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Economic gloom

August 17, 2009

As much of Western Europe begins to crawl out of recession, central and eastern European nations are slowly following. But some are finding it difficult to get their economies back on track.

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Nightshot of city of Warsaw
Poland leads economic recovery in Central and Eastern EuropeImage: Ministry of Foreigns Affairs of the Républic of Poland

Analysts say many European countries have begun to slowly pull themselves out of the economic doldrums. Yet for some regions, such as the Baltics, recovery will likely be painfully slow.

“Poland and Slovakia have fared better than their neighbors in the second quarter this year compared to the first quarter,” Romanian economic analyst Aurelian Dochia told AFP. “The Baltic countries are facing the worst situation, while Romania, Bulgaria and Hungary are somewhere in-between.”

Notable improvers

Poland performed relatively well due to its solid economic structure and its large domestic market.

“This could compensate for the steep fall in exports,” Dochia said.

Poland expects gross domestic product (GDP) growth of 1.0 percent this year. This would make it an incredible exception in the economic crisis. The International Monetary Fund, however, believes Poland's economy will likely shrink by 0.7 percent.

Slovakia grew 2.2 percent in the second quarter, largely due to cash rebate programs in its main car export markets.

"It's good news,” said Juraj Valachy, an analyst with Tatra Bank. “The economic results were better than we expected." Slovakia is managing "to stay competitive" by keeping salaries relatively low as part of its bid to join the euro zone, explained Dochia.

The Czech Republic grew 0.3 percent in the second quarter, announcing it was emerging, like Germany and France, from recession.

"We already hit the bottom in the first quarter of this year," said Helena Horska, a Prague-based analyst with Austrian lender Raiffeisenbank.

Doing better, but not great

Parliamentary building on the river Donau
Budapest is struggling with the financial crisis and soaring unemploymentImage: J. Sorges

Hungary was the first nation in the European Union to turn to the IMF for help last year and remains in recession with unemployment rising. According to official data, Hungary's economy contracted 2.1 percent in the second quarter this year. That's a slight improvement over a first quarter contraction of 2.6 percent and could indicate a possible bottoming out.

Romania's economy shrank by 2.1 percent in the second quarter. That's also an improvement on the first quarter contraction of 4.6 percent. Bucharest, however, is facing huge budgetary constraints and is struggling to pay salaries and pensions. The government is forcing state employees to take 10 days of unpaid leave to trim the public deficit. Analysts say while it's too early to talk about a recovery, they do expect the decline to reverse in the next few months.

Bulgaria also has to sharply cut the public deficit. The government has announced plans to cut public spending by 15 percent and to crack down on customs fraud to raise revenue.

The Baltic nations are in deep

Lithuania, until last year, enjoyed a reputation as a European Union "tiger," but now is deeper into recession than any other EU nation.

Lithuania's central bank predicts its economy will contract by 19.3 percent in 2009 compared with 2008. The Baltic state's economy shrank by 12.3 percent in the second quarter, after shrinking 10.2 percent in the first three months prior.

All eyes are now on how the new government plans to rein in public spending. Lithuania has, so far, avoided following Latvia and other Eastern European economies in seeking a bailout from the International Monetary Fund and the EU. Vilnius may be forced to seek help if it fails to raise more money from foreign capital markets to prop up the economy.

Latvia's economy also took a sudden about-turn. It grew 10.2 percent in 2007, but since then it has gone downhill. Output contracted by 4.6 percent in 2008 and is forecast to shrink by18 percent this year.

The pattern was similar in Estonia. The economy there grew by 6.3 percent in 2007, but slid into recession in 2008. Within 12 months, the economy shrank by 3.6 percent and is forecast to contract by 15.3 percent this year.

Credit agency Standard & Poors last week issued a warning about credit risk in Lithuania, after downgrading Estonia and Latvia earlier.

wl/AFP/Reuters
Editor: Trinity Hartman