The media love nothing more than a good horror story. And a horror story that's coming to a street near you is the very best kind.

No surprise then that they're having a field day with the current economic crisis.

But we can't really claim the media is exaggerating this time.

However much they might love the script, the fact is it doesn't change one bit that we are on the verge of a slowdown - maybe even a recession in the US.

When the Fed cuts the prime rate 125 basis points in a matter of a few days, something serious is going on.

And for all the talk of decoupling - in other words Asia and all the developing economies being able to carry on relatively unaffected by a recession in the US - we can see now that at least stock investors think that's hooey.

Decoupling myth

We see bad news emerge form the US and the stock markets plunge from Wall Street to Warsaw to Hong Kong.

The consumer markets in China and India are now huge and they may well be able to absorb some of the slack left as the US slows, but the world's biggest economy still hold sway.

It still accounts for over 22% of the entire world economy, according to World Bank estimates. Japan, plus Germany, France, Italy, Spain and the UK, account for around an additional 24%.

So, the big economies DO matter because they are where the customers still are.

US consumers spent about $9.5 trillion in 2007 - almost 600% more than Chinese and Indian consumers put together.

Biggest consumer base on earth

If the biggest customer base on earth starts to contract, we're all going to feel it.

The question then for property investors in central and Eastern Europe is not IF there's a slowdown - there WILL be one, but instead: How much will this slowdown hit these economies AND what effect is that going to have on their property markets?

Surprisingly, perhaps, and despite recent headlines based on forecasts from the World Bank and the European Bank for Reconstruction and Development, the effects are likely actually to be mostly benign.

We can say this for two fundamental reasons:

1) The key economies (by which I mean those PS has targeted as the best for property investors - Slovakia, Romania, Poland, Bulgaria and Czech) are incredibly strong going into the slowdown. So, we'll see a slowing of growth, but it will not be excessive.

2) A slowing of GDP growth and consumer driven growth is exactly what many of these economies - especially Romania and Bulgaria - urgently need.
Basically a slowdown was coming anyway. This way it may well come before we see markets (property markets as well as whole economies) becoming dangerously over-heated.

(Obviously, if the US does go into a deep and prolonged recession and drags much of the rest of the global economy down with it - a sort of 'Richard's armageddon' scenario, for those who follow his forum posts - then nowhere will be immune and nothing we're invested in, probably not even gold. In this case, we'll all just have to simply sit out the cold hard economic winter.)

But how likely is that? Very unlikely.

We've already looked at the effects of a slowdown on FDI into CEE.


But it's worth taking a moment to realise how fast these economies are actually growing.

Huge growth

Poland's economy grew at 6.5% in 2007, the fastest for a decade. Romania will be somewhere around 6%. Bulgaria is expected to be 6.2%. The Czech Republic around 6%. And the truly outstanding Slovak Republic is expected to have grown by 9% in 2007.

These are very, very impressive figures and a measure of just how much growth momentum there is in these economies.

But with such pace (usually, at least) come some negatives, most notably inflation and current account deficits, which of course have to be financed somehow.

And just as the mighty US deficit needs foreign cash to support it, so do those CEE economies with big deficits. That cash is likely to become increasingly harder to attract as investors look for safety. That means it'll cost more.

(Slovakia might seem the odd man out here, with great growth and under control inflation AND a healthy current account. But Slovakia too needs customers for all those cars its turning out).

We've already seen some of the effects of this as some CEE currencies have weakened - the leu in particular is down around 20% against the euro in six months. If you're a Romanian with a euro linked mortgage, that can't help but hurt.

Sounds bad?

Well, not so terrible actually.

Let's put things into perspective.

The European Bank for Reconstruction and Development has cut its 2008 growth forecast for eastern Europe to 5.0-5.5% from 6.1% entirely due to the global credit crisis.

5.5% GDP growth is hardly a disaster! Even 5% growth would be great.

Put it into context - let's be optimistic and assume the UK makes 1.5% this year. What about the US? 1.5%, 1%? Anyone's guess really - but few would bet on much more. Germany, France - are they really likely to do better than 1.5%? Italy will barely register any growth. And Spain's GDP growth rate is almost certain to plummet.

Suddenly 5% sounds pretty fine!

And the EBRD points out in its forecast this week something we at PS have long argued:

That these economies ...'... are less vulnerable than other emerging economies because they benefit from the extra economic security offered by European Union membership. Investors assume greater risks than elsewhere because membership brings clear development perspectives and outside financial scrutiny.'

Bingo!

That's the key difference with these markets.

And it's the one that we (sound of own trumpets blowing) said way back in 2003 (when Eastern European Property Secrets was first published) would make all the difference to property investors.

Here's a demonstration of how important this key strength it is in concrete terms.

In 2008 Romania will receive almost $1.5 billion in EU structural funds to improve its infrastructure. A massive sum.

And this, it's fair to say, is the kind of backing that last year drew net investments of €460 million into the country's stocks and bonds markets - more than twice the previous year's net sum.

Overall, foreigners bought €2.36 billion worth of Romanian stocks and bonds, up from €1.123 billion the year before. And the net the balance shows people and funds are buying and keeping their money in.

Turbo-charged growth is seen everywhere you look.

Mortgage penetration rates relative to GDP in all these countries might still be low, but they are growing at staggering rates of 50% and more.

Bulgaria's mortgage market grew by 64% in 2007. The size of Poland's market increased by 50%. The Czech market grew in value by 41%, year-on-year, in 2007.

When you see growth rates of this ilk - doubling, even 50% growth - it's almost certainly time for a period of more measured growth.

Slowdown needed

So, a slowdown of a few percentage points in overall GDP growth is - it's worth repeating - exactly what most of these economies need.

A slowdown will allow the Polish government to continue saying 'no' to inflationary wage demands from public workers, as it is currently doing.

A slowdown will enable the huge wage rises we've seen in some sectors of the Romanian economy slow and fall more in line with raised productivity, allowing the country to be competitive on salaries for longer.

And, if a few hundred thousand Romanians return home from Spain and Italy because work dries up there for them, then this will also help cool wage inflation. The same is true of Poles in the UK or Holland or Ireland.

Sure, this probably will slow the huge growth we've seen in property prices - but how much more healthy and stable it is in the longer term.

Bucharest's finance ministry forecasts GDP growth of 5.9% until 2010, but the trend will be gradually downward.

Here's what it says about this growth: '...against the background of improved internal and external economic competitiveness, which will result in a high export pace, in production matching better demand and in reducing the share of the current account deficit within GDP.'

I think that's what everyone else calls 'sustainable growth'.

And that for property investors, eyeing the longer term, is far better than a blistering pace right now.