Central and Eastern Europe will resume catching up with Western Europe in 2011 after the economic crisis lost the poorer part of the continent some 5-7 years of income convergence.

This is one of the main conclusions of the Vienna Institute for International Economic Studies (WIIW) in its "Forecast for Central, East and Southeast Europe (CESEE), 2011-2013.

The report section on Bulgaria entitled "Bulgaria: A Painful Rebalancing" forecasts a modest economic recovery for the country in the next couple of years.

"In Bulgaria, GDP growth for 2010 was close to zero reflecting an ongoing painful rebalancing of the economy: for the most part, further curtailment of domestic demand and reduction of the current account deficit. The marked recovery of exports has been accompanied by a further contraction of both private consumption and, most pronouncedly, investment. The outlook for 2011 and the years thereafter envisages a modest recovery, with GDP growth likely to be curbed by both supply and demand constraints," the report says.

The trend in Bulgaria will not be much different from the situation in the rest of the wider region, according to the WIIW researchers, who point out that all Central, East and Southeast European (CESEE) countries will return to growth in 2011 even though post-crisis GDP growth will be slower than before and not suffice to generate additional jobs.

The forecasts states that the outlook for the world economy has improved in the course of 2010 and the recovery has gained strength in Europe as well. The Central, East and Southeast European countries (CESEE) have benefited from these developments; the majority of them recorded positive GDP growth last year.

"The recovery of exports has been even stronger than before the crisis. Trends in industrial output have so far remained more or less flat. The persistent decline in construction and fixed investments – both related to the still hesitant credit markets – represents one of the key downward internal risks to our moderately optimistic regional economic forecast," the WIIW report says.

"The general outlook for the CESEE region in the baseline scenario reckons with a strengthening of

economic growth over the period 2011-2013, in most cases rarely exceeding 4% per annum. GDP

growth will become more broadly based. The formerly predominant role of external demand will weaken somewhat, with both household consumption and gross fixed investments ultimately

contributing positively to GDP growth. With exports, industrial output levels and eventually also GDP growth having already recovered, the economy is seen as having largely returned 'back to normal' – yet with at least two important differences: (1) post-crisis growth will be slower. Slower growth, however, also implies that (2) the labour market situation will be 'very far from normal," it explains.

The WIIW further predicts that unemployment will remain high, with young and low-skilled workers being especially affected, and any improvement only gradual and delayed.

Inflation will pose no (or little) immediate threat as the moderate economic upturn and a revival of capital inflows have resulted in renewed appreciation pressures with potentially adverse implications for competitiveness.

The forecasts point to a gradual deterioration of current account positions in all CESEE countries, yet the return (or persistence) of extreme imbalances are only expected for Montenegro, Albania and Serbia. The financing constraints will constitute one of the key brakes on future economic growth. Given the limited fiscal space government deficits and public debts will be gradually scaled back.

The WIIW stresses that the sharp drop in GDP in most CESEE countries during the crisis resulted in both absolute and relative declines in their per capita GDP. The catching-up process of the previous decade was thus interrupted and income gaps vis-?-vis Western Europe widened. In the baseline growth scenario wiiw reckons with a renewed catching-up process starting as early as 2011 – after losing 5 to 7 years in terms of income convergence.