Add to cartThe Central, East and Southeast European (CESEE) economies will experience on average a minor rebound of economic growth to 1% in 2010 which will speed up to 2.5% in 2011 and 3.5% in 2012. GDP growth will be higher in the CIS countries and in Turkey, about average in the Central European NMS and lower in the SEE countries and the Baltics. Growth is currently driven mostly by exports which should outweigh the dampening effects of the austerity measures. Whether the countries will actually benefit from the global trade recovery depends on their exchange rate regime and the strength of their industrial sector. Investment and household consumption will recover in the subsequent years. These are the main results of the new medium-term forecast for the region published by the Vienna Institute for International Economic Studies (wiiw).
Foreign demand: only the fittest will profit from the trade rebound
The mild improvement in the international environment has helped to uplift the mood among the CESEE exporters. In 2010, exports are likely to be the main growth driver throughout the region, in many cases contributing to an improvement in external balances. The latest data reveal a return to about 80 - 90% of pre-crisis export levels. Transport equipment, metals, energy products, chemicals, machinery and equipment are currently among the region's most successful export goods. Countries with flexible exchange rate regimes and a stronger industrial base appear to be benefiting most from the current international trade rebound. They are expected to record growth above the regional average (yet still below pre-crisis levels).
Growth patterns
The previously overheated growth rates in excess of 7% on regional average in 2007 were followed by a severe cooling-down to some 3.5% in 2008 and a steep drop to no less than -6% in 2009. We expect a minor rebound in the order of 1% for the year 2010. In a rather optimistic scenario, our average forecasts predict a pick-up of growth to about 2.5% in 2011 and approximately 3.5% in 2012 (see Table). Growth is mostly driven by exports and regained competitiveness. In subsequent years, investment and household consumption will gradually pick up. In most countries of the region, previously postponed investments will be finally put into effect and household consumption will show signs of life after the crisis as well.
Differentiation among country groups
The CIS countries are expected to register the strongest performance over the forecast period. This upswing will be mainly driven by the recovery in global commodity prices (especially for oil and steel). The Central European new EU member states have improved their external competitiveness - via devaluation and/or cuts in employment. On account of their solid industries, they profit most from the ongoing recovery in global trade. However, their growth prospects are constrained by the anaemic growth performance in their main export market - the eurozone. Prospects for recovery are weakest in the Baltic States and the countries of Southeast Europe. Their general reliance on fixed exchange rates has prevented an improvement in external competitiveness. Furthermore, their weak industrial sectors remain an obstacle to export-led growth.
Unemployment still on the rise
Most CESEE countries have been recently shedding labour and unemployment is on the rise - a belated consequence of the crisis. In the Western Balkans, significant employment cuts have so far been mostly averted, but they might well come to the fore in the near future. Labour market deterioration - in tandem with the ongoing 'credit crunch' and austerity measures - is suppressing consumer demand almost everywhere (except in the CIS and Turkey).
Medium-term challenges
The recent surge in CESEE budget deficits reflects primarily the recession-induced shortfalls in tax revenues rather than a rise in expenditures. However, funding deficits under the current conditions is becoming costlier. The fiscal consolidation measures being envisaged might well increase the drag on domestic demand (first and foremost in the NMS). A permanent tightening of financial conditions and a sustained need for deleveraging will most likely result in slower capital accumulation in the years ahead. Furthermore, as a consequence of the crisis, persistently low employment levels might result in human capital losses. The slower growth will also have an impact on the region's long-term prospects of convergence. As a result of the crisis, the average CESEE country might lose close to a decade in the process of income catching-up.
Special section on longer-term growth prospects
The CEE economies are adjusting to the effects of the crisis in the West. Those adjustments are slowing down economic growth and suppressing the speed of convergence. Unless the 'old' EU starts growing faster than in the recent past, the long-term growth in the CEE countries will not be very spectacular either.
The secular weakness of growth in the EU/euro area has its roots in the basic paradigms of EU economic policy-making. Not only does the acceleration of growth depend on changes in those paradigms, but the very preservation of the EU, which is exposed to ever stronger centrifugal forces, may also be at stake. It is in the best political and economic interests of the NMS to help avert such an eventuality, while helping to make the Union's architecture more resilient and conducive to faster growth. One issue relates to the way in which monetary policy has been defined and pursued in the euro area. It is argued that the principle 'one size fits all' on which this policy rests supports deflationary/stagnation tendencies in low-inflation/low-growth countries and bolsters booms/inflation in high-inflation/high-growth countries. Whereas Germany has fallen victim to this policy, in a number of other countries this policy fed credit and import booms. Diverging trends in unit labour costs, external competitiveness and external balances are the other side of the ECB single monetary policy. Germany has been running increasing external surpluses; its partners increasing deficits. Worse still, the German policy has supported this trend as it allegedly helps to reduce unemployment. The 'beggar-thy-neighbour' policy turns out to be harmful to Germany itself because it suppresses domestic demand more than it helps advance external surpluses. Weak overall growth in Germany is the result. The external surpluses mirror the spiralling debt of the external deficit countries. As that debt proves unserviceable, the German government is forced to take it over in order to save the country's financial institutions.
The intensity of the centrifugal forces within the euro area (and generally in the EU) should be dampened by closer coordination of the member states' fiscal and wage policies. In particular, it may be useful to demand that growing labour productivity be matched by wages at the national level. In addition, it should be possible to institute 'excessive external surplus procedures' against countries that generate large net exports at the expense of cuts in domestic consumption. We also argue that, until the mechanisms are in place to limit the divergences in unit labour costs and external imbalances, it is advisable for the NMS to retain their own currencies and floating exchange rate regimes.
The Stability and Growth Pact is also in need of modification. The 3% fiscal deficit/GDP mark may prevent the efficient operation of automatic stabilizers that today are rightly considered vital under cyclical growth slowdowns. Furthermore, the Pact's insistence that in the medium term the budgetary positions should be close to balance or in surplus is not consistent with economic reality. Attempts to observe that requirement are doomed to failure whenever the private sector's propensity to save is larger than its propensity to invest in real (fixed) productive assets. Under balanced external accounts, a permanent fiscal deficit may be a secular necessity. Problems related to rising public debt may also need to be addressed. For the euro area these problems could be rendered far less serious than is often believed.
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Monthly Report No. 10/2012 (by Rumen Dobrinsky, Doris Hanzl-Weiss, Gabor Hunya, Sebastian Leitner, Leon Podkaminer, Sandor Richter and Hermine Vidovic) Leon Podkaminer (ed) wiiw Monthly Report No. 10, October 2012 46 pages including 20 Tables DETAILS |
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What went wrong in Slovenia and how to get out of the mess? (by Joze P. Damijan) wiiw Seminar Series 'EU in Crisis' 08 October 2012, 5 p.m., Venue: wiiw, 1060 Vienna, Rahlgasse 3 DETAILS |
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Monthly Report No. 11/2012 (by Vasily Astrov, Vladimir Gligorov, Peter Havlik, Mario Holzner, Olga Pindyuk and Hermine Vidovic) Leon Podkaminer (ed) wiiw Monthly Report No. 11, November 2012 40 pages including 18 Tables DETAILS |
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Albania: Rainfall export growth (by Mario Holzner) in: Will Exports Prevail over Austerity?, wiiw Current Analyses and Forecasts No. 6, July 2010, pp. 110-112 DETAILS & BUY |
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Baltic States: Everything for the euro? (by Sebastian Leitner) in: Will Exports Prevail over Austerity?, wiiw Current Analyses and Forecasts No. 6, July 2010, pp. 91-98 DETAILS & BUY As expected, in both Latvia and Lithuania GDP will continue to decline throughout 2010, falling by 3.5% and 1.5%, respectively. Domestic demand is shrinking after the local housing and credit-driven consumption bubbles burst, which led to a dramatic surge in unemployment and a sharp decline in real wages. Both households and enterprises are in the process of deleveraging. Not least owing to the massive austerity measures adopted by both governments, deflationary pressures are strong. GDP growth will only pick up slowly: in Latvia by 0.7% in 2011 and 2% in 2012, and in Lithuania, by 1.5% in 2011 and 2.5% in 2012. In Estonia similar developments are to be observed; the outlook, however, is somewhat rosier. The introduction of the euro on 1 January 2011 may bring about a stabilization of private investments and FDI inflows. Since private demand will remain rather sluggish throughout the forecast period, Estonia - like its Baltic neighbours - is clinging to the hope of a sustained revival of external demand. GDP is expected to grow by 0.5% in 2010, while an upswing of 2.5% is expected for 2011 and 3.5% for 2012. ...more |
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Bosnia and Herzegovina: Downers and uppers in moderation (by Josef Pöschl) in: Will Exports Prevail over Austerity?, wiiw Current Analyses and Forecasts No. 6, July 2010, pp. 113-116 DETAILS & BUY Bosnia and Herzegovina experienced a relatively modest GDP decline, but the recovery may remain modest as well. In recent months, manufacturing has benefited from the rise in metal prices, but the contraction of the construction sector continues and the relative weight of both sectors is insufficient to give the economy a vigorous push in one or the other direction. The times of easy funding of huge current account deficits may be over, and this is likely to dampen the growth of both investment and consumption. ...more |
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Bulgaria: In the trap of macroeconomic mismanagement (by Anton Mihailov) in: Will Exports Prevail over Austerity?, wiiw Current Analyses and Forecasts No. 6, July 2010, pp. 63-66 DETAILS & BUY The Bulgarian government has grossly mishandled the crisis thus prolonging and deepening the economic slump in the country. The most damaging procyclical fiscal step has probably been the curbing of public investment. The economy fell into a largely self-inflicted vicious circle of economic downswing and swelling fiscal imbalance. The short-term outlook for the Bulgarian economy remains skewed towards the downside and GDP will stagnate at best in 2010. ...more |
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China: Economy fast on track (by Waltraut Urban) in: Will Exports Prevail over Austerity?, wiiw Current Analyses and Forecasts No. 6, July 2010, pp. 134-141 DETAILS & BUY |
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Croatia: Another year of recession (by Hermine Vidovic) in: Will Exports Prevail over Austerity?, wiiw Current Analyses and Forecasts No. 6, July 2010, pp. 99-102 DETAILS & BUY 2010 will be another year of recession in Croatia. Fiscal constraints and high foreign indebtedness constitute a major obstacle to financing public investment projects. Employment will continue to contract, possibly triggering a further decline in household consumption. The expectations are that GDP growth, might only rebound in 2011, provided foreign demand for both goods and services increases. ...more |
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The Czech Republic: Fragile recovery (by Leon Podkaminer) in: Will Exports Prevail over Austerity?, wiiw Current Analyses and Forecasts No. 6, July 2010, pp. 67-75 DETAILS & BUY A muted recovery in the Czech Republic in 2010 hinges on the performance of foreign demand. The economy has remarkable buffers that permit the active pursuit of a more expansionary fiscal policy. Under these conditions, the quest for fiscal consolidation and a certain passiveness on the monetary front affords the economy still greater insulation from fiscal risks and those posed by monetary instability, yet leaves it at the mercy of foreign trade developments. Growth could accelerate in 2011 as fiscal policy will probably relax. ...more |
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Hungary: New government's visions cut to size (by Sandor Richter) in: Will Exports Prevail over Austerity?, wiiw Current Analyses and Forecasts No. 6, July 2010, pp. 71-75 DETAILS & BUY |
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Kazakhstan: On track of steady recovery (by Olga Pindyuk) in: Will Exports Prevail over Austerity?, wiiw Current Analyses and Forecasts No. 6, July 2010, pp. 130-133 DETAILS & BUY |
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Macedonia: Stability preserved (by Vladimir Gligorov) in: Will Exports Prevail over Austerity?, wiiw Current Analyses and Forecasts No. 6, July 2010, pp. 103-105 DETAILS & BUY |
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Montenegro: Another year of negative growth (by Vladimir Gligorov) in: Will Exports Prevail over Austerity?, wiiw Current Analyses and Forecasts No. 6, July 2010, pp. 117-119 DETAILS & BUY |
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Poland: Solid but moderate growth (by Leon Podkaminer) in: Will Exports Prevail over Austerity?, wiiw Current Analyses and Forecasts No. 6, July 2010, pp. 76-79 DETAILS & BUY |
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Romania: Desperate austerity (by Gabor Hunya) in: Will Exports Prevail over Austerity?, wiiw Current Analyses and Forecasts No. 6, July 2010, pp. 80-83 DETAILS & BUY The GDP growth forecast for Romania has been revised to -1% in 2010 due to the negative effects of the recent fiscal austerity on consumption and investment. The shaken political power of the ruling coalition hinders reforms that are necessary to raise the efficiency of public services. With IMF support in place and exports recovering, external financing will remain adequate to avoid a more severe crisis. ...more |
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Russia: Consolidated yet unspectacular recovery (by Peter Havlik) in: Will Exports Prevail over Austerity?, wiiw Current Analyses and Forecasts No. 6, July 2010, pp. 123-125 DETAILS & BUY The Russian economy started to recover from the crisis in late 2009. The crisis has not been seized as an opportunity to overhaul economic policies; the strategic goal of economic diversification and modernization is slipping out of reach. Fragile signs of recovery include a modest increase in output, a rise in export revenues, the stabilization of inflation and the exchange rate appreciation in early 2010. The current forecast reckons with both private consumption and investment growing faster than GDP; the latter will grow by around 4% per year over the period 2010-2012. The current account surplus will drop to below 3% of GDP by 2012. Annual CPI inflation will remain in single digits and the budget deficit will gradually revert to a surplus once again. Demographics are mitigating the adverse effects of the crisis on employment as the supply of domestic labour is shrinking. ...more |
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Serbia: Slow recovery with depreciation (by Vladimir Gligorov) in: Will Exports Prevail over Austerity?, wiiw Current Analyses and Forecasts No. 6, July 2010, pp. 120-122 DETAILS & BUY In Serbia, prospects point to a slow rate of recovery mostly driven by improvements in the trade balance. That, however, has its limits because the tradable sector is rather small and, given declining investments, export capacity in the short term, it also has its limits. The government intends to sell Telecom and invest the money in infrastructure in the hope that this will lead to a rise in foreign investments in the tradable sector. As wages are quite low in euro terms, better and cheaper access to external markets could support a speed-up in growth. The risk, however, is that the pressure to support current consumption may lead to revenue from privatization being spent rather than invested. In any event, slow recovery, if not stagnation, over the medium term seems the most probable outlook. ...more |
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Slovakia: Export-driven growth, but rising unemployment (by Zdenek Lukas) in: Will Exports Prevail over Austerity?, wiiw Current Analyses and Forecasts No. 6, July 2010, pp. 84-87 DETAILS & BUY GDP growth in Slovakia has been largely the result of a revival in external demand supported by improved competitiveness. Apart from the depreciation of the Slovak currency (i.e. the euro), the export expansion has been driven by a strong fall in unit labour costs coupled with rising labour productivity and falling producer prices. An increase in the unemployment rate to an average level of 15% (LFS) is the shadow side of those developments. If the euro remains weak and ULCs low, GDP growth may expand by above 3% in 2010. The main challenges for the new government relate to rising unemployment and the escalating general government budget deficit (about 7% of GDP in 2010). ...more |
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Slovenia: Strenuous recovery after severe recession (by Hermine Vidovic) in: Will Exports Prevail over Austerity?, wiiw Current Analyses and Forecasts No. 6, July 2010, pp. 88-90 DETAILS & BUY |
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Turkey: Recovering and reconnecting (by Josef Pöschl) in: Will Exports Prevail over Austerity?, wiiw Current Analyses and Forecasts No. 6, July 2010, pp. 106-109 DETAILS & BUY |
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Ukraine: Exports to the rescue (by Vasily Astrov) in: Will Exports Prevail over Austerity?, wiiw Current Analyses and Forecasts No. 6, July 2010, pp. 126-129 DETAILS & BUY |
