Emerging Europe Moves Ahead but Slower

Robust recovery in most of the region, except in Russia and other CIS economies

Growth still lower than before crisis, catch-up with advanced Europe to take longer

Countries need to address structural bottlenecks

Yet, average growth rates across the region are well below the levels before the crisis, thus it could take longer to catch up with advanced Europe. With the global economy facing mediocre growth prospects over the medium term, structural reforms offer the best hope for CESEE to lift growth and speed up convergence.

Central and Eastern European (CEE), Southeastern European (SEE) and Turkish economies have continued to expand at around 3-4 percent in 2015 (see table). In much of the region, growth has been driven by domestic consumption, which, in turn, is due to supportive macroeconomic policies and rising real wages. European Union (EU) member countries also benefited from a boost to investment due to increased utilization of EU funds before their expiration in 2015.

CIS countries remain in recession. The Russian economy contracted sharply last year as a result of plunging oil prices and Western sanctions, and will likely return to growth next year. Other CIS countries suffered from domestic political and financial woes and weaker external demand. IMF forecasts CIS contraction in 2016 to moderate to 1.5 percent, from 4.25 percent in 2015.

Heading for choppy waters

Although there is a strong cyclical rebound in CESEE countries, risks have increased. The strongest break on CESEE growth would be a stagnation in the euro zone, the largest trading partner for many CESEE countries. Also, prospects for CESEE countries would be dampened by lower-than-expected growth in the United States and China, and tighter financial conditions around the world. In addition, political instability and the rise of populist parties aggravate uncertainty throughout the region. With these higher risks, supportive monetary policy combined with medium-term fiscal consolidation remains valid policy advice for many economies in the region.

Catching up with advanced Europe requires extra effort

With the global economy less supportive in the medium term, lower growth can turn out to be the new normal in the region. This means that the pace of convergence to the living standards of advanced Europe may fall short of earlier aspirations.

To close the gap with advanced Europe faster, CESEE countries thus need stronger policies to improve labor supply, boost...