Factbox: OECD sees recovery taking hold in Eastern Europe

PRAGUE (BestGrowthStock) – Emerging Europe will show a solid recovery in 2010 and accelerate next year, the Organization of Economic Cooperation and Development said on Wednesday, although it said fiscal consolidation was expected to weaken demand.

Following are excerpts from the OECD’s Global Economic Outlook on Poland, the Czech Republic, Hungary and Israel.

POLAND

After ending 2009 as the only EU country not to contract, Poland is expected to accelerate this year to grow 3.1 percent on the back of exports, public consumption, preparations for the 2012 European football championship and inventory restocking.

There are no concrete plans to reduce the fiscal deficit from around 7 percent of GDP and it is expected it to stay above 6 percent of GDP in 2011, implying a “backloaded consolidation path” to the target of 3 percent of GDP in 2012, the OECD said.

Poland may be able to avoid constitutionally-mandated spending cuts by keeping its debt below 55 percent of GDP according to local accounting standards but the risk of breaching that is high. The OECD said harmonizing Polish standards with the EU’s would help motivate budget tightening.

The OECD said central bank intervention to counteract appreciation in the zloty would be inconsistent with inflation targeting unless the inflation forecast were to undershoot the target by a large margin.

CZECH REPUBLIC

The OECD expects the Czech economy to grow 2 and 3 percent in 2010 and 2011 with inflation rising gradually to about 2 percent next year. The government to emerge from a May 28-29 election must create a plan to rein in spending on pensions, healthcare and welfare benefits, it said.

The Czech banking system is showing resilience despite a rise in non-performing loans. Unemployment is projected to be stable this year at almost 8 percent but fiscal tightening is expected to limit domestic demand.

HUNGARY

A weak recovery of 1.2 percent growth should take place in 2010 and gather pace in 2011 as external demand offsets weak domestic demand. Inflation should fall to below the central bank’s 3 percent target by the end of next year.

The OECD said that to maintain investor confidence and provide scope for further rate cuts, the government should continue fiscal consolidation in line with Hungary’s medium-term fiscal framework.

The government should take new thrift measures to offset overspending in the election year and risks from Hungary’s main trading partners in the euro zone and other factors meant the growth outlook could be better or worse than forecast, the OECD said.

ESTONIA

Estonian growth will rebound from a 14 percent economic drop in 2009 to be flat this year and almost 5 percent in 2011, driven by higher exports and investment. The global recovery and high confidence could push growth beyond that, the OECD said.

Expected to join the euro zone in 2012, Estonia should now try to re-employ job seekers in the export sector. Unemployment is still rising and policymakers should take measures to control any potential rise in consumer prices linked to euro adoption.

ISRAEL

After a mild downturn, Israel should return to 3.8 percent growth in 2010 and 4.2 percent, near potential, next year, the OECD said. Price growth should stay within the upper half of the Bank of Israel’s 1-3 percent target band through 2011.

It said the Bank of Israel should look toward ending its policy of frequent market intervention through purchasing foreign currencies and the bank is expected “to raise its policy rate substantially by the end of 2011.”

Israel’s fiscal targets for 2010 look reasonably assured and the government should focus on achieving its 2011 deficit target by raising spending less than that implied in its spending rule or delaying tax cuts, it said.

External risks to GDP growth are balanced but a surge in housing prices raised the possibility of a speculative bubble that could dampen the effect of further monetary tightening.

Investment Research

(Reporting by Michael Winfrey)

Factbox: OECD sees recovery taking hold in Eastern Europe