Page 47 - bne Magazine August 2022

bne August 2022 Central Europe I 47
food prices: “A major reason for this is the shortage of supplies on world markets due to the loss of Ukrainian and Russian agricultural exports. Lower supplies of fertiliser as a result of the war could limit crop production in many countries and further exacerbate the food crisis.”
However, inflation is not limited to food and energy prices. “Worryingly, core inflation (excluding food and energy) is also picking up in the CESEE region. This suggests that inflation is now becoming increasingly broad-based,” said the report.
Amid fast rising inflation, confidence is already deteriorating among businesses and – to a much greater extent – among consumers.
“Inflation is starting to bite households, eating into real incomes, and this is only the beginning. The situation is likely to aggravate in the second half of 2022,” said Pindyuk.
“Real wages declining in some counties and the positive growth [in others] is not sustainable as inflation is spiralling. This means a slowdown in consumer spending is coming. Households [in emerging Europe] are poorer than in Western Europe and a higher share of their spending is on food and non-alcoholic beverages. Demand for these items is inelastic so demand for other things
will inevitably decline.At the same time, increasingly more households will be pushed into poverty,” she added.
Ukraine’s economy devastated
On top of the loss of human life and destruction in Ukraine, the country’s economy has been devastated by the war. Previous forecasts from various institutions initially projected a bounceback in 2023 but as the war drags on into the second half of the year that is no longer a given; wiiw currently forecasts growth of just 5.0% in 2023 rising to 13.0% in 2024.
“The war continues to have a devastating effect on the Ukrainian economy, with damage from the destruction of residential and non- residential buildings and infrastructure
exceeding 60% of the country’s 2021 GDP,” the report says.
“As Ukraine is adjusting to the new reality of the war, economic activity is starting to recover slowly in both the manufacturing and the services sector, with more companies resuming their activity. Still, capacity utilisation remains 40% lower than before the start of the war.”
While the timing is unclear, at some point the war will be over and the reconstruction of Ukraine begin, heralding the start of the country’s recovery.
“We expect – on the end of the war and beginning of reconstruction, private capital to flow,” said Pindyuk, pointing to the IT and agriculture sectors as being particularly attractive, along
with renewable energy.
On the other hand, Pindyuk said, “for the parts of Ukraine that may end up under Russia, the future is very gloomy, with no rebuilding, and isolation from the global economy”.
Delayed reaction in Russia
Russia’s self-inflicted comic contraction is now expected at 7% the year – milder than previously anticipated.
“Russia has so far coped better with the sanctions than was foreseeable in spring. The sharply lower imports and still high revenues from energy exports have pushed the rouble to a new five-year high against the euro and the US dollar,” the report said.
“The strong rouble and the population's reluctance to spend are also dampening inflation, which we now see at around 16% in 2022. In the short term the country has additionally benefited from the EU oil embargo via further increases in the oil price.”
However, Vasily Astrov, senior economist and Russia country expert at wiiw, said more pain is in store for Russia. "Although it was possible to slow down the slump, the full effect of the Western trade sanctions is only gradually becoming apparent,’ Astrov commented, pointing to the “dramatic” production losses in some industrial sectors due to a lack of Western components.
Negative risks abound
Even the increasingly pessimistic forecasts may yet be lowered since, as Pindyuk pointed out, the negative risks are mounting.
First among these are the continuation of the war, still a subject of “huge uncertainty”, though it’s already clear it will last much longer than initially thought.
Secondly, Pindyuk said, “persistently high inflation could trigger a stagflationary hard landing, with prices growing out of control and an economic recession.”
As Russia and the West continue to inflict economic damage on each other, Pindyuk believes a sudden stop of gas supplies cannot be ruled out, and this would be particularly damaging for
the Central and Southeast European countries that almost all their gas imports from Russia. A suspension of gas supplies "would imply winter energy rationing and push many countries into recession,” warned the economist.
Fourthly, there are the inflated real estate prices, which wiiw sees as unsustainable.
Finally, analysts are already looking ahead to the next US presidential election in 2024, given the importance of the US to Europe’s security and economic situation.
“The war continues to have a devastating effect on the Ukrainian economy, with damage from the destruction of residential and non- residential buildings and infrastructure”
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