SEB : SEB: Eastern European Outlook: Continued decent growth in northern Eastern Europe

   SEB : SEB: Eastern European Outlook: Continued decent growth in northern
                                Eastern Europe

Economic growth in Eastern (including Central) Europe has bottomed out in the
past 3-6 months, as in the West. And just like the pattern in Western Europe,
the northern part of Eastern Europe is performing better than the southern
part. The three Baltic countries in particular, but also Russia and Poland,
will continue to show decent GDP growth during 2013-2014 while Ukraine will
remain mired in economic stagnation this year as well. Countries in central
and southern parts of the region, such as the Czech Republic and Hungary, are
climbing extremely slowly out of recession while Croatia and Slovenia will
continue to show negative growth, writes SEB in the latest issue of its
twice-yearly Eastern European Outlook.

The northern part of Eastern Europe is displaying relatively good resilience
to the global slowdown and the euro zone debt crisis, largely because their
economies and banking sectors are in relatively good fundamental shape and
because Russia is benefiting from continued high oil prices of around USD
110/barrel. Countries in the southern part of the region have larger internal
imbalances and their banks are squeezed more by the problems in Western

Unemployment is gradually falling in the Baltics and Russia, but will rise in
Poland this year and remain stuck at a high level in Ukraine. Large emigration
from the Baltics in recent years is causing some bottleneck problems in their
labour markets. Although pay increases are generally speeding up, the cost
situation is under control with the possible exception of Estonia. Export
competitiveness thus remains good, after earlier internal devaluations. In
Russia, the jobless rate has already dropped below its equilibrium level,
generating cost pressures and growth problems generally. This year, inflation
will continue to fall in the Baltics and Poland but rise somewhat in Russia
and rebound clearly in Ukraine, despite its economic crisis.

A separate theme article in the report examines the euro timetable for the
seven European Union (EU) countries in Eastern Europe that remain outside the
euro zone. At present, only Latvia meets all the Maastricht criteria for euro
zone membership, SEB's analysis shows. For a long time, SEB's assessment has
been that Latvia will convert to the euro as planned in 2014; in this spring's
coming evaluations by the European Commission and the European Central Bank
(ECB), the country is expected to meet all the criteria by a wide margin. But
no wave of new euro zone memberships by the EU countries in Eastern Europe can
be expected; for most of them, accession will be delayed for some years. The
main reason is that, except for Lithuania, their governments have made their
ambition to adopt the common currency a lower priority due to the euro zone

"Most EU countries in Eastern Europe, except for Latvia and Lithuania,
probably make the assessment that it is too uncertain to join the euro zone
during the next few years. The crisis has made it unclear where the euro zone
is headed, for example in terms of supranationalism in fiscal policy and the
stability of the euro in general. These Eastern European countries are waiting
to see the outcome of the euro zone crisis before the question of adopting the
currency comes up again on their political agenda," says Mikael Johansson,
Head of Eastern European Research at SEB and Chief Editor of Eastern European

Here are the GDP forecasts for the six countries that Eastern European Outlook

  *Russia's growth will cool slightly to 3.0 per cent this year and 3.5 per
    cent in 2014. "Given historically low unemployment, the economy is already
    hitting its resource ceiling, and far-reaching reforms will be needed to
    lift its growth potential to President Vladimir Putin's 5-6 per cent
    target," says Andreas Johnson, Russia and Ukraine analyst at SEB Economic
  *Poland is recovering from a deep domestic slump, aided in part by the big
    decline in interest rates over the past six months - but the central bank
    is finished cutting interest rates. This year, GDP will increase about as
    much as last year, 2.1 per cent. In 2014, growth will speed up to 3.5 per
    cent, still below the potential rate of around 4 per cent.
  *Ukraine will see zero growth again this year, and GDP will rise 1.8 per
    cent in 2014. The economy is hard pressed by a big current account deficit
    and sagging confidence. A new bail-out loan from the International
    Monetary Fund is needed, and a devaluation is expected in the second
    quarter of this year.
  *Estonia's growth will accelerate from 3.2 per cent last year to 3.8 per
    cent in 2013 and 3.7 per cent in 2014. This is still below potential,
    which is roughly 4 per cent in all of the Baltic countries. As elsewhere
    in the Baltics, growth will be relatively balanced.
  *Latvia remains the fastest-growing of all the EU countries. A temporary
    dip from last year's 5.5 per cent to 3.8 per cent will occur this year. In
    2014, growth will revert to 5 per cent.
  *Lithuania's GDP will increase by 3.2 per cent this year and 3.5 per cent
    in 2014, after last year's 3.6 per cent growth.

For further information, please contact Press contact
Mikael Johansson, Head of Eastern       Anna Helsén, Group Press officer
European Research,                  +46 8763 9947, + 46 70698 4858
SEB Economic Research         
+46 70372 2826

Daniel Bergvall, SEB Economic Research
+46 73523 5287
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in Sweden and the Baltic countries offers financial advice and a wide range of
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Eastern European Outlook (PDF)
Press release (PDF)


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