The recovery in manufacturing across Emerging Europe has for the most part been pretty impressive. With the notable exceptions of Romania and Bulgaria, industrial output is now growing at doubledigit annual rates in nearly every country. But while there are tentative signs that the rebound in manufacturing has started to spread to other sectors in some countries (notably Turkey and to a lesser extent Russia), the general picture is that domestic demand across most of the region remains constrained by a combination of weak bank lending, tighter fiscal policy and still fragile consumer confidence. In short, the latest data reinforce our view that a twin-speed recovery is taking shape in the region. Turkey and Poland should continue to outperform but the economies of South-Eastern Europe and the Baltic States are likely to contract once again this year.
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