OREANDA-NEWS. January 25, 2011. Going into 2011 we expect continued strong growth in Poland, Russia and the Baltics. As foreign demand is set to slow next year domestic demand will become an increasingly important source of growth. This is enabled by the continued improvement in labour markets. A new challenge is the briskly accelerating inflation rates not least due to the sharply rising commodity prices, and with increasing upside risks to inflation monetary policy tightening is back in focus again, reported the press-centre of Nordea Bank.

The Russian economy disappointed in the second half of last year due to contraction in the agriculture sector, but we have seen positive signs in the previous few months, as investment recovered strongly alongside domestic consumption. Reviving credit flow makes us believe the economy will come back to a stronger recovery path this year. Inflation risks have increased and the central bank has started to tighten monetary policy. It remains to be seen how the government manages fiscal policy in the election year, but higher oil prices will certainly help.

The Polish economy grew solidly in the second half of last year and will continue to grow strongly this year. Still, we believe expectations are too high and will be disappointed. Political risks have increased going into an election year the government debt close to the limit that, if breached, prompts tough fiscal tightening. The National Bank of Poland has hiked banks’ reserve requirements and is likely to hike interest rates for the first time very soon.

The outlook for the Estonian economy is improving, with activity having continued on a rising trend throughout 2010. Last year turned out better than hoped for due to the brisk recovery of exports and a stabilisation in private consumption. Consumption is, however, still restrained by the weak labour markets. The accelerating inflation poses one of the main concerns, but the fragile labour markets are expected to keep domestic price pressure in check.

The Latvian recovery gained pace in the second half of last year, and thus we are only seeing a minor contraction in 2010. Also the financial markets calmed considerably. However, further fiscal consolidation remains on the agenda to secure confidence on the international markets, and further structural reforms will be needed this year to soothe the international lenders. The recovery is expected to broaden further in 2011 with increasing support from the domestic economy.

The Lithuanian recovery is slowly broadening from the foreign trade sector to the domestic economy. Although quarterly growth has remained sluggish, exports have continued to steadily support the economy. After a difficult year in both investments and consumption, the domestic economy is expected to be boosted by the gradually improving labour market situation and firming confidence.

Russia
Rebuilding growth momentum
Private domestic demand drove economy in H2 2010
Consumers to get more appetite in 2011
Credit flow improves
Monetary tightening has begun
Interest rate cycle has turned
More gains for the rouble seen ahead

Poland
Political risks have increased
Below-consensus growth in 2011
Heightened risks ahead of October general elections
Inflation has surprised on the upside
Monetary tightening cycle started
Stronger PLN in the near term

Estonia
Improving economic outlook
Growth expected to be boosted by the adoption of the euro
Private consumption still lagging exports
Labour markets gaining strength gradually
Inflation supported especially by food prices

Latvia
Post-recession mood
Exports close to pre-crisis levels
Strict fiscal consolidation still ahead
Financial markets eased in 2010
Credit rating upgrade reflects improved growth and lower-than-expected public debt

Lithuania
Economic recovery broadening
Exports driving the recovery
Unemployment rate seems to have peaked
Demand strong especially from Russia
Cutting the deficit below 3% of GDP in 2012 remains a challenge.