Solid Q2 growth, but strong headwinds persist (Aug 10)

Most economies in Emerging Europe posted positive quarterly growth in Q2 and some countries, notably Russia and Turkey, remain on track for an impressive rebound this year. However, a number of factors suggest that Q2 will mark the high point for growth in the region. For a start we expect global growth to slow over the next year, particularly in key export markets in Western Europe. Commodity prices are likely to fall too, which will act as a brake on the Russian recovery. Moreover, while there are tentative signs that consumer spending in parts of the region is starting to accelerate, a combination of weak labour markets, tight credit conditions and a fiscal squeeze in pretty much every country means that this is unlikely to last. A ‘double dip’ recession should be avoided. But while the region’s economy is likely to expand by close to its potential rate of around 4% this year, a number of years of sub-par growth are then likely to follow.