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Capital Economics: Eastern Europe economy to fall in 2009

  East Europe’s GDP will shrink 6% on average this year, with every economy in the region posting a contraction, Capital Economics Ltd. said.

The Baltic nations of Latvia and Lithuania will show the biggest decline at 15%, the London-based research firm forecast in a note published today. Poland, whose government still expects positive growth in 2009, will contract 3%, according to Capital Economics.

Poland, the largest economy in the region, will see a contraction led by a decline in industrial output that will help push the unemployment rate to close to 15%, they wrote.

Falling tax receipts will widen the fiscal gap to 5% of GDP, making the goal of euro adoption in 2012 unlikely as the rules stipulate a deficit of no more than 3%, the note added.

Hungary, which needed an IMF-led bailout last year, and Romania, which is negotiating external aid, will both shrink 7,5%, the research company said. Hungary is “paying a price for past profligacy” and Romania’s banking system will come under ‘huge pressure’ as the leu currency (RON) depreciates, the economists wrote.

Bulgaria, expected to shrink 5% this year, is likely to follow its neighbor Romania in applying for an IMF loan as a collapse of exports and inward investment will shrink the money supply, forcing the government to drain its fiscal reserves to restore liquidity, according to Capital Economics. It added that reserves will only cover such needs for six to 12 months. (novinite)   Read full article.