Poland: Eastern Europe's strongest motor will stall

The flood of grim news over the past year might suggest otherwise, but not all eastern European economies are basket-cases.

Take Poland, the only one to have avoided recession; its annual growth rate rose to 1.1% in the second quarter. Unlike some of its regional peers it has a flexible exchange rate, so a falling currency cushioned the blow.

Its large domestic market means it is less dependent on exports to western Europe than most. It also went on less of a borrowing binge households and firms didn't rack up so much foreign-currency debt so the banking system is in relatively solid shape and credit looser.

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Meanwhile, industrial production growth is recovering and monthly retail sales climbed by an average of 4.5% year-on-year in the third quarter.

Nonetheless, economic growth isn't going to take off now, as Capital Economics points out. Unemployment continues to rise, while constitutional limits on public debt mean the government will have to tighten fiscal policy next year.

It's unlikely that 2010 will see growth of more than 1%, the same as this year. A likely rise in risk aversion, as the global recovery disappoints, also suggests that the Polish stockmarket will still be at its current level at the end of 2010, says CapitalEconomics.