Eastern Europe and the former Soviet Union will see 2007 economic growth moderate slightly from record levels, the European Bank for Reconstruction and Development said on Sunday.
Economic growth in 2007 is projected at 6.5 percent in the 29 transition countries it tracks, up from a November estimate of 6.0 percent growth.
Spurred on by industrial revival, foreign direct investment and rapid credit growth on both the consumer and corporate level, growth reached a record 6.9 percent in 2006 versus 5.8 percent in 2005.
Russia, the largest economy in the EBRD's sphere, had economic growth of 6.7 percent in 2006, and is expected to buck the general trend of decline with a 6.9 percent increase in 2007.
"Russia is the engine of this region. Russia is entering into a very strong investment phase. It is in it already and affecting growth," Erik Berglof, chief economist at the EBRD told reporters during the bank's annual meeting in the ancient Russian city of Kazan, 500 miles east of Moscow.
"The main issue is about the ability to absorb the very large amounts of money that are being invested," he said.
Berglof told Reuters in an interview on Saturday that the slight drop in economic growth in 2007 was "only natural" given it was a record last year.
The rapid growth of emerging market economies, fuelled by high commodity prices, helped lead to record profits last year at the bank, which was founded in 1991 to aid the transition of communist bloc countries to capitalism.
The fastest growth in 2006 was recorded in the Commonwealth of Independent States and Mongolia, at 7.5 percent, up from 6.8 percent in 2005. The bank forecasts growth of 7.2 percent for 2007.
"This was largely due to continuing high commodity prices but also strong domestic demand," the bank said in a statement. Foreign direct investment in the region is forecast to fall to 61.023 billion in 2007 from a record $70.838 billion in 2007.
Inflation however remains a concern. Across the region median inflation is expected to rise to 5.9 percent in 2007 from 5.6 percent in 2006.
Current account balances are expected to worsen, as are general government balances. "There are vulnerabilities. Most of them are in central and eastern Europe and to some extent some of the countries in south-eastern Europe," Berglof said.
"There are strong inflationary pressures, the path the countries are supposedly on to EMU accession seems longer than it did a year ago. It is going to be a difficult task to achieve given the current objectives," he said. But any troubles that may develop in one country are, Berglof said, not likely to lead to any widespread contagion. "The risk of contagion is not so much."
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