Growth Surprises and Drivers Are Changing in Eastern Europe

Growth across Eastern Europe, and in Russia in particular, has been surprising on the upside, and the domestic demand story is gradually coming back. The upward revision of Russian economic growth continues, and the consensus is getting close to our forecast of 5%. Recently, the World Bank increased their forecast by approximately two percentage points, to 5-5.5% for 2010, and Bank of America/Merrill Lynch set the highest estimates last week, at 7%. Some institutions, most notably the IMF and some Austrian banks, still have fairly conservative forecasts for this year, but this is probably mostly due to lagging revisions. As a matter of fact, the IMF will present their spring forecast in late April, and it would be surprising if they did not continue to upgrade the growth estimate for this year (see chart below). A similar, albeit not as dramatic, trend is evident elsewhere in the region.

But perhaps even more interesting is the fact that more attention is being paid to how the underlying growth drivers are changing: from exports to consumption and investment. In Russia, industrial production bottomed out in Q209, and is now growing briskly but unevenly in year-on-year terms (7.8% in January and 1.9% in February), driven by inventory adjustment. Investment has not yet however turned positive on a year-on-year basis (-8.7% in January and -7.4% in February according to unreliable preliminary figures), even though it bottomed out at the same time. Retail sales, a proxy for private consumption, bottomed out in Q309, but have already turned positive on a year-on-year basis (0.3% in January and 1.3% in February), on the back of rising pensions and wages at the beginning of the year. The economy as a whole grew as much as 5.2% y-o-y in January, according to preliminary numbers.

This trend is not only evident in Russia, but in a number, though far from all, of the economies in the region. We are, for instance, seeing how industrial production is rather strong in Central Europe and that retail sales are positive on a month-on-month basis, but not yet on a year-on-year basis.

It is interesting to note that the domestic sectors outperformed the tradable sectors before as well as during the crisis, which again is an indication that our focus on domestics is a viable strategy over time.



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