Sir Martin Sorrell: Europe's eastern promise offers a mixed bag of prospects

Economic View: Few commentators believe these European economies will become fast-growth
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The Independent Online

Central and Eastern Europe remains one of the biggest global opportunities, but is a complex region – shaped during the 20th century by two world wars and the fall of the Iron Curtain.

Various aspects of the region's economies are, understandably, overlooked by international investors and companies, including comparative advantages such as proximity to one of the biggest trading regions in the world, with few trade barriers within the eurozone, as well as very high levels of education, technical skills and literacy rates – which in most cases are ahead even of Bric (Brazil, Russia, India, China) markets.

However, few commentators believe that many of these European countries will become fast-growth economies, generating high, single-digit GDP expansion over the next few years. Most believe they will languish at minimal or indeed negative GDP growth for some time to come.

From WPP's perspective, and given our position as marketing advisers to some of the world's largest companies in these and other markets, we believe that this region will grow rapidly within the next two to three years and beyond.

Indeed, Central and Eastern Europe is a key part of our plan for faster-growing markets to contribute 40-45 per cent of group revenues within the next five years, as opposed to the current 30 per cent-plus.

Why this confidence? WPP's six-month financial results announced in late August saw our billings up by 5 per cent to £22.7bn, with revenues up more than 7 per cent to £5.3bn and like-for-like revenues up 2.4 per cent.This performance was despite the relative slowdown of the Bric economies and was buttressed by faster growth in the US and Europe as a whole. While Western continental Europe showed a like-for-like decline of 1 per cent for the first half of 2013, our Central and Eastern European sub-segment achieved solid growth.

So where did this growth come from and why now? It was a mixed picture: countries which demonstrated faster growth than anticipated included Romania and Kazakhstan, though others such as Hungary, the Slovak Republic and Ukraine saw further contractions.

Kazakhstan has shown strong growth, largely credited to the successful harnessing of its natural resources (through considerable investment from foreign companies) as well as economic reform programmes creating a more free-market system.

Romania has a population of 22 million, ranking it second in size in the region after Poland, and putting it in the top 10 European markets. WPP has 22 operating companies in Bucharest alone. Romania suffered more than most during the financial crisis of 2008/09, resulting in the country having to go cap in hand to the International Monetary Fund to bail it out to the tune of €10bn (£8.5bn) in 2011. With this loan came the promise of reform, and reform is clearly on the agenda in Romania with the current government's national investment and job-creation plan, which is looking to attract over €10bn of foreign direct investment into strategic projects throughout the country, including infrastructure, energy and mining – all key pillars to building a successful economy.

However, with Romania having done the hard work through implementing one of the harshest austerity packages of any of the European nations, the government needs to continue to reform the country, making it a more open and attractive investment proposition for global companies. Without this engagement it will lose out to other countries such as Slovenia and the Czech Republic, which do not have the natural advantages that Romania has.

WPP believes Romania has a very real prospect of becoming a major source of growth for this European region. With its high literacy rate, long-established and large universities and a pool of well-educated and motivated talent, it already hosts a number of offshore centres and has the potential to be an important hub for service industries. We, for example, have a hub in Bucharest where we do production work for European-based clients.

To date these latest reforms remain intentions rather than actions, yet we believe that a country as strong as Romania, which has gone through substantial political change, will grasp this opportunity and should regain its rightful place in the Premier League of Europe's growth prospects, rather than stuck towards the bottom in Division One or Two, where it is today.

After all, I would like to see it, being a quarter Romanian.

Sir Martin Sorrell is the chief executive of WPP

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