iMFdirect – The IMF Blog

By Marek Belka

As the deep recession in Europe’s emerging market countries finally comes to an end, the question on everyone’s minds is where  growth in the region will come from in the years ahead. Exports are rebounding, and domestic demand is showing signs of stabilization. Most countries will see positive GDP growth this year—a stark difference from 2009. But a return to the high growth rates that preceded the crisis is highly unlikely.

An unbalanced picture

During the boom years, Eastern Europe grew rapidly, but growth in many countries was rather unbalanced. Capital inflows were large, but to a great extent went to the “non-tradable” sector—in particular, real estate, construction, and banking. Capital flows boosted domestic demand rather than supply—leading to a surge in imports, current account deficits that widened to unprecedented levels, and overheating economies.

This kind of growth will not come back. The domestic demand boom came to an end in the fall of 2008.  In the global financial turmoil that followed the demise of Lehman Brothers, capital flows to Eastern Europe plunged, leading to a sharp decline in domestic demand. Further exacerbated by a decline in exports, this contributed a deep economic downturn—in the Baltics and Ukraine, GDP declined between 14 and 19 percent last year.

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Filed under: Economic Crisis, Emerging Markets, Europe, Financial Crisis, growth, recession | Tagged: Baltics, banking, Bulgaria, capital flows, construction, Czech Republic, Estonia, exports, labor force, Latvia, Lithuania, real estate, Romania, Slovak Republic, Ukraine | Leave a Comment »