Economic growth in Europe's developing countries to lag - World Bank

Economic growth in Europe's developing countries to lag - World Bank

Economic activity in developing countries in Europe and Central Asia would grow by 4.1 per cent this year, but that was the slowest growth rate in the world, outside Middle East and North Africa, the World Bank said in its annual summer update to the Global Economic Prospects report on June 10.The recovery largely reflected the strong growth rebound in the region's two largest economies,Russia and Turkey, which accounted for 62 per cent of regional gross domestic product (GDP) and were projected to grow at 4.5 per cent and 6.3 per cent, respectively, the World Bank said."The rebound in activity in the next four largest economies is weak (Poland, Kazakhstan and Ukraine) or remains negative (Romania), and at or below a projected three per cent in 13 of the remaining 16 countries," the report's section on Europe and Central Asia said.For Bulgaria, the World Bank forecast 0.2 per cent growth this year, followed by two per cent and 3.6 per cent in 2011 and 2012, respectively.Within the region, the macro-impacts of the crisis were most severe for those with large current account deficits and vulnerable external debt dynamics at the onset, including Bulgaria, Latvia, Lithuania, and Ukraine, the World Bank said. The region started to recover from the second half of 2009, initially responding to rebound factors, including a recovery from exceptionally depressed bases, and strengthening external demand.The recovery in the largest economies has masked the slower pace in smaller countries, "particularly those that entered the recession with large current account deficits that were supported by rapid credit expansion financed through debt-creating flows". That list included Bulgaria, where industrial production did not shrink as much as in other developing countries in the region, although the "sharp contraction in domestic demand required as financing of large current accounts dried up" meant that "output has not recovered to the same degree."Compared with other developing regions, economic recover in Europe and Central Asia would be slower and "more muted", the report said. "Large household foreign-currency denominated debt obligations, significant negative wealth effects (due to the collapse in local real estate and equity markets), the sharp restructuring underway in high current-account deficit countries, and the weak recovery in high-income Europe are all factors expected to weigh on domestic demand in the region.""A move toward fiscal consolidation is expected throughout the region, which will also serve to dampen growth momentum."The outcome of the debt crisis in high-income Europe will shape conditions globally, but particularly in Europe and Central Asia, both because of its tight trade and financial linkages to countries most immediately affected, but also the broader high-income European economy, the World Bank said.Despite concerted efforts to reduce risk in the banking sector by countries in the region, they were still dependent on financial flows from lenders in some of the most vulnerable high-income countries in Western Europe."In particular, one issue to follow in coming months is the case of Greek banks that hold large shares of outstanding loans in Albania, Bulgaria, Romania, and Serbia. Should Greek banks in an effort to restore their own balance sheets choose (or are forced) not to renew loans, this could have significant implications for investment and economic activity in this group of countries," the report said.The depth and prolonged nature of the crisis posed a risk to the region, with the extended period of high-unemployment and spare capacity risks taking their toll on the ability of consumers and firms in the region to pay back loans, the World Bank said."Already, non-performing loans are rising rapidly and at least in some countries, banks are lagging in their efforts to provision these loans. Should the problem intensify, a second regionally based financial crisis cannot be ruled out."

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