Brighter outlook but still facing an uphill struggle (Q3 2009)

We have nudged up our GDP forecasts for the region’s most open economies, predominantly those in Central Europe, in response to a modest improvement in the outlook for Western Europe. The inventory cycle is also likely to give a temporary boost to growth, particularly in Turkey. But the region is still facing an uphill struggle. For a start, fiscal policy looks set to tighten in every country next year. Country-specific risks also remain: the Russian economy will be hit hard by the fall back in commodity prices that we expect next year, while the Baltics and Bulgaria are embroiled in the painful process of ‘internal devaluation’. Indeed, there remains a real risk that a Baltic peg could break, triggering a renewed bout of financial market selling across the region.