The gradual economic recovery is continuing in much of Eastern (including Central) Europe, although the growth outlook in Russia and Ukraine has deteriorated further due to the conflict between these countries, writes SEB in the latest issue of its twice-yearly Eastern European Outlook.
Direct trade ties between individual countries and the two adversaries are relatively small, except for the Baltic countries. The continued economic upturn in Germany and elsewhere in Western Europe will partly offset lost exports due to weak Russian demand. There is also good potential for higher private consumption. But SEB is generally lowering its 2014-2105 growth forecasts for Eastern Europe, and the risk of short-term reversals in individual countries has increased due to geopolitical turmoil. SEB's forecasts are based on the key assumptions that the Russia-Ukraine conflict will not escalate militarily, no large-scale trade sanctions will be introduced and no serious disruptions will occur in Russian energy deliveries to Europe.
Both the Western powers and Russia will certainly hold back as long as they can before starting any trade war. The underpinnings of the euro zone's nascent recovery are still fragile and there is significant mutual dependence on Russia natural gas deliveries," says Mikael Johansson, Head of Eastern European Research at SEB and Chief Editor of Eastern European Outlook.
Most Eastern European economies - with Russia and Ukraine as notable exceptions - began a recovery in the second half of 2013. The improvement has been clearest in the central region, which has benefited mainly from faster growth in Germany and the stabilisation of the euro zone economy and banking system. The recovery will continue at a steady pace and become more broad-based. In the short term, exports will remain a key driver, although sluggish Russian economic growth will dampen momentum. In many countries, domestic demand will increasingly take over as the main economic engine. Continued low interest rates and fiscal policy loosening will provide support. Private consumption will be fuelled by good real wage growth, partly as a result of low inflation attributable to still-idle resources (though these are small in Russia) and small increases in commodity prices; oil prices will fall somewhat. We expect capital spending to grow but not surge, since industrial capacity utilisation is moderate and the still relatively tight credit conditions in the wake of the euro zone crisis are thawing slowly. Geopolitical turmoil will also hamper willingness to invest in certain countries.
SEB is lowering its GDP forecasts (compared to the estimates in Nordic Outlook, February 2014) for the six countries that Eastern European Outlook covers: sharply in the case of Russia, Ukraine and Estonia; moderately for Latvia; and slightly for Poland and Lithuania.
For further information, please contact Mikael Johansson, Head of Eastern European Research, SEB Economic Research +46 8 763 8093, +46 70 372 2826 mikael.johansson@seb.se Andreas Johnson, SEB Economic Research +46 8 763 3082, +46 73 523 7725 andreas.johnson@seb.se | Press contact Anna Helsén, Group Press officer +46 8 763 9947, + 46 70 698 4858 anna.helsen@seb.se |
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