Inflation dampens growth in ex-Soviet bloc: EBRD bank

Russia's economy is forecast to expand 0.5 percent in 2023

LONDON (AFP) - Persistent high inflation, fuelled by elevated gas prices, will limit growth recovery in the ex-Soviet bloc this year, Europe’s development bank forecast Thursday.

While wholesale gas prices in Europe have largely returned to levels seen before Russia’s invasion of Ukraine 12 months ago, “in real terms, such levels are comparable to the highs of the 1980s”, the European Bank for Reconstruction and Development said in a key report.

Founded in 1991 to help former Soviet bloc countries switch to free-market economies, the EBRD has since extended its investment reach to include nations in the Middle East and North Africa.

Presenting its latest forecasts Thursday, the London-based institution said gross domestic product in the bank’s regions was expected to grow 2.1 percent in 2023, down from an estimate of 3.0 percent made in September.

GDP output across the three continents is estimated to have grown by about 2.4 percent last year, “slower than in 2021 as the war on Ukraine took its toll and the post-Covid recovery has mostly run out of steam”.

‘Not out the woods’

EBRD chief economist Beata Javorcik said “optimism about the rate of recovery and growth after the crises of recent years, notably the war in Ukraine, is… misplaced.

“That is why we are calling this end-of-winter update to our forecasts ‘Not out of the woods yet’.”

And she sounded a cautious note on investment with no end yet in sight to the Ukraine conflict.

“At the moment, we do not see a quick resolution of the war,” Javorcik told AFP.

“This lack of clear path to resolving the war means that high level of uncertainty will persist and that is damaging investment.”

Global inflation surged last year, largely on runaway oil, gas and food prices after key energy producer Russia launched its assault on neighbouring Ukraine in February 2022.

Decades-high inflation

While inflation shows signs of cooling, the rate of price increases remains around the highest levels in decades.

“The price of gas increased sharply in 2022 as supplies of pipeline gas from Russia to Europe fell by more than 70 percent” in the second half of the year compared with the final six months of 2021, the bank added Thursday.

Average inflation in the EBRD regions dropped to 16.5 percent in December after peaking at 17.5 percent in October, it added.

“The EBRD’s economies are still suffering from a mix of high gas prices and (wider) inflation, with the latter likely to take longer to fall than markets expect,” said Javorcik.

She added: “Very high inflation is eroding real wages (and) that is translating into consumption.”

That is massively down, however, on its September prediction of eight-percent growth.

Russia’s economy is forecast to expand 0.5 percent in 2023, up slightly from the previous EBRD estimate of flat growth.