East Europe to See Sluggish Growth This Year, Institute Says

Economic growth in eastern Europe will improve “marginally” this year as austerity measures in the euro area damp private investment and domestic demand, the Vienna Institute for International Economic Studies said.

Many of the region’s countries are being “held hostage to the excessive fiscal austerity pursued in the euro area and the sluggish progress on the part of its policy makers,” the institute said in an e-mailed statement today. “Any significant improvement will be unlikely before 2014.”

Economic growth is set to decelerate in Poland and Slovakia to 1.5 percent and 1 percent, respectively, as high unemployment and stagnating wages suppress private consumption, the institute said. Countries that are less reliant on the euro area, such as Russia, Kazakhstan and Turkey, will probably outperform their regional peers, helped by their flexibility over the timing of fiscal consolidation, it said.

The economy in the 17 member states of the euro area shrank 0.6 percent last year, according to the European Commission. That has further curbed eastern Europe’s exports, which have been declining for two years across most of the region’s countries.

Exports Slump

“Exports have slowed pretty much everywhere,” Vasily Astrov, an economist at the institute, told reporters in Vienna. “The recession in the euro area is of course a crucial factor, as it’s the most important trade partner of many eastern European countries.”

The recession predicted by the European Commission in the currency bloc will continue to weigh down on the 10 new member states of the European Union, whose combined economic output will expand 1.2 percent this year, up from 0.9 percent in 2012, according to the institute. The Baltic states of Estonia, Lithuania and Latvia, which have closer ties to Russia, will be the exception in posting faster growth, it said.

A “more deeply rooted” recovery is expected for 2014, in line with projections for the euro area. Government-sponsored infrastructure projects with support from the EU will play an important role in the rebound, the institute said.

“Even under the most optimistic scenario,” the region won’t replicate growth rates sustained prior to 2008, the institute said. Previous sources of growth, like foreign capital, have become scarce, it said.

European banks have in recent years reduced their balance sheets in the region while increasing their assets in western Europe, Olga Pindyuk, an economist at the institute, said. Prior to 2008, banks had expanded rapidly in the east by issuing new loans, she said.

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