Eastern European Outlook: Growth will slow - bu...

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, writes 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 euro zone is headed,
and weaker growth in Eastern Europe could make it more difficult to meet the
budget deficit criterion for euro zone 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," says 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.

  * Russia's GDP will increase by 4.3 per cent in 2011 and 4.2 per cent in
    2012. The economy will continue to be sustained by high oil prices and
    consumption will rebound after a dip.

"We are still relatively optimistic about Russia's growth in the short and
medium term, but long-term question marks remain since the pace of reform is
slow. There may be some opening for more reforms after the coming parliamentary
and presidential elections, when the rhetorically reform-friendly Dmitry
Medvedev is expected to take over as prime minister," says Daniel Bergvall,
Russia and Ukraine analyst at SEB Economic Research.

  * Poland's economy will be increasingly driven by capital spending, but growth
    will cool from 4.0 per cent this year to 3.4 per cent in 2012, mainly due to
    slowing German demand. Monetary policy will shift, with two key interest
    rate cuts in the first half of 2012. Policies will remain generally stable,
    since we expect the government to be re-elected on October 9.
  * Ukraine will muddle through, with annual GDP increases of some 4 per cent.
    High steel and agricultural prices will provide support, but austerity
    requirements from the country's lender, the IMF, will restrain growth.
    Relations with the IMF will be stormy, and loan disbursements will stay
    frozen this autumn before an agreement is reached.
  * Estonia will see its growth see-saw from 2.3 per cent last year to 6.5 per
    cent in 2011 and 3.0 per cent in 2012. As in the other Baltics, recovery has
    mainly been export-led so far while the upturn in domestic demand has barely
    begun, partly because private sector debt consolidation is continuing after
    the bursting of earlier bubbles. With its high export/GDP ratio, Estonia
    will be relatively harder hit than Latvia and Lithuania.
  * Lithuania's GDP will increase by 6.5 per cent this year and 4.0 per cent in
    2012. Consumption and capital spending have shown signs of faster recovery
    than elsewhere in the Baltics but are not strong enough to offset weaker
    exports.
  * Latvia still lags behind Estonia and Lithuania in its upturn. Growth will
    slow from 4.4 per cent this year to 3.5 per cent in 2012. The recovery is on
    reasonably firm ground but will also be restrained in 2012 by budget
    tightening aimed at paving the way for euro zone accession in 2014.


For further information, please     Press contact:
contact:                            Elisabeth Lennhede,  Press & PR
Mikael Johansson, Head of Eastern   +46 70 763 99 16
European Research,                  [e-mail]
SEB Economic Research
[phone]

Daniel Bergvall, SEB Economic
Research
[phone]
--------------------------------------------------------------------------------
SEB is a leading Nordic financial services group. As a relationship bank, SEB in
Sweden and the Baltic countries offers financial advice and a wide range of
financial services. In Denmark, Finland, Norway and Germany the bank's
operations have a strong focus on corporate and investment banking based on a
full-service offering to corporate and institutional clients. The international
nature of SEB's business is reflected in its presence in some 20 countries
worldwide. On June 30, 2011, the Group's total assets amounted to SEK 2,201
billion while its assets under management totalled SEK 1,356 billion. The Group
has about 17,500 employees. Read more about SEB at www.sebgroup.com.







Press Release (PDF): 


http://hugin.info/1208/R/1552285/478228.pdf

Eastern European Outlook: 


http://hugin.info/1208/R/1552285/478229.pdf




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