RIGA - The EBRD raised its economic growth forecast for the 30 emerging European countries it invests in, tempering this announcement by adding that the region exhibits “stark variations” in the strength of the recovery, reports Bloomberg. The region’s economies will grow about 3.3 percent this year, after contracting about 6 percent in 2009, the bank reported on Jan. 22. This was the second upgrade to its forecast for 2010, as it said in October that it estimated a 2.5 percent expansion. For 2011 the region will average about 3.8 percent growth.
“The gradual global recovery will support regional growth, but local factors will dampen it,” says the bank’s chief economist Erik Berglof. “Appropriate public and private sector policies and actions to clean up balance sheets, restructure debt and deal with distressed assets will be important to help sustain credit growth and support” the recovery.
The upward revision was triggered by a better-than-expected outlook for Poland, Turkey, Russia and Kazakhstan, some of the region’s largest economies. Russia and Kazakhstan benefit from a recovery in the prices of global commodities as growth globally gathers momentum, while the region as a whole is seeing more investment as capital flows resume after the stabilization of the credit crisis.
Investor confidence in Eastern Europe rose to a record high this month on expectations of renewed demand from Western Europe. An index of investor and analyst expectations for the region in the next six months rose 7.1 points to 59.1 points, the highest since the index started, in Dec. 2007, according to ZEW Center for European Economic Research and Erste Bank. This gain follows a 21.1 percent increase in December.
“Financial market experts expect the economic situation to improve in the region until the middle of the year,” says ZEW analyst Mariela Borrel. “Assessment of the current economic situation in central and eastern Europe also denotes a strong improvement.” Central and east European countries are benefiting from rising orders from the region’s main trading partners in Western Europe including Germany and France after dropping demand last year pushed most East European countries into recessions.
The Polish economy is expected to expand 2.3 percent this year and 3 percent next year. Russia will grow 3.9 percent this year and 4.2 percent in 2011, while Turkey will expand 4.7 percent and 4 percent, this year and next, respectively. Ukraine will grow 3 percent both years, the bank said.
In the rest of the region, recovery will remain sluggish with Hungary, Latvia, Lithuania and Estonia contracting for a second year. Every economy in the region will grow in 2011, the EBRD predicts.
The economies of Latvia and Estonia will contract the most this year, 2 percent and 1.8 percent, respectively. They will grow 2.5 percent and 2.7 percent next year, according to the EBRD. Hungary’s economy will shrink by 0.6 percent this year and grow 2 percent in 2011.
Rising non-performing loans continue “to burden balance sheets and hamper banks’ ability to provide funding,” the bank said. Slow credit growth and rising unemployment will weigh on domestic demand, while the pick-up in exports will be offset by spending cuts that many governments in the region are required to carry out, the bank said.
Nordea Bank analysts also believe that Estonia, Latvia and Lithuania will stay in recession this year before returning to growth in 2011, as Western European demand for their exports fails to rebound. Estonia’s GDP may fall 0.5 percent, said the bank in its Baltic Rim Outlook report. Latvia’s economy will probably contract 2.9 percent this year and Lithuania’s output may shrink 2.4 percent. The three economies will return to growth in 2011, with Estonia expanding 4 percent, Latvia 2.7 percent and Lithuania 3 percent.
The Baltic states are experiencing the deepest recessions in the European Union after a collapse in the real estate market and consumer spending, which has been exacerbated by the global crisis. Optimism about an export-led revival may be overdone because of sluggish growth in Western Europe, where the three countries make more than 60 percent of their foreign sales, according to Nordea.
“The hopes of recovery largely rely on the export sector, but so far demand from the main export partners is only growing cautiously,” the report said. Nordea warned of political uncertainty in Latvia, adding that “a collapse of the government before October’s parliamentary election cannot be excluded.” A political crisis or failure to obtain funding may prompt devaluation speculation to re-emerge, the bank said.