OREANDA-NEWS. July 23, 2010. The economies of emerging Europe are slowly recovering from the global crisis, but with notable differences in the pace of that recovery among individual countries. The region is also facing heightened external risks arising from financial market volatility and the impact of fiscal tightening, reported the press-centre of EBRD.

The EBRD’s latest economic outlook has modestly revised downward its average growth forecasts for the region to 3.5 percent in 2010 from the 3.7 percent predicted in May. The growth forecast for 2011 was also revised downward marginally to 3.9 percent.

The report warns that significant uncertainty remains as the outlook for the remainder of 2010 and for 2011 is generally weaker than recent economic activity suggests.

“Given the weakening outlook for the eurozone – as fiscal austerity programmes are implemented and financial markets are likely to remain volatile – the external environment is likely to be less benign than previously projected,” the report said.

It added, “While banks’ balance sheets remain under pressure and the cost of capital elevated, credit growth is likely to remain weak. In addition, country-specific developments will constrain growth.”

The report highlights clear differences in the pace of the recovery.

The outlook has weakened most for south-eastern Europe where the recession appears to be lingering, with the important exception of Turkey.

Output growth continues to be near zero or negative in most countries of this sub-region, where recovering exports are offset by weak domestic demand and financial systems suffering pressure from the turmoil in southern European sovereign debt markets. In several countries net capital inflows declined and credit to the private sector contracted or stagnated.

Fiscal consolidation will weigh on growth in the short run in many countries. On average the economies of south-eastern Europe are expected to contract by 1.5 percent this year, compared to 0.3 percent growth forecast in May. In the two EU members, Bulgaria and Romania, as well as Montenegro growth in 2010 is projected to be negative. The current forecast for 2011 is 1.2 percent, down from 2.9 forecast in May.

The report says that parts of Central Europe and the Baltics region are benefiting from a recovery in eurozone industrial production, which turned out surprisingly strong in the second quarter, but prospects have deteriorated in others.

Considerable fiscal adjustment that now lies ahead in a number of European countries will weigh on the external environment of the Central Europe and the Baltics in the second half of this year. Disruptions in macro economic adjustment programs – as in the case of Hungary where IMF/EC program discussions broke down recently - can cause additional volatility and dampen growth in the country and beyond.

As a whole the region is expected to grow by 1.7 percent this year, compared with 1.8 percent seen in May, and by 3.1 percent in 2011. Stark differences remain even within this region, with resilient domestic demand driving Polish growth (2.7 per cent expected in 2010), but this could prove fragile due to rising public debt and sizeable fiscal deficit. Growth prospects have deteriorated recently in Croatia and Slovenia, pushing down 2010 forecasts to -1.3 percent and zero respectively.

Eastern Europe and the Caucasus has benefited from higher commodity prices and a general improvement in market confidence in emerging markets. However, vulnerabilities remain significant, and stronger than projected recent growth is expected to fade in 2011. The Ukrainian economy has begun to recover, as market confidence and capital flows returned after the presidential elections and authorities began to implement structural reforms.

Both the Russian and the Kazakh economies have been on a steep recovery path since the end of 2009, on the back of higher oil prices, large-scale fiscal stimulus packages and banking-system support. The outlook for growth and exchange rate stability in both of these countries remains highly dependent on the outlook for commodity prices, especially oil, and also on the global sentiment in capital flows to emerging markets, the report said. The forecasts for growth in Russia for both 2010 and 2011 remain unchanged from May at 4.4 percent and 4.6 percent respectively.

The forecast for 2010 for Central Asia and Mongolia was revised up to 5.4 percent from 5.2 percent in May, and the 2011 remains the same as in May - 6.5 percent. For the Kyrgyz republic, the EBRD expects an output contraction of 3.5 percent in 2010, reflecting the impact of the recent political turmoil. Tajikistan, Uzbekistan and the Kyrgyz republic remain largely dependent on remittance inflows and shock-prone sectors such as gold mining, agriculture, and hydroelectric power.

The report concludes, however, that “expenditure-based fiscal consolidation may benefit growth and competitiveness in the medium-term” despite dampening demand in the short-term.