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CEE growth with a two speed recovery

• With a GDP growth of 3.1 % the outlook for the CEE region is stronger than for Western Europe (Euro zone 1.0 %)
• It is however a two-speed recovery, with some countries growing fast and some lagging behind
• Corporate sector growing faster than retail

The countries in Central and Eastern Europe (CEE) have weathered the financial crisis quite well to date, proving that the widespread concerns and scepticism prevailing a year ago were exaggerated. The recovery is underway, and   the economists of UniCredit have increased their 2010 GDP growth forecast for the region from 2.8 % to  3.1 %. In solid positions are Turkey (5.6 %), Russia (3.4 %) and Slovakia (3.5 %), whereas some others are finding it harder to exit the recession, like Croatia (-1.5 %) or Bulgaria (-1.0). In other words, this remains a two-speed recovery for the region. The main risks come from the Eurozone, which has been experiencing a resurgence in financial market tensions triggered by concerns on sovereign debt.

While differences in country performances are likely to continue in the coming months, several growth indicators referring to industrial production and export confirm that the recovery remains on track. Especially Russia and Estonia have sped up in the last three months, showing their solid potential. With a still growing demand coming from Asia as well as Western Europe, exports are the key source of growth across the region. Benefitting from this are especially those countries most open to the global trade cycle. However, the difference between the confidence indicators and the real production data has widened a bit.

Two speed of recovery: corporate sector outperforming the retail sector

Due to austerity packages implemented as an answer to fiscal problems and still high unemployment, private consumption remains low and there is no change in this picture to be expected in the coming quarter. On the contrary, lending dynamics are very soft and wage growth is slower now than in the pre-crisis period, adding to the weak performance of the retail sector. Domestic demand should therefore continue to lag behind, with exports remaining the main engine of the recovery and of accelerating industrial production.

However, the good news on the domestic side is that a number of countries are undertaking wide-ranging infrastructure development programs. To give some examples: Poland and the Ukraine are in preparation for the EURO 2012, Kazakhstan is in a drive to modernize its infrastructure, Russia is in preparation for the Sochi 2014 Olympics and Serbia has several projects ongoing as well. These programs are spilling over into increased levels of construction activity and are helping to ease the hang-over from the previous construction boom. All in all the CEE region remains an important growth driver, having great potential and slowly but steadily regaining confidence in the aftermath of the crisis.

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