Central and E Europe’s growth forecast slashed - FT

16:48, 25 November 2008
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The European Bank for Reconstruction and Development says

The global credit crisis is forcing a rapid slowdown in economic growth in the ex-Communist states of central and eastern Europe particularly in countries dependent on international financial flows, says the European Bank for Reconstruction and Development, The Financial Times reported.

In its annual economic review published on Tuesday, the bank has slashed its forecast for the region’s Gross Domestic Product growth for next year from 5.7 per cent before the summer to 3.0 per cent and warned that there were risks of an even bigger down turn if international funding suddenly fell away. “In particular, some countries continue to ruin excessive current account deficits combined with high foreign currency debt and are therefore prone to significant output reductions if capital inflows fall off rapidly,” said Erik Berglof, the EBRD’s chief economist.

In a sign of the rapidly deteriorating outlook, the EBRD has trimmed its forecast even in the last month, reducing the 2009 figure from 3.5 per cent. The bank’s expectations are sharply lower than those of the International Monetary Fund which last month, in its World Economic Outlook predicted growth of over 4 per cent for the region. These figures compare with an EBRD forecast of 6.3 per cent for the current year, thanks to a very strong first half.

Mr Berglof urged governments to prepare for the down turn by taking coordinated action with other governments and international organisations to stabilise their banking systems. He said: “Stablisation measures will need to be coordinated with other countries – both in western Europe and in other transition (ex-Communist) countries – taking account of the inter-linking ownership structures in the region’s financial system.”

The report says that recent economic reforms should help countries avoid the worst of the crisis, or at least mitigate its impact, notably cuts in government debt levels since 2000 which had created room for more flexibility now. Business conditions and labour markets have also improved which should allow for faster recoveries, when they materialise, says the bank.

The EBRD, the multilateral bank for the region, last week announced plans to increase by 20 per cent to ?7bn, its planned investments for next year to help fill a gap left by the forecast decline in private sector flows.

In Russia, the region’s largest economy, the bank forecasts a slowdown from an expected 7.3 per cent this year to 3.0 per cent, following the drop in oil prices. In neighbouring Ukraine, the growth decline is predicted to be even steeper, from 6.0 per cent to 1.0 per cent. The average for the former Soviet Union (minus the Baltic states) is likely to be 3.4 per cent, down from 7.3 per cent in 2008.

Further west in Poland, the second biggest economy after Russia, the EBRD predicts a more moderate drop in growth, from 5.3 per cent to 2.8 per cent. The worst performance is expected in the Baltic states, with recession in Estonia and Latvia next year and sluggish 0.7 per cent growth in Lithuania. Central Europe and the Baltic states a whole are predicted to see growth drop almost in half from 4.3 per cent in 2008 to 2.2 per cent. In South east Europe, the fall is forecast to be even greater from 6.5 per cent to 3.1 per cent.

The Financial Times

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