Some new economic data on the region appeared in my inbox today, care of Euromonitor International, which touts itself as “the world’s leading independent provider of business intelligence on industries, countries and consumers”. I can’t vouch for that, but I did find the China-related conclusions of particular interest.

Most Eastern European economies are recovering faster than expected following the global economic crisis of 2008-2009 but growth remains uneven. Trade with and investment from Western European countries have proved central to the economic recovery and Chinese investment in the region has seen significant growth in the aftermath of the economic crisis. However, domestic demand remains low as a result of weak consumer confidence, eroded incomes and high levels of unemployment.

The key points of the report:

• Real GDP growth in Eastern Europe is expected to rise by 3.0% in 2010 after contracting by 6.2% in 2009 owing to stronger trade links with Western Europe. However, domestic demand in Q2 2010 remains below 2008 levels across the region due to reduced credit availability, persistent unemployment and depressed consumer confidence;
• The recovery of most Eastern European countries is boosted by the recovery of the eurozone economies and the rest of Western Europe, their key export markets. In 2009, exports to France, Germany and the UK represented 23.8% of the region’s total exports;
• The rise in energy prices has improved growth prospects for the Russian economy – the largest economy in the region in terms of total GDP, accounting for 44.8% of the total Eastern European economy in 2009. Real GDP growth is forecast to reach 4.4% in 2010 and 4.6% in 2011 in Russia. The Baltic States, on the other hand, were the worst performers in 2009, with Latvia forecast to contract further in 2010, and Estonia growing by only 1.8% in real terms;
• Fears of a region-wide worsening government debt have largely been curbed as many governments took steps to contain their spending and balance their budgets, having surged as a result of the debt crisis in Greece in 2010. Nevertheless, government debt worsened across the region, reaching 78.4% of GDP in Hungary in 2009 (compared to 72.3% in 2008) and 36.7% in Latvia (19.7% in 2008);
• Investment from China may prove crucial in the recovery of foreign investment in Eastern Europe, while many Western investors still struggle to access finance and renew their expansion in the region.

Most of those conclusions are what we’d expect, i.e. the better Western Europe does, the better Central/Eastern Europe will do; energy prices spur growth in Russia; and domestic demand hasn’t yet recovered from the years before the crisis. Some of those debt figures are still striking, however, even if one knows just how bad the situation has been in Hungary and Latvia. And, despite TOL and other’s coverage of the inroads Chinese companies have made in the region, the stress on Chinese investment as a key to recover was eye-opening. And there was more of that in Euromonitor’s forecasts:

In 2010, the Eastern European region is expected to grow by 3.0% in real terms with a further rise of 3.8% in real terms forecast for 2011.
• After contracting by 61.4% in real terms in 2009, FDI inflows into the Eastern Europe have been slow in 2010 and most analysts do not expect them to recover to pre-crisis levels until at least 2011. This has presented an opportunity for China to boost its investment in the region, including large-scale infrastructure projects in Serbia, Moldova, Poland and Bulgaria;
• Prospects for many Eastern European economies improved significantly as the German economy – a major investor in the region in sectors such as car and electronics manufacturing, and a key export market – has rebounded strongly in the first three quarters of 2010. Following a 4.7% real contraction in 2009, Germany’s economy is forecast to grow by 3.3% in 2010 and 2.0% in 2011;
• As domestic demand gradually recovers and imports grow, those Eastern European economies whose export sectors are not performing well risk a widening current account deficit. In 2009, Romania (US$13.6 billion), Croatia (US$10.7 million) and Serbia (US$9.2 billion) had the highest current account deficits in the region;
• Further integration with the eurozone is generally seen by governments in the region as the key to improving economic stability and boosting trade with the EU. Estonia will adopt the euro in January 2011, and Lithuania aims to join the eurozone in 2012. Latvia’s hopes for adopting the euro by 2012 have been undermined by the economic crisis, as the government was forced to take a US$10.2 billion IMF/EU loan in 2008 to deal with its budget deficit.

Again, the China part stands out to me above any of the other predictions. It will be fascinating to track rising Chinese investment in the region, and see if it sets up alarm bells among local governments and populations. As Sergei Korol pointed out in his TOL article on the theme a few weeks ago:

The latest published numbers, for 2009, are not scary. Total Chinese direct investment in the region amounted to less than $100 million per country. However, the speed of that investment’s growth and visibility, as well as the aggressive approach of Chinese officials, stand out. In 2010 alone, Chinese companies, with the direct and obvious support of their government, made significant investments in the region, the most notable of which is a $500 million commitment to a polyurethane plant in Hungary and a car factory in Sofia.

He also—rightly, I think—concludes that the Chinese are really in this for the money and not regional domination:

“Ultimately, China is guided by simple mercantilist policies, in which the state helps the national business elite, and vice versa, invented a few hundred years ago by the European kings.”

That’s a lot different from the pervading, and sometimes unfair, attitude toward Russian investment throughout the region. The wider public appears to believe that most investments are part of a Kremlin conspiracy to reassert control over the near abroad. OK, that may often be the case, especially in terms of strategic energy assets, but the motivations of some of those Russian companies are probably closer to those of their Chinese counterparts…

Jeremy Druker

Jeremy Druker is the executive director and editor in chief of Transitions Online. Twitter: @JeremyDruker Email: jeremy.druker@tol.org

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