So far, the turnaround in Eastern and Central Europe 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.
“In the coming year, the recovery will continue to be driven by higher exports, which appear to be competitive. In Russia and Ukraine, exporters are also benefiting from high, though stabilising, commodity prices,” says Mikael Johansson, head of SEB’s Eastern European research.
Domestic demand in most countries is only slowly recuperating as consumption and investments will be hampered for another while by rising unemployment, weak wage and salary development, fiscal tightening measures and low capacity utilisation.
Credit conditions are slowly thawing and in Poland the first positive signs of this are now discernible. During 2010-2011, SEB does not expect the six countries on which its report focuses to resume their earlier (excessively) high growth rates, but to barely return to their trend rate.
Low public debt
Many countries in the region have low debt and reasonable budget deficits compared to several Western European countries. In the three Baltic countries government budget deficits remain at high levels in 2010 but will narrow over the next few years due to fiscal tightening and better growth.
“Political conflicts, especially related to austerity policies, may nonetheless generate some market concerns, especially since some of these countries will hold, or have held, elections in 2010-2011,” Johansson says.
In the Baltics, SEB’s main scenario is still that the currency pegs to the euro will survive. We expect Estonia 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. We expect Latvia and Lithuania to qualify for euro zone membership in 2014 and Poland in 2014 or 2015.