Dodging the economic bullet; the outlook for Emerging Europe
Eastern Europe has managed to improve its economic fundamentals since the economic slump in 2008. Yet investors remain skittish and fear that the crisis in the eurozone might spill over to Emerging Europe.
Nobel Laureate Paul Krugman rattled markets in April 2009 when he said: “Emerging Europe is experiencing the mother of all currency crises.” Spreads on government bonds widened and bank shares in Central Europe sold off sharply.
Now the “mother of all crises” – of the sovereign debt kind – affects indebted countries in Western Europe, whereas Central/Eastern Europe (CEE) and Russia have so far been able to stay the course on a post-crisis recovery.
The latest available projection of the International Monetary Fund still puts 2011 growth rates in CEE at nearly twice the level of eurozone expansion (1.5% v. 4.3% in CEE), with growth in 2012 markedly lower than this year (at 2.7%). But the IMF expects growth to return to 4% again.
In addition, Russia is likely to advance at a rate of more than 4% this year and in 2012. This is well below the stellar growth rates that Asian economies experience, yet the expansion in Eastern Europe roughly tracks Latin America.
One of the rare glimmers of good news in Europe has been Poland. Not only has it managed to avoid recessions in 2008 and 2009, but it was able to grow above 4% on a steady basis. Thanks to a boom of exports and domestic consumption alike, Poland advanced to become an economic powerhouse.
Some economists fear painful rebalancing is still ahead for the country that runs both a fiscal and a current account deficit. Yet the consensus sees a healthy advance for it. The same is true for Turkey. Analysts and politicians have been surprised by the “Boom at the Bosphorus”, the Istanbul strait that links Europe and Asia. The country is one of the fastest growing globally and it advanced quicker than China this year, with growth running at 8.8%.
The outlook for Russia, by far the largest country in the region, has been aided by a stable – but expensive – oil price of more than $100 per barrel of Brent oil.
However, economists such as Birgit Niessner, at the CEE Macro team of Austrian bank Erste Group, argue that the region will not be able to duck a major slowdown in Western Europe. “ The risk of contagion is real,” she says. “Some economies such as the Czech Republic and Slovenia have very close trade ties with the eurozone. Private consumption has been lagging so far, so a fall in exports will likely have a quick effect on growth.”
The linked economies might thus experience a more pronounced slowdown in the case of a eurozone recession, whereas other countries with domestic growth sources might come through relatively unscathed.