The economies of eastern Europe and the former Soviet Union will grow by 4.9 percent this year, higher than original estimates, according to the EBRD, the development bank for the region.
Alongside stronger economic growth in the eight East European states which will join the European Union in less than two weeks, there will be a rebound in foreign direct investment, the European Bank for Reconstruction and Development said.
It upped its weighted average growth forecast for 2004 to 4.9 percent from 4.7 percent, made in September last year, for its 27 countries of operation, after 5.6 percent growth in 2003.
Although the overall level of growth will be lower than 2003, due to a slowdown in ex-Soviet states, growth in the eight east European countries which will join the European Union on May 1, especially Poland, has accelerated, the EBRD said.
"Growth in the central Europe and Baltic region is expected to rise to 4.3 percent in 2004, mainly due to higher growth in the largest countries," the bank's annual update to its transition report.
"Poland has recovered from its slowdown in 2000-01 and is forecast to grow by around 4.5 percent, benefiting from recovery in the euro area and the rapid expansion of credit," the EBRD said.
The same will be true in Hungary, the Czech Republic and Slovakia, while the Baltic states of Latvia, Lithuania and Estonia are forecast to see slower growth, as is Croatia.
Foreign direct investment, which boosted economic growth in the eight accession countries by 3-7 percent annually through the 1990s, will rise strongly in the new EU states, the EBRD said.
It forecast FDI would rise to $14.59 billion for the new EU members - Poland, Hungary, the Czech Republic, Slovakia, Latvia, Lithuania, Estonia and Slovenia - up from just $6.18 billion in 2003.
The Czech Republic alone will see FDI rise to $6 billion from $2.35 billion in 2003.
Hungary, traditionally one of the best countries at attracting FDI, will see inflows of $591 million in 2004, after a $1.65 billion outflow in 2003, the EBRD forecast.
Countries in south-eastern Europe will grow 4.3 percent this year, similar to 2003, while those in the Commonwealth of Independent States will see slower growth of 5.6 percent.
That compares with a stellar 7.6 percent last year when some countries in the region posted double-digit growth due to strong commodity prices.
The EBRD sees Russia expanding by 5.5 percent after 7.3 percent growth in 2003, while Ukraine will see growth slow to 6.0 percent from 9.3 percent.
In the region, only Uzbekistan will see the pace of economic growth accelerate, but that is to a miserly 2.5 percent from 1.5 percent in 2003.
Even though the economies of central Europe will expand more strongly than expected this year, problems remain on budget deficits.
"The need to address unsustainable expansionary fiscal policies is the main downside risk, as major budget reforms are overdue in many central eastern European countries," the EBRD warned.
As these EU accession countries move towards membership of the euro, there is a risk imbalances will cause volatility in financial markets which could damage the real economy.
"Potential financial market volatility, driven by speculative plays on EU convergence, is also possible, as last year's developments in Hungary showed," the EBRD said, referring to the buffeting experienced by the forint which led to sharp movements in official interest rates.
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