Eastern Europe Reels as Exports Fall

Via The Wall Street Journal

By MARCUS WALKER

BERLIN -- Eastern Europe, which narrowly survived the global financial crisis with help from the International Monetary Fund, now faces a second shock wave: Industry is slumping along with exports to Europe's wealthier West.

Economic data for 2008's fourth quarter, due Friday, are expected to show growth collapsing in countries such as Poland, the Czech Republic and Slovakia, which had coped relatively well with the crisis to date.

Thus far, the downturn's toll has been worst in countries that have large trade deficits and relied on foreign borrowing to pay for their consumption, such as Baltic nations Estonia and Latvia.

Many analysts expect other countries that rely on foreign credit, such as Bulgaria and Romania, will follow the Baltics into recession now that cheap credit has dried up and investors are fleeing emerging markets.

Even the region's strongest economies are caught in the downward spiral, because of trade links with Germany and other euro-zone nations.

Data out Thursday confirm the economic pain isn't limited to Eastern Europe. Spain -- the first major euro-zone member to post national gross domestic product numbers for the fourth quarter -- entered its first recession in 15 years in the fourth quarter, reporting a 1% contraction from the third quarter Thursday. Spanish GDP contracted 0.3% in the third quarter. Two consecutive quarters of contraction is a common definition of recession.

France's GDP also contracted, shrinking 1.2% in the fourth quarter compared with the third quarter, the French finance ministry said Thursday. France, which scratched out 0.1% third-quarter growth, thus far has escaped an official recession.

"Almost every country in central and eastern Europe will have a recession in 2009," says Neil Shearing, an economist at London consultancy Capital Economics. "The collapse in industrial production that we're seeing will spread and engulf these entire economies."

Growth in Poland and Slovakia could fall to around zero this year, while Hungary and the Czech Republic will have sharp economic contractions, Mr. Shearing predicts.

Friday's data are expected to confirm that Hungary's economy is shrinking. The country is suffering from falling exports and financial strains because of its citizens' excessive borrowing in foreign currencies in recent years.

Analysts expect data for Slovakia -- which joined the euro zone in January -- and the Czech Republic to show that a slowdown began in the fourth quarter, driven by collapsing Western European demand for cars.

The two countries fashioned themselves as the Detroit of Europe in recent years. Sales in Western Europe of cars made in the Czech Republic, Slovakia and Hungary are currently down about 30% from a year ago, says Gyula Toth, Central Europe economist at Unicredit in Vienna.

Economists say prospects for a recovery depend heavily on Germany, which buys roughly a third of its eastern neighbors' exports. Germany's economy is set to shrink by about 2.5% this year, the IMF predicts.

Some business surveys suggest Germany might stabilize in the second half, however.

—Geraldine Amiel, Jonathan House and Jason Sinclair contributed to this article.