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Spillover Risks from a Russian Recession

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Since our previous forecast update, the Russian outlook has continued to deteriorate. Year-on-year GDP growth in the first quarter of 2014 was 0.9%, and the Ministry of Economic  Development estimates  that GDP declined by 0.5% relative to the previous quarter. In April, the HSBC composite Purchasing Managers‘  Index (PMI)  fell to 47.6, indicating the worst contraction in economic activity since May 2009. According to the Central Bank of Russia (CBR) net capital outflows in the first quarter have reached US$50.6 billion, almost doubling year-on-year. ECB estimates suggest these outflows could be more than four times larger at around US$220 billion.


Our previous forecast update for Russia discussed  two downside risk scenarios in 2014. This note provides an estimate of the spillover effects from a Russian recession on the most affected economies in Eastern and Central Europe.

Figure 1: Russian Severe Recession Scenario, Decline in GDP Relative to Baseline Forecast

Cumulative gdp effect_v3.jpgSource: Euromonitor International Macro Model

Slowdown Scenario Spillovers

The spillovers are modest in our most likely downside risk scenario, a further slowdown (20-25% probability in 2014). Under this scenario Russian GDP would decline by 0.2% in 2014, falling 1.3% below our baseline path for 2014/2015. Ukraine would be the worst affected by this slowdown, with GDP growth declining to -4.6% in 2014. Kazakhstan and the Baltic states would also suffer declines in output relative to the baseline forecast of 0.4-0.6%. But beyond that, we do not estimate significant spillovers from this scenario.

Figure 2: Russian Slowdown Scenario, Effect on GDP in 2014/2015


Notes: Total change in GDP from the baseline forecast in 2014-2015.

Source: Euromonitor International Macro Model

Severe Recession Scenario Spillovers

In our severe recession scenario (10-15% probability in 2014), spillovers would be more significant due to financial and private sector confidence contagion effects on Eastern Europe. In this scenario, Russian GDP falls by 1.2% in 2014 and by 3.3% in 2015. Overall, Russia suffers an output drop of 7.4% below our baseline forecast path at the peak of the recession in 2015. The most heavily affected economies are Ukraine, Kazakhstan, the Baltic states, Turkey and  Finland. GDP in Ukraine declines 5% below the baseline forecast for 2015, worsening the recession that has already started . The Baltics and Kazakhtan all suffer peak GDP losses of around 3% relative to our baseline forecast. Turkey‘s output falls by 2.2% relative to  our baseline forecast, and annual GDP growth remains below 2% over 2014/2015. Finnish GDP is 1.7% below our baseline forecast in 2015. Other Eastern European economies suffer peak output losses ranging from 1.6% in Bulgaria to 1.2% in Poland and 0.4% in Slovenia. Effects on Western Europe, North America and China are small in this scenario ranging from almost 0 to 0.2%. Germany‘s GDP falls by 0.3% relative to the baseline forecast due to more significant trade links with Russia and Eastern Europe.

Figure 3: Russian Severe Recession Scenario, Effect on GDP in 2014/2015


Notes: Total change in GDP from the baseline forecast in 2014-2015.

Source: Euromonitor International Macro Model


Table 1: GDP Growth, Baseline Forecasts

table1.jpgSource: Euromonitor International Macro Model


Table 2: GDP Growth, Russian Slowdown Scenario

table3.jpgSource: Euromonitor International Macro Model


Table 3: GDP Growth, Russian Severe Recession Scenario


Source: Euromonitor International Macro Model          



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