Montenegro set to experience highest level of economic growth in emerging Europe

Montenegro and Moldova will experience the highest levels of economic growth in emerging Europe in 2021, but the outlook is positive across the region.

The Vienna Institute for International Economic Studies (wiiw) expects the economies of emerging European countries to grow 5.4% this year.

Its fall economy forecast, released on October 20, represents an upward revision of 1.2 percentage points from the previous summer forecast.

The leaders in the region are Montenegro (8.4%) and Moldova (eight percent). It should be noted, however, that Montenegro’s economy, dependent on tourism, suffered the largest drop in GDP in 2020, of 15.3%. This huge contraction means that pre-crisis levels will not be reached this year.

This new forecast means that in 2021, the emerging region of Europe is expected to grow significantly faster than the euro area (4.8 percent). On average, the pre-crisis level of 2019 has already been exceeded in the second quarter.

“The good performance of the economies of Eastern Europe is mainly due to the less stringent Covid-19 rules in many places, and the fact that the service sector is much smaller than in Eastern Europe. West, ”says Vasily Astrov, senior economist at wiiw and lead author of the forecast.

Driver consumption

The Vienna Institute says the main driver of growth in the region is private consumption. With an average of 14.5 percent, it grew massively in the second trimester.

Investment also grew by almost 18 percent, on average, during this period. Much of this, however, has been explained by large-scale projects in Estonia, such as the field of biotechnology and the production of Covid-19 vaccines.

Exports are also recovering sharply thanks to the global recovery and the recovery in tourism. However, industrial production in many countries in the region – such as in Western Europe – also suffers from material shortages, such as the lack of semiconductors in the automotive industry.

Employment is once again approaching pre-crisis levels in many countries. In Croatia, Latvia, Hungary, Poland and Slovenia, it has already been reached or exceeded. However, the coronavirus crisis has left its mark on labor markets: underemployment is now higher than before the pandemic.

Unemployment also remains a problem in many countries, especially in the Western Balkans. At the same time, there are labor shortages in the sectors that have developed as a result of the crisis. This is the case not only in the EU Member States in the region, but also in Montenegro, Serbia and Russia.

Real estate bubble

The rise in inflation is also being felt in emerging European countries. Currently, in most countries in the region, inflation rates are three to four percent higher than at the start of the year. However, high inflation is expected to be a transitory phenomenon. When the euro is used, inflationary pressure is generally lower. Faced with rising inflation, many central banks have already responded by raising interest rates, and further interest rate measures are expected to follow.

“It should also cool the overheated, predominantly credit-funded real estate markets in many places, some of which are showing signs of bubble formation,” Astrov said.

However, he adds that the main driver of the housing boom in the region has been the monetary policy of the European Central Bank.

“For now, it will likely remain ultra-expansive,” says Astrov.

In the Czech Republic and Lithuania, real estate prices have increased by 16 and 15% respectively since the start of the pandemic, and are still showing an upward trend.

Outlook for 2022 also positive

The economic outlook is generally positive, although the recovery in emerging European countries is expected to run out of steam in 2022 (3.7%) and 2023 (3.5%).

The strongest growth next year will be in Croatia (5%) and Poland (4.9%), as well as in Montenegro and Kosovo (4.8%).

The Vienna Institute believes that the greatest risks to a sustainable economic recovery are a further outbreak of Covid-19 and hasty fiscal consolidation.

Budget deficits across the region have exploded during the crisis (to an average of 6.3% of GDP in 2020 and around 4.5% this year). A premature cut in public spending could jeopardize the recovery in a number of countries, in particular in the Western Balkans and the successor states of the Soviet Union.

In addition, the weakening of monetary policy in the United States could slow down the recovery, making funding in dollars more expensive.

The EU’s Covid-19 Recovery and Resilience Facility will provide additional momentum in the Eastern Member States.

In Romania, for example, program transfers – worth a total of around € 29 billion, could in theory generate additional annual growth of up to 3.1 percentage points through 2026. In the Much more developed Czechia, this could still reach 0.7 percentage points per year to real GDP growth.

“In reality, however, the economic effect of the reconstruction fund will be significantly weaker,” predicts Astrov.

“On the one hand, because the economies of the region cannot fully absorb the money, and on the other hand, because EU transfers will partly replace the financing of investment projects from national budgets. .

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