The Economist has revived its R-word index. This attempts to predict whether there will be a recession by counting the number of times the word is used every quarter in the Washington Post and the New York Times.

It won’t surprise many people to know that the index started to rise in the second half of 2007, and that, so far in 2008, it’s rocketed.

It’s not a science, of course, and we could all probably guess the standing of the index anyway – just by doing the same on the PS forums!

Interestingly, perhaps, the index is still lower than prior to earlier recessions. So maybe we’ll get off the hook.

One thing is certain, whether the US or anywhere else slips into a technical recession or not – two quarters of negative GDP growth – growth in most economies (and especially developed economies) is going to slow this year.

Slow down, note – which doesn’t mean the end of the world as we know it, as so many gloomsters seem to enjoy predicting.

It doesn’t mean a 1930’s style depression is inevitable, as so many love to predict as soon as we see a downturn on the way. It doesn’t mean, as someone posted the other day on the PS forums, that UK Inc is finished!

We’ve had US recessions before – we had one at the start of the decade – look what happened to UK house prices since then.

Everyone has a view about what to watch for – the price of gold, the price of oil, the housing market.

All of these factors are in some way meaningful, but the one that always rings the loudest alarm bells, in my view, is the employment figure.

Once we start to see consistent falls in the number of new jobs being created, we can be pretty sure the economy is heading the wrong way.

As yet the employment figures are holding up. So, watch this space.

Assuming then that a slowdown is inevitable, because it is, by even the most bullish assessment, where does that leave the developing economies of central and eastern Europe?

It’s a key point, because it seems reasonable to assume that it’s not a question of whether they will be affected. The question is only by how much.

These economies have seen fabulous growth over the last few years – in some cases (the Baltics), that growth has probably been too fast.

And the driver of the growth has been, overwhelmingly, FDI.

Property markets in these countries have grown at a blistering rate on the back of FDI that has created jobs and a slowly enlarging middle class, which in turn creates demand for more and more consumer goods and ….modern housing.

It’s a simple equation and it’s served the property investor pretty well up to now.

But when we look at where all that FDI has come from, it’s primarily from the developed Western economies.

The obvious question then is this: as a general economic slowdown takes hold in many of these developed countries, will FDI to CEE countries also slow dramatically?

Probably the best way to answer this is to look at what happened last time there was a serious economic slowdown.

But let’s bear in mind that during the last significant economic downturn (2000 – 2002) , the CEE opportunity wasn’t anything like as clear as it is today.

Nowadays, big business investors have proof that the EU enlargement of 2004 really does work. A trend of relocating manufacturing to this region is already established – anyone doing the same is no longer a pioneer.

In short then, the positive pull of CEE as a place to invest is hugely stronger than six, seven or eight years ago.

And this point isn’t made to make unpalatable prospects stick in the throat a little less. Far from it.

OK, so what the effects on FDI in CEE from the fairly brief downturn between 2000 and 2002?

Actually not much.

Few businesses seemed to scrap investment plans, preferring instead perhaps to buy on the downturn.

A 2003 report from the Vienna Institute of Economic Studies, revealed that FDI shrank 50% to central European countries in the first three months of 2002 – even though eight key countries were just two years away from EU accession with all the economic promise that held.

FDI in 2003 was a paltry €7.2 billion, compared to €22.6 billion the year before.

But what, it has since been reported, and what was left out of the equation was reinvested profits. In Hungary alone, for example, in 2002 reinvested profits totalled just under €2 billion – roughly the amount of yearly FDI it had been receiving.

So, effectively, while new FDI shrank, the momentum of previous investments sustained the pace.

And the momentum of FDI going into the downturn had a big impact on how much growth was sustained during the slowdown AND how much the pace of investment picked up coming out of the downturn.

And this is almost certainly likely to be the case this time around. More of this in a moment.

Total FDI in 2000-2002 in central Europe amounted to more than $50 billion, with Poland and Czech attracting the most ($14 billion each), followed by the Slovak Republic ($7 billion) and Hungary ($5 billion).

And as Sam Vaknin Ph.D. wrote in the American Chronicle earlier this month:

The global recession of the early years of this decade ‘…..had little effect on Central and Eastern Europe's traditional export markets.

‘The region was spared the first phase of financial gloom which affected mainly mergers, acquisitions and initial public offerings. Few multinationals scrapped projects, scaled back overseas expansion and cancelled long-planned investments.’

A.T. Kearney's Global Business Policy Council – which is a group of corporate leaders from the world's biggest 1000 corporations - publishes the FDI Confidence Index. This plots FDI intentions of the companies responsible for 70% of worldwide FDI.

And by September of 2002, the index showed CEE countries within the first 25 places globally. Poland beat Japan, Brazil, India and Hong-Kong and immediately followed Australia, for example.

Czech and Hungary - closely together - were found more attractive than Hong-Kong (the gateway for investors into China), the Netherlands, Thailand, South Korea, Singapore, Belgium, Taiwan and Austria.

The report concluded: ‘Europe has become the most attractive destination for first time investments.

‘More than one third of global executives are expected to commit investments for the first time in Europe over the next three years 2003-6 (especially in) Russia, Poland and the Czech Republic.’

And since then, as the American Chronicle points out, a new trend has developed – cross border investments from one developing country into another.

Czech, for example, is responsible for 4% of the FDI going into Slovenia. Slovenia and Bulgaria are investing in Macedonia, Hungary in Serbia, Czech in Romania.

And the fact is that the FDI impetus is much, much stronger this time round?

The latest report from UNCTAD – the UN Conference on Trade and Development – from a few days ago, estimates that FDI globally in 2007 was a record $1.5 trillion ($1.3 trillion in 2006), up on the previous record of $1.4 trillion in 2000.

The financial and credit crisis that began in the latter half of 2007 has not affected the overall volume of FDI inflows, UNCTAD economists reported.

The report concluded:

‘FDI flows to developed countries in 2007 grew for the fourth consecutive year, reaching US$1 trillion.

‘Flows were particularly buoyant in the United Kingdom, France, and the Netherlands. The United States maintained its position as the largest single FDI recipient.

‘The European Union (EU) as a whole continued to be the largest host region, attracting almost 40% of total FDI inflows in 2007.’

(Good news then, too, for UK Inc - not finished just yet!)

‘FDI inflows to developing countries and economies in transition (the latter comprising South-East Europe and CIS) rose by 16% and 41%’

And what of the major recipients of FDI among the EU’s CEE members?

Overall, surely, we would expect to see a dramatic tail off in the latter part of 2007.

In fact, this wasn’t the case.

Overall, the FDI figure was just 2.3% down for all the EU’s ten new members – all but Cyprus and Malta in CEE. The figure went down from $38.9 billion in 06 to $38 billion in 2007.

So far, then, so good.

What we should have seen – a serious FDI downturn – hasn’t happened.

And that is great news for anyone invested in CEE property markets, such as Romania, Czech Republic, Slovakia, Bulgaria and Poland. Because, while a serious and prolonged downturn in the big economies of the West will certainly have a negative effect, that effect looks quite likely to be minimal.

And let’s face it, in some overheating EU markets, like those of the Baltics in particular, a slowdown would be welcome.

What about intentions then?

Well, again, things look fairly optimistic.

Here’s one headlinefrom December 2007, looking at the latest findings of investment intentions, this time from a survey of global executives carried out by management consulting firm A.T. Kearney.

‘Corporate FDI Plans Constant Despite Credit Market Turmoil

‘Study Confirms Shift in Global Economic Power as Corporate Investment Increasingly Targets Developing Nations’

One story went on to summarise the report like this:

‘Troubles in the credit markets are not dampening corporate plans for new foreign direct investments, says the first detailed survey of top executives conducted since the sub-prime crisis began this summer.

‘The assessment of senior executive sentiment at the world’s largest companies found corporate investors optimistic about the prospects for developing nations and increasingly targeting them for more corporate investment in the years ahead.’

And I found this snippet from Bloomberg a couple of days ago even more telling.

East European Buyouts Unhindered by Subprime, Dealmakers Say, was the headline.

‘Financing for takeovers of central and eastern European companies by private investors hasn't been hurt by the subprime-mortgage crisis in the U.S., according to dealmakers in the region.

‘Leverage has become available for the past few years,'' said Piotr Nocen, director of The Carlyle Group in Warsaw.

‘It's still now available on much more favorable terms than in Western Europe or even the U.S.’

The number of private equity deals in central and eastern Europe rose 90 percent to 351 in 2007, compared with 185 the year before, according to research presented by Euromoney Institutional Investor Plc.

The value of deals rose 13 percent to $18.6 billion.

I wonder why that is?

Seems simple really. Financiers, whose whole reason to be is to invest, see this region as a great long term bet – and they’re willing to bet hard cash on that vision.

The emerging economies as the new safe havens indeed!