EDB Macroreview, July 2016. EAEU COUNTRIES GROWTH AFTER ADAPTATION

The prolonged search for the “low point” has not yet given us grounds to conclude unambiguously that it is inevitable the EAEU economies will recover soon. However, indicators for the first half of 2016 continue to indicate that the economies are gradually adapting to the shocks that have taken place in the last few years. Negative trends in the economies of EAEU countries, which strengthened amid a fall in commodity prices, have somewhat weakened. The economies started to show an improvement in macroeconomic indicators in the first half of 2016. The volume of migrant remittances from Russia began to decline sharply in Q4 2014 amid a significant fall in economic activity in the region; however, the pace of the decline started to slow down a year later. The year on-year fall in remittances from Russia to other EAEU countries in Q4 2015 exceeded 30%, but the rate of the quarter-on-quarter fall was the lowest in a year. The stabilization of the exchange rates of the national currencies of EAEU countries, and the stabilization of economic dynamics in the region, will contribute to a further slowdown in the fall in remittances. The external environment will improve through: a decline in the volatility of the world’s financial markets; a fall in capital outflows; and a rise in exports. This will contribute to the stabilization of the exchange rates of national currencies in the region. In turn, this will be a significant factor leading to a further slowdown in inflation and a decline in inflation expectations in EAEU countries. Due to inflationary pressure falling, the central banks of EAEU countries kept unchanged or reduced their base lending rates in the first half of 2016. However, we expect price and exchange rate stabilization in Q2 2016 amid low economic activity to lead to a further softening of the monetary conditions. The impressive slowdown in inflation in EAEU countries will perhaps be one of the surprises of 2016. We forecast the EAEU countries’ inflation to slow from 12.8% to 6.3%. The reduction of the key interest rates may have a positive effect on lending growth, which could provide impetus to a recovery in both investment and household consumption. As for the medium term, we forecast a recovery in GDP1 in EAEU countries from -3.1% in 2015 to -0.9% in 2016 and to a positive growth rate of 0.8% in 2017. Therefore despite 2016’s uneasy start, the first half of the year provides grounds for cautious optimism about the prospect of a recovery in economic growth and trade.