The European Bank for Reconstruction and Development Thursday slashed its growth forecasts for the economies of eastern Europe and the former Soviet Union, and said a sustainable recovery will only begin in late 2010, Dow Jones Newswires reported.

The development bank said it now expects the gross domestic product of the 30 countries in which it invests to shrink 5.4% this year, having forecast as recently as January that it would increase 0.1%.

"The global economic crisis, which initially had an immediate impact on the financial sector, is now severely affecting the corporate sector, leading to large declines in output in late 2008 and in the first quarter of this year," the EBRD said. "It has also started to depress domestic consumption."

The EBRD`s forecasts for 2009 are the most downbeat yet for the region. It expects the largest economy in which it invests - that of Russia - to contract 7.5% this year, having previously forecast it would grow 1.0%. By contrast, the International Monetary Fund last month said it expects Russia`s GDP to decline 5.1% this year.

However, the EBRD does expect the economies in which it invests to grow in 2010, by a combined 1.4%. It hadn`t previously published a forecast for next year.

"Growth is generally expected to be flat or very weak in the first half of next year, as credit growth remains curtailed by high non-performing loans and bank deleveraging, and external demand remains weak," the EBRD said. "A sustainable, gradual recovery is assumed to set in only in the second half of 2010, in line with slowly improving external conditions."

For Russia, the EBRD forecast growth of 2.5% in 2010, a stronger expansion than the 1.2% forecast by the IMF.

The EBRD expects Ukraine`s economy to contract 10.0% this year, and stagnate in 2010. It previously forecast a contraction of 5.0% this year.

"Ukraine in particular has experienced a triple blow, with much lower steel export prices and volumes, higher energy import prices, and a sharp reduction in external financing," the EBRD said.

Other economies that were in poor shape as the global economy slowed are also likely to suffer greatly. The EBRD said Hungary`s economy will shrink 5% this year and stagnate in 2010, having previously forecast it would shrink 2.0% this year. Once again, the EBRD`s forecast for this year is more gloomy than that of the IMF, but it`s forecast for 2010 is more upbeat.

Among the three Baltic States, the EBRD expects Latvia to experience the sharpest contraction this year, with its GDP shrinking a massive 13.2%. The EBRD previously expected a contraction of 5.0%.

The development expects Estonia`s economy to shrink 10.5% and Lithuania`s by 11.8%. Unlike most other economies in which it invests, the EBRD expects the Baltic States to contract again in 2010.

The EBRD expects Romania`s economy to shrink 4.0% this year, having previously expected it to grow 1.0%. It expects the country`s GDP to increase 0.4% in 2010.

Turkey only became a country in which the EBRD invests late last year. The development bank expects its economy to shrink 5.5% this year and expand 1.0% in 2010, having previously forecast a contraction of 3% this year.

Dow Jones Newswires via The Wall Street Journal