costs. While the EBRD does not publish its own inflation estimates, its chief economist Beata Javorcik said many of those forecasts were “optimistic”.

The IMF said in October that it expected inflation in all regions covered by the EBRD to decline to 7 per cent by the end of 2023 and by an average of 10 per cent throughout this year. “If you look at previous episodes of [high] inflation, they have taken longer [to dissipate] than what the IMF is expecting,” Javorcik said.

She added that the scars left by the economic upheaval of the early 1990s in her native Poland and other former communist countries of the region created the risk of a “self-fulfilling prophecy”. In such a scenario homeowners and farmers would continue to be influenced by fears of lingering inflation, demanding high wage increases and continuing to raise prices.

“If you experience hyperinflation in your lifetime, the memory remains with you forever,” she said.

Javorcik also questioned the communication skills of the region’s central bankers, which could undermine public trust in officials’ capacity to bring inflation under control. “Interest rates are the main tool in fighting inflation, but the second [most important] tool is communication with the public and influencing expectations.” 

Since Russia’s attack on Ukraine triggered a surge in energy and food prices a year ago, central and eastern European countries have struggled with inflation at levels not seen since the 1990s.

Polish inflation increased to 17.2 per cent in January, from 16.6 per cent in December, according to data published on Wednesday, though the figure was below expectations of a sharper rise. “The odds of inflation falling to single-digit levels by the end of the year have increased substantially,” said Adam Antoniak, economist at ING Bank. However, Antoniak added that in both Hungary and the Czech Republic inflation had recently “surprised to the upside”. 

Javorcik also said it was unclear how long governments in central and eastern Europe could continue to protect ailing companies. Businesses continue to rely on measures that were introduced to offset the impact of Covid and have since kept the bankruptcy rate in the region significantly below that in western Europe. Should this support be withdrawn, she forecast the disappearance of “firms that were surviving thanks to these emergency measures”.

The EBRD’s report covers 36 economies from central and eastern Europe to north Africa to central Asia, which the bank expects to grow on average 2.1 per cent this year, down from its 3 per cent forecast in September and from 2.4 per cent last year. The EBRD expects Russia’s economy to shrink by 3 per cent this year.

Source link

Comments are closed, but trackbacks and pingbacks are open.