Eastern European Outlook: Growth Will Slow - But Not as Sharply as in the West
Eastern (including central) Europe has recovered nicely since the financial crisis and deep recession of 2008-2009. Economic growth is now on its way towards slowing in 2012, in response to weaker global demand, but will not decelerate as quickly as in western Europe. Given relatively low or moderate public sector debts, domestic demand will be fairly resilient, according to SEB in its October 2011 issue of Eastern European Outlook.
Because of more favourable public debt positions, large budget deficits in eastern Europe need not be corrected as sharply and quickly as in parts of western Europe. Poland, Latvia and Ukraine will continue to pursue moderate fiscal austerity next year, while fiscal policy will shift to mildly expansionary in Russia, Estonia and Lithuania. This will help sustain consumption and capital spending relatively well now that export growth is falling markedly. Whereas labour market improvements will encounter obstacles next year, purchasing power will meanwhile strengthen as the energy and food price-driven inflation upturn of the past year fades.
The ambitions of EU countries in eastern Europe to adopt the euro have cooled because of the euro zone debt crisis.
“Partly due to the worsening euro zone debt crisis and the risks of a Greek default, EU member countries in Eastern Europe will probably hold off on converting to the euro. It is unclear in what direction the eurozone is headed, and weaker growth in eastern Europe could make it more difficult to meet the budget deficit criterion for eurozone accession. Latvia is the region’s only euro zone candidate in the near future, and its planned accession in 2014 may still be on track,” said Mikael Johansson, head of eastern European research and chief editor of Eastern European Outlook.
Some eastern European currencies, including the Russian rouble and the Polish zloty, have been squeezed hard during the current global financial crisis. The main reason is general risk aversion, which has hit eastern Europe in particular; confidence in the solvency of these countries has remained relatively stable, with the exception of Ukraine. Their currencies will decline somewhat further in the coming months, followed by stabilisation and gradual appreciation. Total depreciation will not be as large as in the 2008-2009 financial crisis.
In all six countries covered by Eastern European Outlook, GDP growth will drop somewhat below trend in 2012-2013; in 2013 it will level out or bounce back a bit. The risks are skewed to the downside: