Sorry I took my time getting back, obviously I’m not prepared to put my money where my mouth is .

No. It isn’t exactly that, the issue is that at the end of the day I don’t disagree. Hungary has already had a ‘correction’ and I doubt there will be another big one next year. Since they let the currency drop in many ways this makes the correction softer.

Another question is whether Hungary will have a recession or not in 2007. This is much harder to call. I think it might, but this depends in large measure on what happens to housing in the US, and this is far from clear. To quote Dave Altig yesterday.

“What does this all add up to? Pretty simple,really. The economic environment is a total murk, and everyone is just guessing. In other words, nothing unusual.”

This reticence isn’t simply being shy, these things are really hard to call, and anyone who things otherwise doesn’t understand much about economics IMHO.

On the other hand what we have are such a diverse set of countries. Bulgaria and Romania are likely to get ‘coupling impetus’ from EU membership (assuming that comes) so should be fine in the short term, but since Bulgaria has the Lev peg, when any correction does come it could be significant.

Czech Republic looks not bad to me. Baltic states look to be problematic, but not tomorrow.

I think here there are going to be winners and losers. I think those who can attract labour will do comparatively well, and those who lose it will not. Obviously those who get into higher level economic activities can leverage their price differential with places like France and Germany for some time to come. You won’t make a fortune out of either textiles, or electrodomestics, or cars.

Poland and Hungary are clearly the ones to watch say 2006 – 2010 in my book. I just read this from Poland which is interesting (in the sense that if Polands is not like Ireland or Spain – and I’m pretty sure it won’t be – then a lot of people are going to get stung. Also my guess is also that if they are talking about low interest rates, then these will also be euro denominated loans):

Foreigners spur housing boom in Poland

House and apartment prices in Warsaw and other leading Polish cities have spiraled upward since the eve of the nation’s 2004 entry into the
European Union — a boom driven by low interest-rate mortgages, housing shortages and foreign speculators snapping up real estate as investments.

“The market is very hot,” said Bogumil Rutkowski, a manager at the Knight Frank real estate agency in Warsaw. “We’ve had a boom since the second half of 2003, but it’s just been accelerating more and more lately.”

In 2005 alone, real estate prices in Warsaw rose 30 percent in prime locations, and between 10 and 20 percent in other areas amid the strong demand, according to Knight Frank. Now, for example, a one-bedroom apartment of 700 square feet in central Warsaw runs between $90,000 to $325,000.

“The demand is generally driven by local people but there are buyers from Spain, the U.K. and Ireland buying new constructions in bulk — 10, 20 or 30 apartments and sometimes even more,” Rutkowski said. “They compare Poland to Ireland and Spain of 20 and 25 years ago, and they believe the price appreciation in residential property there will happen in the same way in Poland.”

But as housing prices in this former communist country rise, wages for most Poles remain low compared to western European levels — making much of the housing stock unaffordable. Last year, gross domestic product in Poland was at $15,000 per capita, significantly lower than Ireland’s $41,000 or Britain’s $35,000, according to Polish government figures.

Prediction: we won’t see a “severe correction” within the next 15 months in Bulgaria, Romania, the Czech Republic, Slovakia, Macedonia, or Croatia. Hungary and Poland, hmm, unlikely IMO but could just maybe happen. Baltic states I don’t know enough.

But in those first six countries, no “correction” this year or next.

I got ten euros. Who wants a piece?

Doug M.

The Short View: Central and Eastern Europe

By John Authers, Investment Editor

Could Central and Eastern Europe be the new powder keg of global emerging markets? The International Monetary Fund’s latest Global Financial Stability report warned that investment flows to the region could prove unsustainable, and warned of the risk of “severe corrections”. It said: “Current account deficits are large in the Baltics, Bulgaria, Hungary, Romania, the Slovak Republic and Turkey; fiscal deficits are high in some other countries such as Hungary; and the ratio of private sector credit to gross domestic product has risen particularly strongly in the Baltics, Bulgaria and Slovenia.”

Meanwhile in Asia and Latin America, current accounts are either in surplus, or show a manageable deficit. But little concern has shown up in prices. Quite the reverse. According to the latest performance data from Hedge Fund Research of Chicago, Eastern Europe/CIS hedge funds have beaten all other strategies so far this year. By the end of August, they were up 23.3 per cent, twice the return of any other sector – even energy funds had made only 11.75 per cent.

Mind you, that still doesn’t beat the deathless quote from the British exit from the ERM, that “the Bank of England has ceased supporting the pound and it is floating downwards to find its own level”. Gordon Brown reused it on John Major as “the Chancellor has ceased supporting the Prime Minister, leaving him floating downwards to find his own level.”

Curious how things change, no?

yeah, im getting off topic. but to combine this idea with previous posts…i’ll be surprised if Hungary’s 3-4% growth can survive this onslaught of different “attacks”. we shall see…

As the Forint winds its way down to its natural floor (worst case as low as 300 HUF/Euro), workers demand wage inflation in keeping with their loan obligations. Unfortunately, productivity is not accelerating at the same pace. In short, Hungary is in for a real squeeze. I suspect Pestiside will agree on the political front: there are only two parties with strong representation: the Euro-socialists (ex- communists) and the Nationalist-socialists (ex-anti communists; neither of whom have an answer to the Hungarian population who demand the same wages, work hours, and retirement and health benefits of French and German workers without agreeing to any real increase in productivity or recognizing the gap in skills. Old Europe trade unions fear low wage competition from the new member states. The truth is the new member states are already priced out of the productivity game.

I promise to be more optimistic next time…

Sorry, I should perhaps qualify this, the technical definition of a recession is two quarters of negative growth (or shrinkage). If they go through with the cuts then I think this is quite possible at some stage during 2007.

The worry is that with the debt dynamics this could drag on a bit if things go the wrong way.

This is the sort of shrinkage the US had back in 2000/2001. There is another kind of shrinkage coming at some point of course, the shrinkage caused by population decline. At that stage you will simply need to add productivity and subtract the reduction in the workforce to see what growth will be. At some stage the second factor will dominate, and then the big shrink will begin, unless of course they attract a lot of Ukrainians or Russians or whatever. But anyway they will be far from alone in this.

But we are some years away from all this at this point (2013-15??). As you say the EU coupling momentum (and the technology catch-up factor) more or less guarantees growth, its after this that the tricky part starts.