2006-10-11

SEB presents Eastern European Outlook: Good growth at the price of continued imbalances

Economic growth in Central and Eastern Europe will culminate this year but remain healthy in 2007-2008. The exception is Hungary, which is entering a slowdown. Global deceleration will have a modest impact. The uncertain political situation in Central Europe will continue, but this does not threaten the region's favourable growth, according to SEB's new issue of Eastern European Outlook, which is being published today.

"In the space of only six months, after parliamentary elections in several countries a new political landscape has emerged in Central Europe. This is now resulting in a more expansive fiscal regime in Poland, the Czech Republic and Slovakia, which will provide short-term support to growth. Meanwhile this will make it increasingly difficult to come to grips with large government budget deficits. There are risks that economic instability will increase and that necessary structural reforms will be postponed," says Mikael Johansson of SEB Economic Research, Chief Editor of Eastern European Outlook.

One consequence of the new political situation is that euro zone membership is no longer as high a priority in Central Europe. SEB Economic Research expects Slovakia and the Czech Republic to join in 2011, Poland and Hungary even later. In the Baltic countries, high inflation remains an obstacle to euro zone accession. Delays imply that the Baltics will join in 2010 at the earliest.

In the Baltic countries, labour shortages pose both an inflationary risk and an obstacle to continued rapid economic growth. The situation is exacerbated by adverse trends in demographics and emigration.

"The labour shortage has emerged as one of the most heated issues in political discourse in the Baltics. So far, few steps have been taken to deal with it. The governments would also need to cool off strong domestic demand. Estonia and Latvia show clear signs of overheating, but no fiscal tightening is on the horizon," Mr Johansson says.

Russia's economy is growing at a healthy pace, with domestic demand as the strongest driving force. High inflation is being dampened somewhat by a degree of rouble appreciation.

"The Russian economy is looking good in the short term, but a low investment level will be a source of concern for growth in a longer perspective. Unanswered questions about the federal government's role in the business sector remain an uncertainty factor in attracting investments," says Bo Enegren of SEB Economic Research.

Information about the company: Skandinaviska Enskilda Banken AB SEB