Economic activity in the Europe and Central Asia region is likely to remain subdued this year due to the ongoing fallout from Russia’s invasion of Ukraine, persistent high inflation and tighter financial conditions, says the World Bank’s Economic Update for the region, released today.

Regional output is now expected to grow by 1.4% in 2023, substantially better than the previously anticipated 0.1%. The positive, though deeply depressed, economic activity in 2023 reflects a softer contraction of Russia’s economy and an improvement in Ukraine’s outlook. Regional growth is expected to increase to an average 2.7% over 2024-25 as inflation eases, domestic demand recovers, and the external environment improves.

A sharp rise in consumer prices, particularly for food and energy, resulted in median annual inflation spiking to 15.9% by late 2022 in the emerging markets and developing economies (EMDEs) of Europe and Central Asia, the highest in more than 20 years, and the highest among all developing regions of the world. Inflation averaged less than 4% in Europe and Central Asia EMDEs before it began rising in 2021.

The outlook remains highly uncertain. Growth in 2023 may be weaker if the war caused by Russia’s invasion of Ukraine escalates further, food and energy prices continue to increase, interest rate hikes accelerate globally or in the region, or there is a sudden reversal of capital flows to the region. There could be spillovers to growth from the current banking developments in some advanced economies.

Ukraine’s economy is projected to grow by 0.5% this year, following a staggering contraction of 29.2% in 2022, the year of Russia’s invasion of the country. While the economic toll suffered by Ukraine as a result of the invasion is enormous, the reopening of Ukraine’s Black Sea ports and resumption of grain trade, as well as substantial donor support, are helping support economic activity this year. According to recent World Bank estimates, the cost of reconstruction and recovery in Ukraine has now grown to $411 billion, which is more than 2 times the size of Ukraine’s pre-war economy in 2021.

Türkiye experienced two devastating earthquakes on February 6, 2023, which have resulted in direct damages of about $34.2 billion, or 4% percent of the country’s 2021 GDP, according to World Bank estimates. Actual costs to meet the full range of recovery and reconstruction needs could be double the direct damages. Incorporating the impact of the recent earthquakes, growth is projected at 3.2% in 2023, rising to an average of 4.2% over 2024-25, underpinned by government support to households and investment amid ongoing reconstruction efforts.

Against the background of slow growth and high inflation, the report includes a special focus chapter on the cost-of-living crisis, which examines the impact of high inflation on the standards of living of people in the region.

“Inflation erodes the real incomes of people – and high inflation affects the poorest much more than the richest segments of the population,” said Ivailo Izvorski, World Bank Chief Economist for Europe and Central Asia region. “To better protect vulnerable groups and promote economic growth, policies should take into account the varying impacts of inflation across different income levels and use more precise indicators to measure the actual cost of high prices on the poorest.”

Governments across the region responded to the cost-of-living crisis with social assistance and subsidies, the latter involving moratoriums on energy price increases, reduced public transport fees, and caps on electricity and natural gas prices for households and businesses.

The report’s analysis, however, reveals the unequal burden of the cost-of-living crisis. It finds that inflation was 2 percentage points higher for the poorest 10% of the population compared to the wealthiest 10%. This difference exceeded 5 percentage points in some countries in the region, including Moldova, Montenegro, and North Macedonia.

Policies that do not account for the different inflation rates faced by households are likely to provide inadequate support to vulnerable groups and may end up being both inefficient and less effective, the report notes. It recommends going beyond the standard consumer price index (CPI) to measure inflation in order to capture more precisely the actual cost of living of the poorest. This is essential for designing better growth and poverty alleviation policies.

Latin America and the Caribbean economies have proven relatively resilient in the wake of increasing debt stress, inflation and rising global uncertainty. But new headwinds in the form of lower commodity prices, higher interest rates in developed countries and China’s unsteady recovery could potentially turn the region’s prospects bleak.

In order to boost much needed growth, countries should preserve their hard-won resilience and seize the unique opportunities global economy trends offer in nearshoring – moving production closer to home markets, and the green industry, according to a new World Bank report, “The Promise of Integration, Opportunities in a Changing Global Economy”.

The report estimates regional GDP will grow by 1.4 percent in 2023, a lower-than-expected rate. Rates of 2.4 percent are expected for 2024 and 2025, too low to make significant progress in poverty reduction.

“The region has largely recovered from the pandemic crisis but unfortunately is back to the low growth levels of the previous decade,” said Carlos Felipe Jaramillo, World Bank Vice President for Latin America and the Caribbean. “Countries need to urgently accelerate inclusive growth, so that everyone benefits from development, and this will require maintaining macroeconomic stability and taking advantage of the opportunities trade integration offers today.”

After recovering from the pandemic, the region has managed with relative success the multiple crises caused by the Russian war in Ukraine and the uncertainties surrounding the global economy. Both poverty and employment are mostly back to pre-pandemic levels, while average inflation, excluding Argentina, is expected to decline to 5.0 percent in 2023 after reaching 7.9 percent in 2022.

According to the report, the region´s overall resilience is the result of hard-won progress in macroeconomic management over the past two decades. Preserving this progress will be paramount.

However, on average, fiscal imbalances remain high, expected at 2.7 percent of GDP in 2023, further eroding already tight fiscal space, and debt levels are estimated to reach 64.7 percent of GDP this year, slightly down from 66.3 percent in 2022. Furthermore, the recent bank failures in the US and Europe introduce additional uncertainty. Its resonance in LAC´s banking system and capital flows remains to be seen.

“The LAC region remains one of the least integrated, while trade openness and FDI flows have mostly been stagnant or decreasing over the past 20 years; countries should find ways to gain attractiveness and take advantage of the nearshoring trends,” said William Maloney, chief economist for Latin America and the Caribbean at the World Bank. “In addition, leveraging the region’s extraordinary comparative advantage in sustainable energy production, commodities necessary for emerging green industries, and the region’s unique natural capital offers a new potential source of growth, but will require policies to facilitate access to global markets, capital, and technology.”

The report suggests a series of integration advancing policies countries should consider to seize these opportunities. This includes long term policies such as reducing systemic risks, boosting traditional and digital infrastructure investments, and improving human capital, as well as short-term options such as preserving macro stability, promoting customs and transport regulatory advances, and improving export and investment promotion agencies.

Growth in developing East Asia and the Pacific is forecast to accelerate in 2023 as China’s economy reopens, while the pace of growth in most of the economies in the rest of the region is anticipated to ease after a strong rebound last year, a World Bank report said on Thursday.

Economic performance across the region, while robust, could be held back this year by slowing global growth, elevated commodity prices, and tightening financial conditions in response to persistent inflation, according to the World Bank’s East Asia and Pacific April 2023 Economic Update.

Growth in developing East Asia and the Pacific is forecast to accelerate to 5.1% in 2023 from 3.5% in 2022, as China’s reopening helps the economy rebound to a 5.1% pace from 3% last year. Growth in the region outside China is anticipated to moderate to 4.9% from the robust post-COVID-19 rebound of 5.8% in 2022, as inflation and elevated household debt in some countries weigh on consumption.

“Most major economies of East Asia and the Pacific have come through the difficulties of the pandemic but must now navigate a changed global landscape,” said World Bank East Asia and Pacific Vice President Manuela V. Ferro. “To regain momentum, there is work left to do to boost innovation, productivity, and to set the foundations for a greener recovery.”

 Among the larger economies of the region, most, including Indonesia, the Philippines, and Vietnam, are anticipated to grow more modestly in 2023 than in 2022. Most Pacific Island countries are forecast to grow faster in 2023, but Fiji’s exceptionally strong economic pace in 2022 is likely to moderate.

Most countries in the EAP region have seen two decades of higher and more stable growth than economies in other regions. The result has been a striking decline in poverty and, in the last decade, also a decline in inequality. However, the catch-up to the per capita income levels of advanced economies has stalled in recent years as productivity growth and the pace of structural reforms has slowed. Addressing the significant “reform gap,” especially in services, could magnify the impact of the digital revolution and boost productivity in sectors from retail and finance to education and health.

The economies of the region must also cope with three important challenges as policymakers act to sustain and accelerate economic growth in the aftermath of COVID-19. Rising tensions between major trading partners will affect trade, investment, and technology flows across the region. The rapid aging of the major economies of East and Southeast Asia heralds a new set of challenges and risks with implications for economic growth, fiscal balances, and health. Finally, the region is particularly exposed to climate risks, in part due to the high density of population and economic activity along its coasts.

“De-globalization, aging, and climate change are casting a shadow over the growth prospects of a region that has thrived through trade and is growing old fast,” said World Bank East Asia and Pacific Chief Economist Aaditya Mattoo. “However, promoting trade, addressing population dynamics, and enhancing climate resilience could strengthen growth.”

The global economy’s “speed limit”—the maximum long-term rate at which it can grow without sparking inflation—is set to slump to a three-decade low by 2030. An ambitious policy push is needed to boost productivity and the labor supply, ramp up investment and trade, and harness the potential of the services sector, a new World Bank report shows.

The report, Falling Long-Term Growth Prospects: Trends, Expectations, and Policies, offers the first comprehensive assessment of long-term potential output growth rates in the aftermath of the COVID-19 pandemic and the Russian invasion of Ukraine. These rates can be thought of as the global economy’s “speed limit.”

The report documents a worrisome trend: nearly all the economic forces that powered progress and prosperity over the last three decades are fading. As a result, between 2022 and 2030 average global potential GDP growth is expected to decline by roughly a third from the rate that prevailed in the first decade of this century—to 2.2% a year. For developing economies, the decline will be equally steep: from 6% a year between 2000 and 2010 to 4% a year over the remainder of this decade. These declines would be much steeper in the event of a global financial crisis or a recession.

“A lost decade could be in the making for the global economy,” said Indermit Gill, the World Bank’s Chief Economist and Senior Vice President for Development Economics. “The ongoing decline in potential growth has serious implications for the world’s ability to tackle the expanding array of challenges unique to our times—stubborn poverty, diverging incomes, and climate change. But this decline is reversible. The global economy’s speed limit can be raised—through policies that incentivize work, increase productivity, and accelerate investment.”

The analysis shows that potential GDP growth can be boosted by as much as 0.7 percentage points—to an annual average rate of 2.9%—if countries adopt sustainable, growth-oriented policies. That would convert an expected slowdown into an acceleration of global potential GDP growth.

“We owe it to future generations to formulate policies that can deliver robust, sustainable, and inclusive growth,” said Ayhan Kose, a lead author of the report and Director of the World Bank’s Prospects Group. “A bold and collective policy push must be made now to rejuvenate growth. At the national level, each developing economy will need to repeat its best 10-year record across a range of policies. At the international level, the policy response requires stronger global cooperation and a reenergized push to mobilize private capital.”

The report lays out an extensive menu of achievable policy options, breaking new ground in several areas. It introduces the world’s first comprehensive public database of multiple measures of potential GDP growth—covering 173 economies from 1981 through 2021. It is also the first to assess how a range of short-term economic disruptions—such as recessions and systemic banking crises—reduce potential growth over the medium term.

“Recessions tend to lower potential growth,” said Franziska Ohnsorge, a lead author of the report and Manager of the World Bank’s Prospects Group. “Systemic banking crises do greater immediate harm than recessions, but their impact tends to ease over time.”

The report highlights specific policy actions at the national level that can make an important difference in promoting long-term growth prospects:

Align monetary, fiscal, and financial frameworks: Robust macroeconomic and financial policy frameworks can moderate the ups and downs of business cycles. Policymakers should prioritize taming inflation, ensuring financial-sector stability, reducing debt, and restoring fiscal prudence. These policies can help countries attract investment by instilling investor confidence in national institutions and policymaking.

Ramp up investment: In areas such as transportation and energy, climate-smart agriculture and manufacturing, and land and water systems, sound investments aligned with key climate goals could enhance potential growth by up to 0.3 percentage point per year as well as strengthen resilience to natural disasters in the future.

Cut trade costs: Trade costs—mostly associated with shipping, logistics, and regulations—effectively double the cost of internationally traded goods today. Countries with the highest shipping and logistics costs could cut their trade costs in half by adopting the trade-facilitation and other practices of countries with the lowest shipping and logistics costs. Trade costs, moreover, can be reduced in climate-friendly ways—by removing the current bias toward carbon-intensive goods inherent in many countries’ tariff schedules and by eliminating restrictions on access to environmentally friendly goods and services.

Capitalize on services: The services sector could become the new engine of economic growth. Exports of digitally delivered professional services related to information and communications technology climbed to more than 50% of total services exports in 2021, up from 40%in 2019. The shift could generate important productivity gains if it results in better delivery of services. 

Increase labor force participation: About half of the expected slowdown in potential GDP growth through 2030 will be attributable to changing demographics—including a shrinking working-age population and declining labor force participation as societies age. Boosting overall labor force participation rates by the best ten-year increase on record could increase global potential growth rates by as much as 0.2 percentage point a year by 2030. In some regions—such as South Asia and the Middle East and North Africa—increasing female labor force participation rates to the average for all emerging market and developing economies could accelerate potential GDP growth by as much as 1.2 percentage points a year between 2022 and 2030.

The report also underscores the need to strengthen global cooperation. International economic integration has helped to drive global prosperity for more than two decades since 1990, but it has faltered. Restoring it is essential to catalyze trade, accelerate climate action, and mobilize the investments needed to achieve the Sustainable Development Goals.