Outlook for Eastern European markets by Marcus Svedberg, Chief Economist at East Capital
- There are notable signs that the region is not only recovering but is about to enter a period of more normal development
- The main feature of a recovery in Eastern European economies is growth in line with potential - rather than over potential. This growth is not based on a low base effect or cheap credit but rather on low inflation, low positive real interest rates and a combination of increasing domestic demand and exports
- There is, however, a wide spread in the region, and for some of the worst-hit economies in the region, such as the Baltic states, the recovery period will be longer and could last well into 2011
- The two largest economies in Eastern Europe, Russia and Turkey, have managed to bail out their respective economies on their own and thus do not have any major limitations on domestic demand going forward
- Russian growth will surprise on the upside and growth forecasts will be revised from the existing 1.5-2.5% to around 5% due to restocking, low base effect, large stimulus program as well as a supportive high and stable oil price. Turkey and Poland will also benefit from solid recovery but more along existing expectations
- Some of the economies in Central Europe, such as Poland and the Czech Republic, have benefitted from the faster than expected recovery in Germany and Western Europe in general combined with not having very large imbalances at the start of the crisis
- The main risks to the recovery are primarily external but should not be neglected as they could affect the region through financial or trade linkages. Other external factors with high degrees of uncertainties that could affect Eastern Europe are related to commodity prices and inflation
- Valuations in Eastern Europe remain lower than in both developed markets and the main global emerging markets despite strong performance in 2009.
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