Growth in the former communist countries in Central and Eastern Europe and Eurasia has been very strong over the last couple of years. However, now a number of shocks have hit the region and these shocks are likely to weigh on growth.

The global credit crunch has increased stress in the money markets in the region. This is especially true in Kazakhstan and the Baltic states. Tighter global and local credit conditions are likely to slow credit expansion significantly in many countries in the region as credit institutions have tightened lending policies significantly.

Inflation has risen dramatically - driven by in particular higher food and energy prices, but also very strong wage growth and strong domestic demand. In particular the rise in food and energy prices - items which in some countries in the region constitute nearly half of the consumption basket - are eroding real disposable incomes and hence slowing private consumption growth.

Property prices have risen dramatically in the last couple of years and there are signs of bubble tendencies in some of the regional property markets. How-ever, we are now seeing that property prices are be-ginning to decline in some countries. Over the last couple of months we have especially seen signs of fairly strong declines in property prices in Estonia, Latvia and Kazakhstan. The cooling of the property markets in the region is likely to lead to lower construction activity - as we are seeing already in for example Estonia - in most of the regions. Lower property prices are also likely to slow private consumption growth through a wealth effect.

Source: Danske Bank