Positive growth outlook conceals mounting risks (Q4 2007)

We remain upbeat on the growth outlook for Emerging Europe. But this is largely due to our positive assessment of the prospects for Russia and to a lesser extent Turkey and Poland, which between them account for around 75% of the region’s output. Elsewhere, we have become increasingly concerned about overheated and unbalanced growth in the Baltics and Balkans. While our central forecast continues to be for a ‘soft-landing’ in these countries, a further dip in global risk appetite could prompt a disorderly devaluation of currency pegs and subsequent recession. Latvia remains the most at risk but contagion could spread across the Baltics and to Bulgaria and Romania.