Eastern Europe cools off, but may get soft landing

Vienna- Some of Eastern Europe's hottest economies are cooling off, but the party doesn't seem to be over yet.

While a credit boom that fuelled several years of consumer-driven economic growth is ebbing, analysts say risks in the region are lower than those that triggered last year's home-loan shock in the United States.

Not that Eastern Europe will emerge unscathed. Growth is forecast to slow this year in most countries from the Baltics to Bulgaria under the impact of tighter credit, central-bank moves to fight surging inflation and the ripple effect of a weaker global economy.

Still, the area's 2008 expansion - pegged at around 5 per cent - will be a bright spot, easily beating the sluggish eurozone and United States, experts say. Low wages and millions of eager consumers look likely to keep eastern Europe an inviting place to do business.

"Growth in these countries is driven by domestic demand, so the slump in the US and Western Europe is not as contagious," said Marion Muehlberger, an emerging markets analyst at Deutsche Bank in Frankfurt. "The rise of consumer debt is the biggest risk factor."

Cooling has already hit the three Baltic Tigers that helped power the post-communist expansion. Retail sales have retreated in Estonia and Latvia, including big-ticket items such as cars.

Estonia's expansion slowed to 7 per cent last year from more than 11 per cent in 2006.

In Hungary, the government has helped engineer a drastic slowdown with austerity measures including higher taxes and energy prices, aimed at eventually getting the country ready to join the euro.

Romania and Bulgaria, which became the European Union's newest - and poorest - members in 2007, may be headed a similar way as their economies risk overheating. If foreigners decide that lending in those nations is getting too risky, an economic crunch could result.

Romania, with the second-lowest wages in the EU, offers a snapshot of the trends. Last month, workers went on strike at Renault SA's Dacia plant, which makes budget-priced cars for Eastern Europe. Their demand: a wage hike of more than 30 per cent, profit sharing and higher holiday pay.

Two days later, the Romanian National Bank raised its benchmark interest rate for the third time this year to 9.5 per cent, hoping to fight core inflation running at 8 per cent.

Yet in January, handset maker Nokia said it would lay off 2,300 workers at a German plant and move production to Romania. The bold move caused shock in Germany, where wages are about 10 times higher.

Banks, construction companies and capital-goods makers also remain bullish on Eastern Europe. Tourism has been a boon, driven by travellers looking for bargains in places like Croatia's Adriatic coast.

"We still view Eastern Europe's profit potential as highly interesting," said Stefan Maxian, head of company research at Raiffeisen Centrobank, a Vienna brokerage. "The Eastern European financial system has largely avoided the direct impact of the US subprime crisis."

Slovakia is tipped to be the year's star performer, buoyed by solid growth, a successful fight against inflation, low taxes and a strong contingent of foreign auto and electronics companies. Slovakia's economy is expected to grow by about 7 per cent in 2008 after jumping about 10 per cent last year.

As a reward, the EU may invite the nation of 5 million this year to adopt the euro in 2009. That would make it the second ex-communist nation to join after Slovenia, a smaller country that was part of Yugoslavia.

Some experts believe a slackening now may help Eastern Europe avoid a sharper shock in the future.

"We've seen incredibly high growth in the region," said Danske Bank analyst Lars Rasmussen. "So we could see a fairly sharp slowdown over the next few quarters."(dpa)

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