"The EU10 are affected by the ongoing global financial crisis, and growth will be slower this year and next due to weak external demand and tight credit conditions," the financial institution said in a statement presenting its latest World Bank EU10 Regular Economic Report which includes a special supplement on EU candidate Croatia.
The EU10 report, published three times a year, monitors macroeconomic and reform developments in the EU10 countries: EU newcomers Bulgaria and Romania, which joined the bloc in 2007, plus Estonia, Hungary, Latvia, Lithuania, Poland, Slovakia, Slovenia and the Czech Republic, EU members since 2004.
The financial turmoil has spread quickly to reach the EU10 countries, including Croatia and credit default swaps have widened, the World Bank said.
According to the bank some countries in the region are experiencing a shortage of liquidity reflected in sharp increases in interbank rates.
Weakness in external demand and tightening credit conditions will likely result in a decline in exports and investment growth, the World Bank said.
While further moderate slowdown appears likely in Bulgaria, the Czech Republic, Poland, Slovenia and Croatia, other countries such as Romania and Slovakia are likely to face a larger slowdown, but also from higher rates of economic growth, the World Bank added.
It noted that in contrast to weaker economic expansion in the rest of the EU10, real GDP growth strengthened in Bulgaria and Romania in the first half of the year.
"Real GDP growth rose to 7.1% in Bulgaria and is likely to have remained strong in the third quarter, thanks to a buoyant harvest," the World Bank said in its report.
It added that growth accelerated to 9.2% in the second quarter in Romania, reflecting strong expansion in private consumption and investment.
In Bulgaria the surplus should remain broadly unchanged at 3% to 3.5% of GDP with the additional fiscal austerity measures adopted by the government, the report also said.
According to the bank, the inflation has peaked in most of the countries from the report but remains elevated. The bank added that it is likely inflation to ease further, because of the declining energy import prices since midyear and an abundant harvest, but uncertainty remains.
"Weak growth will put pressure on living standards, especially in the poorer EU10 countries," Ivailo Izvorski, the principal author of the report, said.
He added that properly funding and improving the targeting of social protection systems in these circumstances is becoming increasingly important.
Regarding Croatia, the World bank noted that appropriate policies taken well in advance to create the adequate liquidity reserves in the banking system helped withstand financial market disturbances.
"A government measure to increase guaranteed deposits’ amount to 56,000 euro as well as the establishment of the Stability Fund by non-bank financial institutions are equally important in these volatile times to secure depositors’ trust and confidence in the financial system," the World Bank said.
It added that for Croatia it is essential to maintain frontloaded expenditure-led fiscal adjustment to address external vulnerabilities as well as inflation.
The bank recommended that Croatia also prepares for the time when financial conditions return to normal not to allow for protracted growth convergence.
