OREANDA-NEWS. January 25, 2010. The EBRD has revised upwards its 2010 growth forecast  for the region*, reflecting a slightly faster economic recovery than anticipated last October, but with stark variation across the region. The recovery is expected to strengthen moderately in 2011, reported the press-centre of EBRD.

Following a contraction of real GDP of about 6 per cent in 2009, the EBRD now expects average growth for the region of 3.3 per cent in 2010, compared to 2.5 per cent predicted in October. For 2011, the EBRD predicts average regional growth of 3.8 per cent.

The upward revision is driven by stronger than expected performance in four large economies in the region: Poland, Turkey, Russia, and Kazakhstan, on the back of stronger commodity prices, and a resumption of capital flows to large emerging market countries.

In contrast, for most of the smaller countries that do not export commodities, the recovery will continue to be slow, and in some cases (the Baltic countries and Hungary) we expect to see continued negative growth in 2010.

Chief Economist Erik Berglof said, “The recovery in the region remains fragile, with large variations across countries. The gradual global recovery will support regional growth, but local factors will dampen it. Appropriate public and private sector policies and actions to clean up balance sheets, restructure debt and deal with distressed assets will be important to help sustain credit growth and support economic recovery.”

Banks will follow cautious lending policies as the recession has heightened risk perceptions. Rising non-performing loans still burden balance sheets and hamper banks' ability to provide funding needed in the region to emerge from the crisis.

The recovery in external demand is expected to be partly offset by the fiscal tightening required in many of the countries in this region.

Private domestic demand will be constrained by rising unemployment and slow credit growth and unemployment will continue to rise as firms enhance productivity in an effort to rebuild buffers depleted during the crisis.

In central Europe and the Baltic states, the EBRD expects average growth of 1.4 per cent in 2010.In the Baltics and Hungary growth is expected to remain negative in 2010 despite a gradual bottoming out of the deep recession. Poland, the Slovak Republic and Slovenia are likely to benefit from a rebound in eurozone growth, being deeply integrated into Western European manufacturing production and having entered the crisis with more moderate domestic demand growth.

On average, south-eastern Europe will have similar growth as central Europe and the Baltic states but with significant heterogeneity. Parts of south-eastern Europe may benefit from a rebound in metals prices (e.g. FYR Macedonia and Serbia) or from capital inflows following a recent rating upgrade (Turkey). The recovery in Romania and Bulgaria, on the other hand, will likely be slowed by fiscal tightening.

The commodity exporters are expected to benefit from the rebound in commodity prices suggested by futures prices, with spillover effects on the neighbouring region. Russia and Kazakhstan are expected to grow between 3.5 and 4 per cent in 2010, and Azerbaijan by as much as 9 per cent, driven to varying degrees by remaining spare capacity in the natural resource sector and continued support of domestic demand by fiscal policy.

This will spill over into growth in the other economies of central Asia that rely heavily on remittances from or exports to Russia and Kazakhstan. Growth in central Asia will also be supported by stabilising non-oil commodity prices and substantial government- or donor-funded investment.

Eastern Europe and the Caucasus will likely grow faster, around 4 per cent on average. This is partly a rebound from a sharper decline in 2009, and partly a result of rapid growth forecast in Azerbaijan. Remittances from and exports to a recovering Russia will benefit the countries in the Caucasus and Belarus. Ukraine will likely begin to emerge from the deep contraction experienced in 2009 once the political situation settles after the presidential elections.

* The region includes 30 countries from central Europe to central Asia, including Turkey.