When it comes to emerging markets, the financial press has focused largely on Asia and Latin America in recent years. You can see why. Of the emerging regions, eastern and central Europe (excluding Russia) suffered the worst recession during 2008-2009, and also experienced the weakest recovery. GDP is now staggering along at an annual pace of around 1% a year.
The main problem is the region’s level of dependence on the crisis-ridden eurozone. Exports to the single currency area are worth more than 40% of GDP for Hungary and Slovakia. Western European banks’ subsidiaries, meanwhile, have dominated emerging Europe, so as they have cut back on lending during the crisis, credit in the region has been squeezed.
This problem is very gradually abating, notes Capital Economics. The uptick in Germany, the region’s top export market, bodes well. Any recovery is likely to be tepid, and remains vulnerable to the euro crisis flaring up again. But longer-term prospects are better. GDP per head is only at 25%-35% of German levels, so there’s scope for rapid growth as the region catches up by raising productivity to Western levels. Foreign direct investment worth an impressive 5%-7% of GDP a year has helped to transfer Western technology and expertise to emerging Europe.
It has also allowed the area to become a manufacturing hub. Productivity tends to grow much faster in manufacturing than in other parts of the economy, so it is “crucial to development in emerging markets”. So emerging Europe has “many of the ingredients for growth”, concludes Capital Economics. Provided the eurozone does return to growth and the crisis continues to abate, it reckons most states in the region could expand by 3%-4% a year in the coming decade.