Emerging Europe 'set for next growth curve'

Emerging Europe might be breaking free of a deep five-year setback sparked by the financial crisis and even be on the verge of a new growth curve, experts say.

International Monetary Fund chief Christine Lagarde said that "the worst is most likely behind" the region after it clocked positive first-quarter growth.

"Evidence of a possible turnaround is strongest in emerging Europe, and weakest in emerging Asia," London-based analysts at Capital Economics said on Friday.

Long a crossroads between East and West, emerging Europe comprises advanced ex-communist countries in the European Union and eurozone.

It also includes Turkey, which exports heavily to the eurozone, as well as the less-developed Balkan countries, Russia and some CIS (Taiwan OTC: 5864.TWO - news) states.

The population tallies around 400 million, compared to the EU's near 500 million.

In many of these countries growth is expected to pick up steam provided the eurozone pulls ahead without setbacks in the next 18 months, economists told AFP this week.

"From 2015 onwards, we think the region as a whole could grow by 3.0-4.0 percent a year," William Jackson from Capital Economics told AFP.

He also believes that eastern European economies are "more competitive" than crisis-hit countries on the eurozone's southern periphery.

That view is echoed by analysts at the Washington-based IHS (NYSE: IHS - news) who forecast a 22.4-percent expansion across the region over six years in 2013-2018, compared to 6.3 percent in the eurozone.

Having built up free markets on the ruins of the communist command economy it shed two decades ago, the region is still slowly catching up with western Europe and has a lot going for it.

"Low public debt, its position as a manufacturing hub closely integrated with Western Europe, and low incomes, (...) mean it has plenty of scope for 'catch-up' growth," says Jackson.

These qualities have not been lost on China, which sees the region as a way into the EU.

Although Chinese investment is still low, a promise by Premier Wen Jiabao in April last year of $10.5 billion (8.0 billion euros) in credit lines has triggered "discussion on investment agreements with several countries in the region," IHS economist Charles Movit said.

China could bring in components for assembly and use the region as a "back door into the EU (...), especially in the automotive area," he told AFP

But modest credit expansion in Central Europe will restrain domestic demand as a growth driver in the near term, cautions Movit.

West European banks which dominate the banking sector continue to be wary of taking on risk.

Poland, Romania, and particularly Hungary have cut interest rates to stimulate demand. The key rate in the Czech Republic is close to zero. Turkey cut its key rate in May but has begun to reverse direction.

Central European heavyweight Poland, which has a debt ceiling capping fiscal stimulus, has used monetary policy to fuel growth, slashing its key rate to a record low 2.5 percent.

Central bank governor Marek Belka said this week that more cuts were on hold amid signs the economy was recovering.

"I think the worst has passed, but that doesn't mean what's coming is extraordinarily good," Belka, who also chairs the governing board of the European Bank of Reconstruction and Development (EBRD), told the Rzeczpospolita newspaper.

Poland is the only EU state to have avoided recession. The IMF forecasts growth of 1.1 percent this year rising to 3.5 percent by 2018.

Despite recent civil unrest and vulnerability to capital outflows, Turkey "could even manage to grow by five percent a year" after 2015, according to Jackson, thanks to its large domestic market.

Croatia, the Czech Republic, Slovenia and Ukraine are struggling to escape from recession, while the economies of Bulgaria, Romania and Slovakia are still at risk of shrinking.

The trend of the eurozone economy is critically important to the speed of their recovery.

Eurozone member Slovenia is the worst off, with a 2.5-percent contraction forecast for this year, EBRD economist Piroska Nagy told AFP.

"There's a major need for banking sector and corporate sector reform," she observed. The new government is making changes, "but it has to really run extremely fast to stand still," she said.

Croatia, which became the EU's 28th member on July 1, has been in recession or stagnated for four years and needs structural reforms.

The Russian economy, powered by oil and gas, is growing at far below its potential as a driver of the global economy, Nagy said, putting growth at about 2.0-2.2 percent this year, possibly rising to 3.0 percent in 2014.

Russia needs reforms to improve confidence in the business environment which is key to drawing much needed investment.

"It's not a question of money or lack of liquidity or lack of resources. It's a question of confidence of investing those resources in an unencumbered way," Nagy told AFP.