The European Bank for Reconstruction and Development (EBRD) became the latest addition to the club of institutions forecasting a contraction of Bulgaria's economy in 2009.

The bank estimated that Bulgaria's GDP growth will shrink by 3% this year and a further 1% in 2010, echoing the predictions made by the European Commission at the end of last week. 

The economies of the EBRD region are expected to contract on average by about 5% in 2009 after growth of over 4% in 2008 and almost 7% in 2007, according to the latest forecasts from the EBRD's Office of the Chief Economist.

The bank points out that the global economic crisis, which initially had an immediate impact on the financial sector, is now severely affecting the corporate sector, leading to large declines in output in late 2008 and in the first quarter of this year. It has also started to depress domestic consumption.

EBRD forecasts see the economies of central Europe and the Baltics slowing by about 3%, after growth of 3.4% in 2008, as double digit declines in the Baltic countries and a severe recession in Hungary are partly offset by about flat growth in Poland, which is expected to benefit from comparatively stable domestic demand.

The recession has also caught up with the economies of south-eastern Europe (SEE), many of which were still growing strongly the second half of last year. After a large output decline in the fourth quarter, the Romanian economy is expected to continue contracting over the course of this year, with a total output decline of 4% relative to 2008. In other SEE countries, somewhat milder contractions are expected, with a similar regional average as in central Europe and the Baltics.

In eastern Europe and the Caucasus, the ongoing contraction is even sharper, due in part to more fragile financial systems and in part to greater dependence on commodities, which have suffered severe price and volume declines since the middle of last year. Ukraine in particular has experienced a triple blow, with much lower steel export prices and volumes, higher energy import prices, and a sharp reduction in external financing. EBRD expects real GDP in Ukraine to be around 10% lower in 2009 compared to 2008.

Russia has suffered large output declines in the final months of 2008 and the beginning of this year. Based on government estimates suggesting an extraordinarily severe year-on-year GDP reduction in the first quarter, the EBRD is now projecting an annual contraction of 7.5% in 2009, as a large decline in the first half of the year is in part offset by a rebound in the second half, driven by the government's fiscal stimulus package.

"There are downside risks to these predictions. But now there is also upside potential. Our underlying outlook assumes continued external engagement, particularly from the western parents of banks in the region," said EBRD Chief Economist Erik Berglof.

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