• The Central and Eastern European (CEE) economies have in general stabilised over the last couple of months supported mainly by a recovery in the manufacturing sectors, but rising exports and easing financial conditions have also contributed positively.
  • While we expect to see most economies, including Russia and Poland, to exhibit positive growth in 2010, there are many indications that it will only be a fragile recovery. The Baltics will not exhibit positive growth until 2011. Overall, private demand is expected to be relatively weak as unemployment rates will rise for most of next year. Further, a need for conservative public spending should put a brake on private consumption growth too.
  • With no demand side pressures and fairly stable currency markets there is currently very little inflationary pressure in the region. Further, wage pressure declined significantly over the course of 2009. We expect inflation in general to bottom out in Q2 2010.
  • Monetary easing is gradually coming to an end in the region. However, there is still some room for further easing, most notably in Russia, but possibly also in the Czech Republic and Hungary. But, as the ECB is expected to scale back quantitative easing and begin its hiking cycle next summer, this will limit downside for CEE rates.

From stabilisation to recovery

The CEE economies have in general stabilised recently supported mainly by a recovery in manufacturing sectors. Further, exports have advanced in recent months as Euroland, the region’s biggest trading partner, has moved out of recession in Q3 2009. However, we still expect rather dismal economic growth in CEE in 2009 of -7.5% y/y. For 2010 we expect slightly positive growth of 0.8% y/y for the CEE region as a whole as the recovery gradually materialises. There are large differences between the countries in the region, but in general the recovery will be fragile for most countries due to years of excessive spending and unsustainable credit growth rates. Further, the fiscal positions need to be adjusted to sustainable levels in order to avoid a public debt spiral, which would halt the process of adopting the euro in the coming years – a goal of many countries in the region.