* Growth to be driven by recovery in exports
* The region grew 0.2 percent in 2014
* Improved investment climate, EU integration could spur growth
By Ivana Sekularac
BELGRADE, Jan 19 (Reuters) - The economies of the Western Balkans will grow an average 1.3 percent this year as demand for their exports rises and the region recovers from 2014's devastating floods, the World Bank said on Tuesday.
The region, which covers Albania, Bosnia, Kosovo, Macedonia, Montenegro and Serbia, posted estimated growth of 0.2 percent in 2014, the Washington-based lender said in a report, despite the impact of the floods that hit Bosnia and Serbia in May.
The World Bank forecast that all but one of those economies would expand by between 1.5 and 3.5 percent this year, although it acknowledged risks to growth from a recession in Russia and a moribund euro zone, both major trading partners.
The exception is Serbia, the biggest economy in the Western Balkans, which is seen contracting by 0.5 percent due to weak domestic demand and government austerity measures.
"External demand will remain a key driver of growth in support of SEE6 industrial activity and export growth," the report said. "Confidence will be dampened by lingering political uncertainty, chronically high unemployment, a weak business climate, and banking systems saddled with high non-performing loans."
Non-performing loans which currently account for 16.7 percent of total lending in the region could weigh on credit growth in 2015, it warned.
The World Bank said exports from the six countries -- all of which aspire to join the European Union -- stood at around 38 percent of GDP in 2014. That was 30 percent below potential, offering the prospect of future export-fuelled growth.
"Potential output growth remains limited by structural challenges," the World Bank report said, citing the need to improve investment climates, accelerate integration with the EU and reform bloated administrations to create new jobs. Regional unemployment was 22 percent last year.
The report said May's floods had devastated the economies of Bosnia and Herzegovina and Serbia, which together account for nearly 60 percent of the region's population, estimating damages at around 15 percent of GDP and 4.7 percent of GDP respectively.
"These losses are comparable to the devastating floods in Thailand in 2011," it said.
But a fall in international primary agricultural commodity prices and low domestic demand had mitigated the upward pressure on food prices from the May floods. (Reporting by Ivana Sekularac; Editing by Catherine Evans)