Economic growth in central and eastern Europe is expected to slow this year, according to the EBRD's Transition Report update, which is released later today by chief economist Willem Buiter.
The report adds that growth in 2004 exceeded expectations and was "somewhat above" the 5.7% achieved by the region in 2003, says Steven Fries, deputy chief economist at the EBRD.
Weakening global economic condit-ions, a shrinkage in investors' appetite for risk and medium-term concerns over the oil price could all spark a fall in output in central and east European economies this year, adds Fries. At the same time, he expects the region to remain one of the world's most buoyant.
One of the triggers for the slight slowdown is the already evident sluggishness of the EU, says the EBRD economist. "The ECB and EC are bringing down their growth forecasts for the EU in 2005 and we agree. That's going to weaken external demand, especially for the [newly acceded countries]."
These economies, including central Europe and the western Balkans, will, however, be supported by reasonably strong domestic demand. "Overall, there will be a slight slowdown in growth," says Fries, "but nothing to get concerned about."
He urges the central European nations to take advantage of the relatively supportive environment to quicken the pace of their fiscal reforms. "We've yet to see a clear and strong political will to make the tough choices on fiscal consolidation," he adds.
The big issue facing the western Balkans is that they are running large current account deficits that are being financed by government funds and remittance flows. These countries "need to redress the balance," says Fries.
The economist anticipates Russia and the Ukraine to see a cooling in growth this year. Russia is experiencing a drop in domestic demand and a weakening in confidence. "Russia is not doing enough to improve the business environment and to increase the activity of the non-oil sectors," he says.
Central Asia should experience moderate growth although political uncertainties will probably lead to a fall in investment and consumption, especially in Uzbekistan and Kyrgyzstan, he says. There was a significant acceleration in growth in Uzbekistan in 2004, adds Fries, but sustaining that level this year will prove more difficult.
Last year central and eastern Europe outperformed global growth "by a significant margin", he says. Performance was driven by a strong external environment, a pick-up in domestic demand, and improved business and consumer confidence. The high oil price also benefited Russia and Kazakhstan, which were the main drivers of growth.