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wiiw Economic Assessment for Central, East and Southeast Europe in 2010-2012

Economic Assessment © photocase.com/nortys

© photocase.com/nortys

March 8, 2010

Crisis Is Over, but Problems Loom Ahead

Most countries in Central, East and Southeast Europe have emerged from the trough of the
crisis already at the end of 2009. Several leading indicators point to a modest upswing. All
countries in the region will grow again only by 2011. Growth may accelerate slightly in 2012,
but will in general be slower than in the pre-crisis period. Given the weak rebound of
economic activities, unemployment will continue to rise. The most vulnerable group of
workers affected by the crisis are those with low skills. Economic policies should focus on
countercyclical measures, correcting real exchange rate misalignments, as well as changing
the regulatory framework and a range of supply-side policies. These are the main results of
the new medium-term forecast and policy assessment for the region published by the Vienna
Institute for International Economic Studies (wiiw).

Recession deeper than expected
After a long period of convergence, Central, East and Southeast Europe experienced a deep
recession in 2009. The relatively moderate GDP decline (-3.6%) on average for the new EU member
states (NMS) reflects Poland’s weight in the group, the only EU country to have recorded positive
GDP growth last year (Albania, Kazakhstan and China registered positive growth rates as well – see
Table). In most other countries the catching-up process was interrupted, in particular the Baltic
States were thrown several years back – more than Russia and Ukraine. The most conspicuous
response to the crisis was a radical depletion of inventories and, closely related to this, a dramatic
improvement in net exports since the contraction of imports was much larger than that of exports.
This, together with less profit realized by foreign companies operating in the region, resulted in a
sizeable reduction of current account deficits.

Modest upswing in the making
Most countries in the region have emerged from the trough of the crisis already at the end of 2009.
Several leading indicators point to a modest upswing. Poland’s growth will once again boost the
NMS average in 2010, while the rate of expansion in the Czech Republic, Slovakia and Slovenia will
be meagre. Hungary, Romania and Bulgaria are still expected to stagnate in 2010, the Baltic States
will record further negative growth rates – just as Croatia, Bosnia and Herzegovina and Montenegro.
Russia, Ukraine and Kazakhstan will rebound more strongly. Wiiw expects all countries in the region to be growing again only by 2011. That growth may accelerate slightly in 2012, but will in general be slower than in the pre-crisis period. The main prerequisite of an upturn is a marked recovery in
global trade, including a rise in demand for imports from the region. Increases in private
consumption are not likely to be very pronounced as long as employment fails to grow. Investment
will not act as a strong engine of growth either. Given the generally weak rebound of economic
activities, unemployment will continue to rise, probably peaking in 2010, before falling slowly to
pre-crisis levels. The most vulnerable group of workers affected by the crisis are again those with
low skills.

Links:

WIIW www.wiiw.ac.at
Press release http://publications.wiiw.ac.at/files/pdf/FC/FC5_presse_eng.pdf

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