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SEB’s Eastern European outlook: Economic recovery but weak domestic demand

Wednesday, March 24, 2010
Opalesque Industry Update - Even Eastern Europe, the region that was hardest hit by the global credit crisis and recession, due largely to its high proportion of foreign currency loans, is now beginning a gradual economic upturn. So far, this turnaround is mainly visible in higher exports and industrial production. In some countries the upswing has been stronger than in Western Europe, but it is occurring from a low level after earlier major declines, writes SEB in its March 2010 issue of Eastern European Outlook.

During the coming year, the recovery will continue to be driven by higher exports.

"Eastern Europe's exports appear to be competitive, despite earlier price pressures in the three Baltic countries and currency appreciation during the past year in several other countries. Russia and Ukraine are also benefiting from high, though stabilising, commodity prices. Domestic demand in Eastern Europe will recover slowly, however; a number of factors, including necessary fiscal tightening, will impede the recovery process," says Mikael Johansson of SEB Economic Research, Chief Editor of Eastern European Outlook.

Consumption and investments will be hampered for another while by rising unemployment, weak wage and salary growth, fiscal tightening measures and low capacity utilisation. Credit conditions are slowly thawing; in Poland the first positive signs of this are now discernible.

During 2010-2011, we do not expect the six countries on which Eastern European Outlook focuses to resume their earlier (excessively) high growth rates, but to barely return to their trend rate. The Polish economy − which is in the best shape − will nevertheless achieve its potential growth in 2011.

• Russia will rebound from deep recession to annual growth of 5 per cent per year.

• In Poland, the only EU country that showed positive GDP growth in 2009, the expansion rate will accelerate to 3.5 and 4.5 per cent, respectively.

• Ukraine's growth will be a modest 3.5 and 4.5 per cent, respectively, after last year's 15 per cent slide.

• Estonia's GDP will increase by 2 and 5 per cent, respectively, after a 14 per cent slide in 2009.

• Lithuania, following its 15 per cent GDP decline last year, will resume growth of 1 and 4 per cent this year and next, respectively.

• Latvia will lag somewhat behind, with recession continuing this year and GDP falling by 2.8 per cent. In 2011 the economy will recover to positive growth of 4 per cent.

In the past year, financial markets have regained confidence in the region, a trend that rests on a fairly stable foundation.

"Many Eastern European countries are moving towards regaining control of their previous severe imbalances, and their need for public sector debt adjustment is less than in many Western countries. Political conflicts, especially related to austerity policies, may nonetheless generate certain market concerns, especially since some of these countries will hold, or have held, elections in 2010-2011," says Daniel Bergvall of SEB Economic Research.

In the Baltics, Eastern European Outlook 's main scenario is still that the currency pegs to the euro will survive. Estonia is expected to meet all Maastricht criteria during this spring's official evaluation, making it highly probable that the country can adopt the euro in January 2011.

Watch the film clip at SEB Newsroom where Mikael Johansson tells more about Eastern European Outlook: Economic recovery but weak domestic demand.

Full Report to be picked up at SEB Newsroom.

SEB is a North European financial group serving some 400,000 corporate customers and institutions and five million private individuals. SEB offers universal banking services in Sweden, Germany and the Baltic countries - Estonia, Latvia and Lithuania. It also has local presence in the other Nordic countries, Ukraine and Russia and a global presence through its international network in major financial centres. On 31 December 2009, the Group's total assets amounted to SEK 2,308bn (~EUR 225bn) while its assets under management totalled SEK 1,356bn (~EUR 132bn). The Group has about 20,000 employees. www.sebgroup.com.


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