By Ed Bace, CFA
Lars Christensen, chief analyst and head of emerging markets research at Danske Markets, a unit of Danske Bank, offered attendees at this week’s Third Annual CFA Institute European Investment Conference a ray of sunlight that stood in contrast to the somewhat dreary Danish weather. The outlook for Central and Eastern European (CEE) economies, he said, was “surprisingly good.”
Christensen — a monetarist who authored a book in Danish about Milton Friedman and who co-authored a 2006 paper foretelling Iceland’s financial and economic collapse (pdf) — said that recovery in the CEE economies has continued apace over the last couple of months, supported mostly by a recovery in the manufacturing sectors as well as a strong rise in exports. His macro forecast suggests overall positive GDP growth in the CEE economies this year, with the exception of Latvia and Hungry. Growth in the region in 2011, he maintained, would exceed that of 2010, with little risk of asset bubbles.
The strongest performance in the region, Christensen noted, has been in Poland, where private consumption has been “nearly unaffected by the global credit crisis” and inflation is well under control.
Still, the landscape for investors is far from uniform. Christensen used the Baltic countries, where the bottom has dropped out and recovery is particularly anemic, as an example of how fiscal policy stimulus efforts have exacerbated budget deficits, as in much of the west. Indeed, CEE economies tied to the euro are hampered in their ability to exercise monetary policy since there is no exchange rate flexibility (a problem also evident in Ireland, Greece and Spain, where the strong euro is dragging economies down).
Countries like the Czech Republic and Poland are following non-inflationary, growth-stimulating monetary policies, unhindered by currency considerations. Poland’s budget deficit is creeping up, but it is nowhere near that of Hungary, where inflation remains stubbornly high and where a weak currency should strengthen as government reforms are implemented.
For most of the CEE economies, recovery will be export-led, built particularly around the “Chinese-German axis,” Christensen said.
Still, a possible double-dip recession in the global economy “could kill the CEE export miracle,” he cautioned.
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