IMF Sees Eastern European Economies Returning to Growth in 2016

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• Russia, CIS countries seen contracting 0.4 percent next year

• Fiscal consolidation still required to prevent shocks

The economies of eastern Europe will return to growth in 2016, even as low oil prices and sanctions imposed by the U.S. and the European Union keep Russia in recession, the International Monetary Fund said.

Countries in central, southern and eastern Europe must still focus on fiscal consolidation, building buffers against future shocks, including by overhauling public pension systems, the IMF said in its bi-annual regional outlook on Friday. While the European Central Bank’s loose policy, low oil prices and other factors have helped boost growth, Russia’s downturn has weighed on the region, particularly the states of the former Soviet Union, according to the Washington-based lender.

“As the Russian economy stabilizes and contraction of activity slows and Ukraine’s economy rebounds, neighboring economies will be seeing higher growth rates in 2016,” the IMF said in the report. “New risks to trade and capital flows stemming from a possible further slowdown in major emerging markets (notably, in China) as well as the ongoing refugee crisis in Europe are the main additions to long-standing risks.”

The countries in the region stretching from the Baltics to the Black Sea and from Poland to the Pacific Ocean are diverging economically. While Russia and some of its former Soviet partners are suffering from runaway inflation as oil prices hammer their currencies, countries closer to the EU are beginning to return to growth rates that are faster on average than their western counterparts. The entire region is expected to contract 0.6 percent this year and expand 1.3 percent in 2016, the IMF said.

Risks to growth include slower-than-expected demand from China, a further deepening in Russia’s recession, and a weaker-than-predicted euro-area expansion, the IMF said. The region’s markets face uncertainties that include a return of financial stress, including concerns about Greece’s ability to adhere to its bailout and avoid bankruptcy as well as the risk that U.S. monetary authorities will tighten policy faster than forecast, according to the report. The war in Syria and the EU migrant crisis may also pose risks.

“There could be some financial volatility related to the slowdown in emerging economies, developments in China, but also the realignment of the global reserve currencies, the U.S. dollar appreciating against other currencies, and of course the geopolitical tensions,” Johannes Wiegand, deputy director of the European department at the IMF, told reporters in Ljubljana before the report was released. “And the new element of that is now the refugee crisis.”

Russia’s economy will shrink 3.8 percent this year and 0.6 percent next, the IMF said, reducing its prediction for a 2016 decline of 1.1 percent made in a May report. Inflation will be 8.5 percent in 2016, from 13.5 percent estimated this year. Russia’s neighbor Ukraine will see its economy contract 9 percent in 2015 -- worse than the IMF’s May outlook of a 5.5 percent contraction -- before expanding 2 percent next year. Ukraine’s inflation will ease to 12 percent at end-2016, from an estimate of 45.8 percent this year, the IMF said.

The IMF sees Russia’s budget deficit widening to 5.7 percent of gross domestic product this year before narrowing to 3.9 percent in 2016. Ukraine’s will shrink from 4.2 percent of GDP in 2015 to 3.7 percent next year, it said. Tiny Montenegro will have the region’s largest public-sector shortfall this year and next at about 10 percent, the report said.