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EBRD sees 5.2% contraction for emerging Europe

  The European Bank for Reconstruction and Development (EBRD) on Thursday slashed its 2009 forecast for emerging Europe to a 5.2% contraction from the 0.1% growth predicted earlier this year.

Cutting its forecasts for the second time in six months, the London-based development bank said the global credit crisis was now severely affecting the corporate sector and leading to large declines in output and domestic consumption.

It said Russia’s economy -- by far the region’s biggest -- would shrink by 7.5% estimate based on the government’s Q1 figures, dwarfing the 4.7% contraction forecast by analysts in a Reuters poll last week.

The region’s economy expanded 4.2% last year, EBRD said, slightly slower than the 4.8% growth the bank had expected. But it also now sees emerging Europe growing 1.4% in 2O10 helped by a “sustainable, gradual recovery” in the H2 of the year.

“There are downside risks to these predictions. But now there is also upside potential,” said EBRD Chief Economist Erik Berglof in a statement. “Our underlying outlook assumes continued external engagement, particularly from the western parents of banks in the region.”

The bank noted that unemployment and non-performing loans in the region had yet to peak and could still exert significant stress on the banking system.

The EBRD first revised its growth estimates for the region in January after initially predicting 3% 2009 economic expansion for emerging Europe in November.


The Baltic states of Latvia, Lithuania and Estonia will all show double-digit declines in GDP this year, while in Central Europe a severe recession in Hungary will be partially offset by flat growth in Poland, the bank said.

Its forecast for the EU’s biggest ex-communist economy falls about halfway between the minimal growth predicted by Warsaw and the shrinkage seen by the European Commission and IMF.

The bank said countries further east and in the Caucasus faced an even sharper downturn due to their fragile financial systems and greater dependency on commodities.

“Ukraine in particular has experienced a triple blow, with much lower steel export prices and volumes, higher energy import prices, and a sharp reduction in external financing,” the EBRD said, forecasting the economy to contract 10% this year, twice the 5% fall initially estimated.

Russia’s 7.5% decline in 2009 compared to the EBRD’s January forecast of 1% growth for the year. But the bank said Russia could see a rebound in the H2 of next year, helped by government fiscal stimulus.

Turkey, the EBRD’s newest recipient country, is seen suffering a 5.5% fall in gross domestic product this year, larger than the bank’s earlier forecast of 3%.

“Common to most of these forecasts is the view that the two worst quarters, in terms of quarter-on-quarter output declines, are behind us at this point. We still predict continuing output declines in most economies for the remainder of this year, but at far milder rates,” the bank said.

Set up at the end of the Cold War to help former communist economies adjust to free markets, the EBRD operates in some 30 countries including Turkey and Mongolia. (Reuters)