South East Europe

Current Economic Outlook

After years of robust growth earlier this decade, South East European economies—specifically Romania, Bulgaria, Croatia and Serbia—are in the midst of sharp contractions due to slowing capital inflows and shrinking domestic demand. High growth rates in recent years were accompanied by a large build‐up of external imbalances. To avert a disorderly adjustment of their imbalances, Serbia and Romania turned to the IMF for financial assistance in Q4 2008 and Q1 2009, respectively. Croatia and Bulgaria may follow. Given the regional dependence on Western Europe for capital and export markets, a full economic recovery ultimately hinges on a sustained return to growth in the eurozone. However, a couple of downside risks loom. A rise in non‐performing loans could strain banking sectors in the region and delay recovery. Moreover, the repetition of a gas crisis this winter would hurt the Serbian and Bulgarian economies, given their heavy dependence on Russian gas imports via Ukraine. Private consumption, the main component of GDP in the region, has been hit by slowing foreign capital inflows and rising unemployment.