OREANDA-NEWS. January 18, 2011. CEE GDP growth expected to reach 3.8 percent this year, following 3.6 percent in 2010 Stronger industry and higher domestic demand promote a more broad-based recovery Risks from the peripheral EMU economies are manageable Hungary and Poland will lead the EU in 2011, giving weight to the region.

The regional GDP of Central and Eastern Europe will grow at 3.8 percent this year, up from 3.6 percent in 2010. Moreover every country in the region, as covered by the banking network of UniCredit, is expected to show gains for the first time in four years. Those are some of the key findings from the current issue of “CEE Quarterly” published by UniCreditґs Economics & FI/FX Research. The baseline global macro backdrop is supportive of CEE: The regionґs core export markets such as Germany, France and Italy will continue to perform well and central banks remain keen to back the upswing. Though risks from the EMU periphery appear plentiful, they should be manageable. For some of the weaker economies a positive full year GDP growth is finally in sight, whereas the strength of recovery is still in question.

In general, the industry should remain a key support for the region this year, though its contribution will slow down moderately from 2010. Most economies in the region showed gains already in Q3. But as the new year is rising, the Purchasing Managersґ Indices have hit a 53 month high and point to an even better Q4 2010 for CEE in terms of economic activity. “The new EU countries in particular have benefited from a stronger German recovery as well as higher demand from Asia. CIS should benefit from stable, if not higher commodity prices”, said Gillian Edgeworth, Head of EEMEA Economics at UniCredit, “We should also see a more broad-based recovery in domestic demand in 2011, not only in stronger economies, but across the board.” Unemployment has peaked in most economies while the rebound in retail sales, though lagging, is beginning to move in line with industrial production gains.

Although UniCreditґs researchers see the potential for negative news ahead, they do not regard this as sufficient to derail the recovery in CEE. “We have identified three channels of contagion: External demand, financial flows and delays to the further expansion of the EU and entry into ERM II/EMU respectively”, the economist stated, “Nevertheless most of the economies in the region are well protected from the developments in the EMU periphery.” Thus only 3.3 percent of CEE exports were destined for the periphery economies in 2009, while 15.1 percent of exports found their way to Germany. Financial flows into CEE are clearly dominated by investments from larger economies such as Germany, Austria, France and elsewhere. As there are pockets of risks, in particular centered around Greece, the EBRD seems resolute, having announced in late October a 300 million euro lending facility for Greek bank subsidiaries in the region.

Budget deficits in the region continue to consolidate but on the whole remain wider than in other emerging market regions and pre-crisis ratios. From an average budget deficit of 7 percent of GDP in 2009, last yearґs budget deficits in CEE should average 5.4 percent before narrowing 4.7 percent of GDP this year. Public debt on the whole will continue to rise in 2011 but remain broadly in line with other emerging market regions at less than 40 percent of GDP. Though trends in Croatia, Poland and Hungary are of certain concern, Turkey is a clear outperformer in budget discipline. Over the first ten months 2010 the deficit was half that for the same period in 2009. The fiscal rule has been put on hold while some pre-election spending is a risk over the first half of this year. Efforts in Bulgaria, Estonia, Czech Republic and Slovakia to narrow deficits are also commendable and in Czech Republic and Slovakia include reductions to the public sector wage bill.

“The crisis brought CEEґs ‘business model’ into question and each country is now being assessed much more on its merits than as part of a group”, reckoned Gillian Edgeworth, “The region can no longer take for granted an endless stream of capital inflow extended at low interest rates while developments since the crisis have removed some key anchors for policy in the region, e.g. the declared intention to expand the EU and the Euro Area further.” After Estoniaґs entry into EMU and Croatiaґs inclusion into the EU, UniCredit researchers consider 2015 as the earliest possible date for the acceptance of additional countries into the Euro Area. If Hungary and Poland, which assume EU presidency in January and in July respectively, succeed in steering policy during this difficult period for the EU, reluctance towards further expansion may ease.