World Bank Sees Feeble Recovery of EU10, Bulgaria

The European Union's 10 ex-communist economies, including Bulgaria, will contract by 4,2 % as a whole this year and grow by around just 1% next year, the World Bank said in a report.

The Washington-based lender said the European Union newest member states in Eastern and Central Europe have begun the recovery one year after the breakout of the global financial crisis as the credit crunch has eased, but it is likely to be feeble and uncertain.

In a quarterly economic report the bank said the region could grow by 3,6 % as a whole in 2011, down from 3,9 % in 2008 and around 6 % a year earlier.

Medium-term growth prospects look weak as the recovery is not yet private-demand driven and potential growth is lower than before the crisis, the World Bank said.

According to the report, the EU10 countries fall into three groups with regards to their recent growth performance with Bulgaria, Romania and other Central Europe countries making the second group with year-on-year contraction of 5 to 10% of GDP.

Poland is in the first group as the only EU country whose economy has expanded throughout the last three quarters.

Third group comprises the Baltic countries, where the output contraction started in 2008, with declines of 15 to 20 % of GDP.

"Robust growth is likely to return only once investment and exports rebound and consumer confidence is restored," it said.

"While growth in 2010 and 2011 in the (ex-communist) EU 10 region is likely to be higher than in the EU 15 region (the bloc's older economies), the growth differential compared to the pre-crisis period is reduced by about 1,5 percentage points."

The Washington-based lender said private capital inflows to the region were shrinking. Syndicated bank lending had plunged in the first three quarters of this year by 93 percent for public borrowing and 80 percent for private, the report said.

It also said that, out of the USD 7.2 B gross capital flows to emerging EU 10 countries in the third quarter of 2009, some USD 6 B was bond issuance.

Bank lending was only USD 800 M, compared to USD 10 B in the fourth quarter of 2007 before the full force of the crisis hit eastern Europe.

Loan growth would be hampered by rising bankruptcy and unemployment -- more than one million workers returned home from countries such as the United Kingdom, Ireland and Spain in the crisis -- while a return of the huge investment flows seen earlier this decade were far off.

"Investment is likely to gain strength only slowly, held back by excess capacity and financing constraints, as banks in Western Europe and North America continue to write down loans and credits," the bank said.

Employment growth was negative in all EU10 countries and wage pressures – with the exception of Bulgaria - moderated in the second quarter of 2009

Unemployment rose in the EU10 countries from 6.1 % in August 2008 to 8.1 % in July 2009, or from about 2.9 million to 3.8 million people. At the same time, one million workers who had emigrated from the region to crisis-hit countries such as the UK, Ireland, and Spain after 2004 have returned home, adding to the pressure on job markets in Eastern and Central Europe.

The EU10 fiscal deficits are set to more than double in 2009 and 2010, exceeding initial forecasts in some cases by a large margin.

With the exception of Bulgaria, all EU10 members will exceed the 3 % of GDP threshold in 2009, some significantly, the bank said.

It also called on governments to make plans for fiscal consolidation after budget deficits grew across the region and for strategies to fuel a rebound to near earlier growth levels.

"Maintaining potential output growth depends on successful structural reforms in areas such as labour markets, education, and business climate," the report said.

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