Increasingly dire growth outlooks for central and eastern Europe are actually still too rosy, and the region will not only probably face a recession this year but take years to return to its rapid expansion.
Governments and financial institutions have slashed growth forecasts for Poland, the Czech Republic, Hungary, and other states but analysts say they have not factored in the worst, with the latest signs of trouble for Russia unlikely to help.
The prospects of plummeting growth and falling interest rates have also spooked investors and deepened a severe selloff in markets previously buoyed by the swift growth of the region's lean, cheap manufacturing and service sectors.
In Poland, the European Union's biggest newcomer, Finance Minister Jacek Rostowski said last year it was "immune" to the crisis. He stuck to a 4.6-5.0 percent growth forecast, even as the downturn walloped its main export market, the euro zone.
Since then, the government has slashed that figure to a worst case scenario of 1.7 percent. The European Bank for Reconstruction and Development says it could be 1.5 percent.
But most economists say both estimates are optimistic, as are the outlooks for the Czech Republic, Hungary and Romania.
"There is a very high risk that all the economies in the region could face recession," said Raffaella Tenconi, economist with Wood & Company. "It's going to be a horrific year."
FORECASTS LAG
There may be several factors at play in the still optimistic growth estimates, ranging from failure to comprehend the speed of the crisis to a desire by some institutions to save face with more gradual reductions rather than lopping off three or four percentage points at once.
But if that has been a trend with governments and central banks, it looks to be waning as the foreign-owned factories that uphold industry here shed thousands of jobs and cut hours.
Economists say that can create negative feedback loops and strangle growth further and the Czechs last month slashed their 2009 forecast from 3.7 percent to 1.4 percent. This week Finance Minister Miroslav Kalousek said it could fall below zero.
"It is very difficult (if not impossible) to estimate the length and depth of the global financial and economic crisis and thus also the extent and intensity of the impact on the Czech economy," his ministry said on Monday.
Hungary has warned its economy may now contract 2.5-3.0 percent this year, versus an earlier forecast of 1.0 percent.
Mounting problems are expected to wreak havoc with policy, hitting budget revenues and causing a rise in social spending.
Scarred by troubles with high foreign debt in the past, governments do not feel able to spend their way out of the crisis the way their western neighbours have — with the risks of borrowing emphasised by a currency slump in recent months.
The credit crunch has led investors to cash out of investments in emerging markets, and central banks in Poland, Hungary and the Czech Republic have also slashed the cost of borrowing — cutting the premium for holding capital locally.
This week, the Hungarian forint hit a new all-time low against the euro and the Polish zloty slid to its lowest level in four and a half years, dragging the entire region down.
Both have lost 12 percent since Jan. 1, and analysts warn that further interest rate cuts could prompt another 10-15 percent slide, undermining banks and firms who had bet on a faster catch-up with euro zone asset prices.
"The consequences can be nasty," said Commerzbank analyst Ulrich Leuchtmannn in a research note. "The increased devaluation speed will certainly trigger a further round of flight of capital from these countries."
OPTIONS LIMITED
The upside to currency losses is that, along with cheaper labour costs, it should make the region's exports very hard to beat on price in the euro zone.
But that still relies on demand recovering in western Europe and neither governments nor banks are in a position to take up the slack by injecting cash and credit domestically.
Although some leading indicators in the euro zone suggest the speed of the downturn may be slowing, there has been a 25 percent fall in sales of cars — a crucial sector for central Europe — and data shows the outlook is still worsening.
If all that seems to cut off the road to a demand-led, Keynesian recovery, the monetarist route to which the Czechs, Poles and Baltic states have worked hard to adhere, also offers little hope soon.
The Czechs have said their budget deficit may double, possibly missing the EU's 3-percent of GDP ceiling, Brussels says Romania's may leap to 7.5 percent, and analysts also wonder if Warsaw can execute a planned 20 billion zlotys in cuts.
The implication is that once recovery does come, governments may again have to rein in spending, undermining an already difficult path back to growth in the face of a world slowdown.
"Whenever we've seen an emerging markets crisis before, there has always been an extremely sharp drop in growth and then a rebound. But that's always been supported on higher global growth," said Neil Shearing from Capital Economics.
"When we get back to potential growth rates in 2011 or 2012, for central Europe we'll be talking about 4 or no more than 5 percent… not the 6 to 7 percent we were seeing in some quarters in the past."
