Average contraction of 6% in 2009 with a “fragile” and “patchy” recovery in 2010 expected

The economies of central and eastern Europe are expected to contract by an average of 6.3 % in 2009 following steep output declines in the first half of the year, according to the European Bank for Reconstruction and Development (EBRD).

Signs of positive growth in the third quarter of 2009 suggest that the recession is now bottoming out in many countries in the region. However, any upturn in 2010 is likely to be fragile and patchy.

In a report the development bank said it expects growth in 2010 for the region of about 2.5 %. A country breakdown is available by downloading the EBRDs Transition Report 2009.

‘”t is also clear that the social costs of the global economic crisis are only likely to be felt in earnest next year, when corporate bankruptcies and unemployment will continue to rise. Growth over the medium term in the EBRD region is also likely to be below the trend experienced over the last decade,” said EBRD Chief Economist Erik Berglof.

Factors restraining growth in 2010 include the subdued pace of export market recovery (particularly in the Euro area) and continuing tight credit conditions, as banks continue gradually to shrink their assets in the region and as lending to households and small firms remains constrained by rising non-performing loans, said the EBRD.

Economies that continue to face problems in their banking sectors and domestic obstacles to a return of confidence could contract further in 2010 or show only flat growth, warned the EBRD. The bank predicted a slow recovery in Bulgaria, Latvia and Lithuania.

In Hungary, which was hit particularly hard at the start of the crisis, the crisis has been contained thanks to strong international support as well as sound domestic policies. However, its growth is expected to remain slow in 2010 due to necessary fiscal adjustment and a continued credit crunch. It is expected to show slightly negative growth next year, driven by a weak economy in late 2009 and early 2010.

The speed of recovery is particularly uncertain in Russia and Kazakhstan, which benefit from stronger fiscal positions, but at the same time suffer from weak banking systems and high non-performing loans and commodity dependence, said the EBRD.

“The recovery prospects for these countries will depend on the success of the authorities in cleaning up banking systems, as well as the strength of the international recovery, particularly through its impact on commodity prices,” it added.

Russia’s economy is expected to shrink by 8.5 % on a year-on-year basis in 2009, followed by a rebound in late 2009 and growth of about 3 % in 2010 year-on-year.

Kazakhstan will suffer a much milder output decline this year (of about 1.5 %) but the recovery is expected to be weak, again in the order of 1.5 %.

Relatively faster 2010 growth, in the order of between about 2 and 5 % is expected in some internationally competitive countries with relatively sound pre-crisis banking systems, such as Albania, Poland, Slovakia, and Slovenia.

Some commodity rich countries including Azerbaijan, Mongolia, Turkmenistan, and Uzbekistan, whose financial systems were smaller and less affected by the crisis, and whose growth is mostly driven by commodities, are also expected to grow faster in 2010, in the order of 5 % or more.