EDB Macroreview, October 2016. ECONOMIC RECOVERY TRAJECTORIES IN EURASIA

In recent years, positive expectations have not been met for the second half of the year regarding economic recovery in the EDB member countries. In both 2015 and 2014, unfavorable external factors, primarily the fall in oil prices, had a negative effect on the dynamics of economic growth in the region. Available data for Q3 2016 indicate a more favorable scenario. This is suggested by both macroeconomic data and leading indicators, as well as signals from international credit rating agencies. Trends in regional growth dynamics in the past several months point to the start of economic recovery. Indeed, judging by data for July-August 2016, there are grounds for positive GDP growth rates in the EDB countries in Q3 2016. To all appearances, one can also expect positive changes in inflation before the end of 2016. The inflation rate in Russia is expected to be lower than 6% in 2016. It will hit an all-time low in 2017-2018 and be close to the central bank’s target of 4%. We expect a fall in the aggregate inflation rate of the EDB countries from 12.8% in 2015 to 6.1% in 2016, and a further slowdown in the rise in consumer prices to 4.8% in 2017 and 4.2% in 2018. Apart from the low world prices on food and primary commodities, a significant contribution to the decline in inflationary pressure is delivered by the stabilization of the exchange rates of the EDB countries’ currencies throughout Q2-Q3 2016. This trend is partially due to a decline in the outflow of capital from EDB countries and makes it possible for the countries to replenish their foreign exchange reserves. An important factor for the economic recovery in a number of the EDB countries was the rise in exports, primarily to the Russian Federation. In some countries, the acceleration of the rise in exports may be attributable to the depreciation of the national currency. However, Kyrgyzstan showed an increase in exports to Russia despite the strengthening of the som against the ruble, which suggests that integration factors may have played a certain role. Despite the positive changes however, there are lingering risks of imbalances in a number of macroeconomic sectors, primarily in the budgetary sphere. There are still significant global risks related to: the slowdown in the growth of the Chinese economy; the fall in the prices of primary commodities; the deterioration of the situation in the banking sector of European countries; as well as an increase in the Fed rate.