Market surge is groundless, economists warn

14/05/2009 | Phil Thornton

The dramatic spike in financial markets across central and eastern Europe is not justified by the region’s economic outlook, leading economists have told Emerging Markets.
Stock markets have soared since hitting a trough in March with some such as Ukraine doubling in value. Equity prices rose further this week in the face a fresh swath of warnings from forecasters that the region faces a deep recession this year.
The IMF said several emerging European economies faced a “deep crisis”, saying the region would contract 4.9% this year and post an anaemic recovery of just 0.7% in 2010.
The Economist Intelligence Unit said the turmoil in global credit markets had hit transition economies more than any other emerging market bloc. It said the 18 transition countries would contract by 3.0% this year, with the Baltic states – Estonia, Lithuania and Latvia – slumping 11.4%.
Last week the EBRD slashed its 2009 forecast for emerging Europe to a 5.2% contraction from 0.1% growth predicted earlier this year. “The data are consistently worse than expected,” Stephen Lewis, chief economist at Monument Securities and a veteran of several crises, told Emerging Markets.
Leading private sector economists told Emerging Markets few of the problems that had led to the financial crisis had been resolved and that the global rebound in optimism among investors that had pulled up markets across central and eastern European markets would reverse in the face of a fresh wave of bad news.
Willem Buiter, former chief economist at the EBRD and now professor at the European Institute of the London School of Economics, said markets had benefited from an indiscriminate surge of optimism. “Markets are up because the OECD has said this is the turning point,” he told Emerging Markets.
“If they are right, that is something to rejoice about. But these countries still have to put back together their financial systems. It would be good news for them, just as it would be good news for the rest of the OECD, but whether the optimism is justified I am not clear about.”
Raghuram Rajan, a former IMF chief economist and professor at Chicago Booth, said there was a risk markets were “excessively exuberant”. “A lot of people suggest that we have not dealt with the fundamental problems and then we will return to a period of really slow growth.”
Danny Gabay, a director of Fathom Consulting in London and a former Bank of England economist, doubted the region was on the brink of sustained recovery.
“What I can say with some confidence is that the freefall we’ve had has landed. But I am not convinced that we have landed at the bottom. It may be just a ledge,” he told Emerging Markets.
“In terms of what caused this crisis, the elements are still in place and nothing has been fixed. So it is plausible that eastern Europe could have a bounceback, but the banking crisis has not been resolved at all, and in our view there are some big problems out there, and that means that any kind of sustained recovery – and the durability that is the big issue – is another question.”

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No government should engage in scaremongering.

László Andor, European Commissioner responsible for employment