IMF sees return to growth next year, with downside risks

Eastern Europe's economies are likely to return to mild growth next year, but downside risks have grown because of China's slowdown and Europe's refugee crisis, the International Monetary Fund said on Friday.

For all 22 countries in Central, Eastern and Southeastern Europe (CESEE), the IMF left its forecast at 1.3 percent for the next year. That is a rebound from this year's 0.6 percent drop, which has been driven mainly by Russia and Ukraine.

"The balance of risks to CESEE growth has shifted from broadly neutral at the time of the (spring report) to being tilted to the downside," the IMF said.

"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 report said.

Russia, hit by low oil prices and western sanctions imposed over the conflict in Ukraine, will see its economy dip 0.6 percent next year after a 3.8 percent drop this year.

Central European countries will see a smaller European Union subsidies, which will limit growth next year, and that part of the region would also be most vulnerable to a weaker euro zone recovery.

"Weaker-than-expected euro area growth would take a toll on the CEE and SEE EU, which are most closely integrated into pan-European global value chains," the IMF said.

"The potential negative fallout from the Volkswagen emissions scandal could be damaging for the Czech and Slovak economies, and to a lesser extent, for Hungary and Poland."

The fund said that countries in Southeastern Europe faced the biggest need to consolidate their budgets, which should be done through cutbacks in subsidies and tax incentives and reforms to welfare programmes.

It forecast overall fiscal balance in the region at -2.9 percent of gross domestic product next year, an improvement from -3.7 percent in 2015.