Eastern (including Central) Europe also began an economic deceleration in the second half of 2011. But as SEB predicted, regional heavyweights Russia and Poland have withstood the international crisis well. SEB still expects their slowdown to be mild due to moderate exports in relation to GDP, modest public debt and small or moderate dependence on bank financing via the euro zone, which is in recession this year. Russia is also benefiting from high oil prices, writes SEB in its March 2012 issue of Eastern European Outlook.
Precisely because of differences in dependence on the euro zone's banking system and import demand, the economic trend in Eastern Europe is becoming more and more polarised. The northern parts, including Russia and Poland, will resist the euro zone crisis relatively well, while some central and especially southern parts of the region will be harder hit. The three Baltic countries and the Czech Republic are among the "medium hard hit" while Bulgaria, Croatia, Romania, Hungary and Ukraine are the "hardest hit", as a consequence of their relatively strong banking links with the euro zone, although Ukraine will muddle through with decent GDP growth.
By supplying low-cost loans to banks and other financial institutions in the euro zone, the European Central Bank's long-term refinancing operations (LTRO I and II) have greatly reduced the risks of a severe, lengthy credit crunch in Eastern Europe too. But credit conditions tightened in the region late in 2011 and will only gradually revert to normal during the coming year.
"The ECB's loans to the euro zone banking system have proved to be a successful move. Interbank borrowing costs have fallen in both Western and Eastern Europe in the past few months. But some stress symptoms persist, partly due to continued uncertainty about the euro question in Greece and Portugal. This spills over into Eastern European banks as well, since the banking sectors of many countries in the region are largely owned by Western banks. This indicates that credit conditions will remain abnormally tight at least during 2012, something that will also hamper economic growth," says Mikael Johansson, Head of Eastern European Research at SEB and Chief Editor of Eastern European Outlook.
Inflation will fall this year in most Eastern European countries, but core inflation will remain relatively high in Estonia and Poland. The recent oil price surge is a general upside risk in inflation forecasts.
In all six countries covered by Eastern European Outlook, growth will drop somewhat below trend in 2012-2013 - in the Baltics considerably below trend this year. A rebound will occur in 2013.