By Karin Strohecker
LONDON (Reuters) - The European Bank for Reconstruction and Development (EBRD) on Thursday lifted this year's growth forecast for the 37 countries in its region, but warned rising energy costs and slow COVID-19 vaccination progress dampened prospects ahead.
The EBRD, which covers economic trends across Europe, Asia and Africa, estimated that a sharp recovery in the first six months of the year would lift region-wide growth to 5.5% in 2021. That is up from its June forecast of 4.2% and follows a contraction of 2.4% in 2020.
"While these are encouraging developments, the recovery is bittersweet," said EBRD chief economist Beata Javorcik. "High prices of natural gas, oil and other commodities weigh on the trade balances of energy importers, in particular in the southern and eastern Mediterranean."
High energy prices ramped up inflation pressures, which were exacerbated by tight labour markets in some countries such as Latvia, Slovenia and Romania, the EBRD said.
Inflation pressures have already seen central banks in the region ramp up rates, in many cases further than anticipated. On Wednesday, Poland's central bank delivered its biggest rate hike since 2000 and did not rule out further tightening.
Meanwhile policy tightening in advanced economies could make it more expensive to service debt burdens, which rose an average 13 percentage points of GDP since the end of 2019, EBRD calculations showed.
The U.S. Fed announced on Wednesday it will begin to reduce its asset purchase program this month.
On a country level, the EBRD ramped up Turkey's growth forecast to 9% this year thanks to a post-lockdown rebound and an export boom driven by the weak lira, but lowered the 2022 outlook to 3.5%, warning risks to macroeconomic stability had increased.
Russia was seen expanding slightly faster-than-expected at 4.3% this year as higher commodity revenues helped fund social spending programmes but grow at an unchanged 3.0% in 2022.
Among its regions, South Eastern EU and Western Balkans had the fastest growth rates this year and biggest upward revisions since the June forecasts.
However, most countries saw next year's forecasts held broadly unchanged or even pared back.
Javorcik said hesitancy over COVID-19 vaccinations in many EBRD countries, which translated into a slow roll out and inability to sever the link between rising cases and rising mortality rates, also posed risks ahead.
"There are clouds gathering on the horizon," she said.
Graphic: EBRD growth forecasts: https://fingfx.thomsonreuters.com/gfx/mkt/lbvgnbrmrpq/EBRD%20growth%20forecasts%20November%204%202021.PNG