SEB: Eastern European Outlook: Gradual recovery - major economies will diverge
This autumn nearly all countries in Eastern (including Central) Europe have
begun an economic recovery after growth bottomed out during the second quarter
of 2013, consistent with the pattern in Western Europe. Their recovery over
the next two years will be modest. Latvia and Lithuania will continue to grow
fastest in the region and in the European Union. The three largest economies
will diverge: with relatively strong fundamentals, Poland will regain its
starring role after an unexpectedly deep growth slump; Russia, increasingly in
need of reforms, has downshifted to slower growth than it enjoyed before the
global economic crisis; and a pressed Ukraine will devalue its way out of an
acute crisis, writes SEB in the latest issue of its twice-yearly Eastern
"Russia and Ukraine are facing significant challenges: Russia to raise its
long-term growth potential, Ukraine to manage an acute crisis that will emerge
this winter. Otherwise, the general economic picture of Eastern Europe is
turning brighter. Looking ahead, expansion will benefit from good real wage
growth and the fact that the region can now shake off the euro zone crisis,
which has hampered growth and created instability in banking systems,
especially in the central and southern parts of Eastern Europe," says Mikael
Johansson, Head of Eastern European Research at SEB and Chief Editor of
Eastern European Outlook.
In most Eastern European countries, the economic upturn is initially being
driven mainly by private consumption, but also by increased exports.
Consumption is being strengthened by good real wage growth, much of it due to
continued low inflation. Unemployment will gradually continue to fall in the
Baltic countries, remain relatively unchanged in Poland and Ukraine and
increase slightly in Russia. Exports will be fuelled by gradually higher
external demand, especially from Germany.
Capital spending will take time to rebound, due to lingering uncertainty about
the growth outlook - internationally and in the region - combined with slowly
thawing credit conditions. Mainly in the central and southern parts of Eastern
Europe, credit conditions have been abnormally tight so far, due to the euro
zone crisis and the relatively large foreign ownership of banks.
Here are our GDP forecasts for the six countries that Eastern European Outlook
*Russia's growth will speed up somewhat from 1.7 per cent this year to 3.0
per cent in 2015. Our forecasts are below consensus, as in the March EEO.
Falling oil prices (to USD 100/barrel two years from now) will provide
less support to growth than earlier. "The economy is already hitting its
resource ceiling, and the labour shortage is expected to increase.
Meanwhile it will be difficult to reverse the negative demographic trend;
more immigration is probably needed. On the whole, far-reaching reforms
will be required in order to boost potential growth to President Vladimir
Putin's target of 5-6 per cent," says Andreas Johnson, Russia and Ukraine
analyst at SEB Economic Research.
*Poland is now clearly recuperating from a deep domestic slump and moving
towards a solid, broad-based recovery. This year, GDP will increase by 1.5
per cent, in 2014 by 3.1 per cent and in 2015 by 3.5 per cent; the latter
is in line with potential growth. Our forecasts remain above consensus.
The central bank's sharp key interest rate cuts are contributing to the
recovery; because of low, below-target inflation a rate hike will not
occur until late 2014.
*Ukraine is hard pressed by large current account deficits, a depleted
currency reserve and sagging foreign confidence. The hryvnia will be
devalued by at least 10 per cent early in 2014, while Ukraine will receive
a new bail-out loan from the IMF. GDP will fall by 0.8 per cent this year.
Despite the devaluation, growth will be a reasonable 2.0 per cent next
year and 3.4 per cent in 2015.
*Estonia's growth will plunge to 1.3 per cent this year in the wake of
falling public investments and sagging exports, partly due to weak growth
in neighbouring Finland. A continued downturn in EU funds will lead to a
weak capital spending picture, contributing to GDP growth that will reach
a modest 2.6 per cent in 2014 and 2.9 per cent in 2015.
*Latvia will remain the fastest-growing of all the EU countries: 4.0 per
cent this year and 4.8 per cent annually in 2014-2015. The economy is
again well-balanced after the deep downturn of 2008-2010, but weak capital
spending is a source of concern.
*Lithuania's GDP will increase by 3.8 per cent this year, 3.5 per cent in
2014 and 4.5 per cent in 2015. After a recent sharp downturn in inflation,
it is now more likely than not that Lithuania will be the last of the
three Baltic countries to convert to the euro - in 2015, according to the
For further information, please contact Press contact
Mikael Johansson, Head of Eastern European Anna Helsén, Group Press officer
Research, +46 8763 9947, + 46 70698 4858
SEB Economic Research firstname.lastname@example.org
+468 763 8093, +46 70372 2826
Andreas Johnson, SEB Economic Research
+46 8763 3082, +46 73523 7725
SEB is a leading Nordic financial services group. As a relationship bank, SEB
in Sweden and the Baltic countries offers financial advice and a wide range of
financial services. In Denmark, Finland, Norway and Germany the bank's
operations have a strong focus on corporate and investment banking based on a
full-service offering to corporate and institutional clients. The
international nature of SEB's business is reflected in its presence in some 20
countries worldwide. On June 30, 2013, the Group's total assets amounted to
SEK2,596 billion while its assets under management totalled SEK1,387
billion. The Group has about 16,000 employees. Read more about SEB at
Eastern European Outlook (PDF)
Press release (PDF)
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