World Bank – Europe & Central Asia, Oct 2023

The Europe and Central Asia (ECA) region is facing numerous challenges, including the Russian Federation's invasion of Ukraine, global financial conditions, inflation, and economic fragmentation. The five-year global growth for 2020-2024 is the weakest it has been in 30 years, with a slow recovery in China and a sharp slowdown in the euro area, which is ECA's largest trading partner. Policy rate increases in advanced and developing economies have resulted in higher bond yields, weakened market access, and reduced credit availability. Inflation in ECA has partially receded due to lower global commodity prices, but disinflation slowed during the summer and real incomes have not yet recovered from the cost-of-living crisis in 2022. Despite an upgrade in the regional growth forecast to 2.4 percent for 2023, the divergence within the region has widened, with growth projections remaining unchanged or downgraded for about half of the ECA countries. Turkey's growth projection has increased to 4.2 percent in 2023 due to resilient household consumption and reduced policy uncertainty. Russia has also seen an upward revision in its growth projection due to increased government spending, primarily on military buildup and social transfers. The South Caucasus and Central Asian economies have experienced upgraded growth projections due to significant inflows of migrants, businesses, trade, and money flows. This has boosted domestic demand, output, currency appreciation, and lower inflation. Eastern Europe, which has been heavily impacted by the Ukraine invasion, is gradually regaining momentum, while Ukraine itself has seen some economic recovery but remains in a state of distress due to security risks, infrastructure damage, energy price increases, and capacity constraints in grain transport routes. On the other hand, Central Europe and the Western Balkans are expected to have weaker growth due to the slowdown in the euro area, slow income recovery, and tight financial conditions.