Growth in the Europe and Central Asia (ECA) region is expected to increase to an average of 2.7 per cent over 2024-25 as inflation eases, domestic demand recovers, and the external environment improves, as per the World Bank. The ongoing fallout from Russia’s invasion of Ukraine, combined with high inflation and higher global interest rates, are dampening prospects for the regional economy.
Due to differences in consumption patterns and varying price increases across goods and services, lower-income households in almost every country in the region faced significantly higher inflation than the wealthiest households. In fact, inflation was 2 percentage points higher for the poorest 10 per cent of the population compared to the wealthiest 10 per cent, with some countries exceeding 5 percentage points, according to the World Bank’s latest economic update from the region titled ‘Weak Growth, High Inflation, and a Cost-of-Living Crisis’.
The report’s findings have strong policy implications, as policies targeting vulnerable populations need to take into account the different inflation rates faced by households of different income levels.
Governments across the region responded to the cost-of-living crisis with social assistance and subsidies, including moratoriums on energy price increases, caps on electricity and natural gas prices, and reduced public transport fees. However, during periods of high inflation, the consumer price index (CPI) is not a reliable estimate of the true cost of living, and policies that don’t account for the different levels of inflation are liable to provide insufficient support to vulnerable groups.
The report recommended going beyond the CPI to measure inflation to capture more precisely the actual cost of living of the poorest. It also noted that the outlook for growth remains highly uncertain, and growth in 2023 may be weaker if the war caused by Russia’s invasion of Ukraine escalates further, energy prices continue to soar, interest rate hikes accelerate on a global level or in the region, or there is a sudden reversal of capital flows to the region.
In Turkiye, the region’s second-largest economy, the devastating earthquakes of February 2023 have added to already considerable headwinds and risks to the growth outlook. Growth is projected at 3.2 per cent in 2023, incorporating the impact of the recent earthquakes, and is forecast to rise to an average of 4.2 per cent over 2024-25. Due to Russia’s invasion of the country, Ukraine experienced a contraction of 29.2 per cent in 2022; however, it is projected that its economy will grow by 0.5 per cent this year. The reopening of Ukraine’s Black Sea ports as well as substantial donor support are helping support economic activity this year.
Policies that take into account the different inflation rates faced by households of different income levels are necessary to support vulnerable populations effectively. The report also noted that the outlook for growth remains highly uncertain, and there are several factors that could further weaken growth in the region in the coming years.