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RZB Special Report

by Peter Brezinschek, Head of Economics and Financial Research, RZB

The slump in the global economy has now reached the CEE region. Although the domestic economies in the CEE countries are still supported by private consumption and investments, a gloomier mood is becoming more and more prevalent in all of the Eastern European economies.

During the last three months, the cycle of forecasts has reflected an unprecedented turn for the worse. Channels of contagion included the drastic deterioration in export prospects and the sudden drying up of cheap financing via loans as capital flows fade away. Competitiveness and attractiveness for foreign investment has declined as a result of excessively strong wage growth compared to productivity gains.

In order to exploit the long-term growth potential, an adjustment process has started and its effects will be felt well on into 2010.

In order to exploit the long-term growth potential, an adjustment process has started and its effects will be felt well into 2010. Along with curtailing budget spending, a pronounced reduction in lending activity and declines in real wages are fundamental prerequisites for consolidating the mostly unmanageably high current account deficits in the region.