In its new special issue on the economies of Central, East and Southeast Europe, The Vienna Institute for International Economic Studies (wiiw) analyses the current economic situation in the region ...as well as development prospects for 2005 and 2006, presenting revised forecasts based on results for the first months of 2005. Brief surveys of the individual countries are added (covering Albania, Bosnia and Herzegovina, Bulgaria, Croatia, the Czech Republic, Hungary, Macedonia, Poland, the Slovak Republic, Slovenia, Serbia and Montenegro, Romania, Russia, Turkey, Ukraine, and China). A short analysis of the ongoing dispute related to the EU budget 2007-2013 as well as an annex with selected indicators of competitiveness and projections of per capita GDP until 2015 are attached. The high growth recorded in 2004 has been generally slowing down in the first months of 2005. The average GDP growth rate for the eight new EU member states (NMS) in the first quarter of 2005 dropped by 2.5 percentage points (to 3.3%), compounded by a marked deterioration of growth in Poland. The growth slowdown is associated with a slow expansion of gross fixed investment; massive declines in the rates of growth of industrial production; quite an abrupt deterioration in industrial labour productivity; and real currency appreciation and a resulting strong rise in unit labour costs. Despite this (and despite growth being weaker than expected in the euro zone), NMS foreign trade continues to perform excellently. Foreign trade has been even more instrumental in generating GDP growth in the first quarter of 2005 than in the past. It should be pointed out, however, that NMS trade with the 'old' EU has grown at a relatively slower pace. The first quarter results confirm our previous assessment of the medium-term prospects in the NMS. GDP growth will generally decelerate to below 4% on average in 2005; it will most probably not accelerate too much in 2006. Given the relatively poor economic performance in the euro zone, there is little that the otherwise constrained fiscal or monetary policies in the NMS can do to change this situation. Much more will depend on the corporate sector's willingness to invest. Growth in 2005 is also slowing down in Southeast Europe - particularly among the region's largest economies Turkey, Romania, Croatia and Serbia. Fiscal consolidation and increasing trade deficits will thus hamper growth which over the biennium 2005-2006 will nonetheless range between 4 and 6%. Only in Croatia will growth be weaker. The prospects for further EU enlargements have taken a turn for the worse in the wake of the recent EU 'constitutional' and budget crises. That notwithstanding, the accession of Bulgaria and Romania is beyond dispute, possibly with a one-year delay. Despite high world market commodity prices, the robust growth in Russia may be a thing of the past. Already in 2004 investment growth was disappointing, reflecting high uncertainty and the deteriorating investment climate. Lagging reforms and huge structural imbalances blur the prospects for sustainable long-term growth. The stimulation of domestic demand through a fiscal relaxation will protract disinflation and induce real appreciation. This will be conducive to higher imports, a lower trade surplus and eventually to slower GDP growth. Following Ukraine's recent explosive growth, things are settling down somewhat, despite some fiscal relaxation. Currency appreciation has adversely affected the trade surplus, while the investment climate has been poisoned by rumours of re-nationalization and the lacklustre programme of the new government. China continues to register extremely rapid GDP growth, despite some slowdown in investment growth. Private consumption is picking up and net exports are rising faster than expected.
The external conditions facing the transition economies slightly improved on balance during the year 2004. The eight new EU member states of Central and Eastern Europe (NMS-8) recorded higher GDP ...growth (5% on average) than in the previous year, largely thanks to expanding domestic demand - in particular of investment (Czech Republic, Hungary and Latvia) and of private consumption (Poland, Slovakia, Estonia and Lithuania). Growth accelerated also in Southeast Europe (except Croatia and Macedonia), as well as in Belarus and Ukraine (Russia's GDP grew by 7% again). The transition economies have thus been one of the most dynamic regions in the world. The NMS have been growing more than 2 percentage points faster than the 'old' EU-15. These countries not only add a certain dynamism to the European economy but put some pressure on the EU reform agenda as well. On the downside, the situation on the labour market remains precarious, robust economic growth notwithstanding. The average rate of unemployment in the NMS is nearly twice as high as in the EU-15 (mainly on account of Poland and Slovakia); in most of Southeast Europe it is even higher, with little prospect for marked improvements any time soon. The latter refers to industry in particular, which - despite a remarkable acceleration of output growth (10% on NMS average in 2004) - continues to shed labour. This implies impressive gains in labour productivity and, given the general wage restraint, in unit labour costs as well. The improving international costs competitiveness of NMS has recently been eroded by appreciating domestic currencies (Hungary, Poland and Slovakia). After a temporary increase in 2004 (largely caused by tax adjustments prior to EU accession and rising energy prices), inflation resumed its downward trend, reaching low single digits in most NMS (except Slovakia) and in the remaining transition countries as well (except Romania, Serbia and Ukraine). Russian inflation has been stubbornly high, fuelled by large inflows of foreign currency, tariff hikes and galloping producer prices. The remaining inflation differential with respect to the eurozone, magnified by a natural appreciation tendency of NMS currencies (frequently stimulated by short-term capital inflows) may lead to competitiveness losses in the future. Given the ongoing productivity and quality improvements this danger is not imminent in most NMS yet. Still the exchange rate developments should be watched closely, not least in the period prior to EMU accession, which in several NMS will probably extend beyond 2010. The need to reduce excessive budget deficits represents another challenge facing several NMS in the coming years. The outstanding feature of last year's economic developments was a boost in foreign trade (or of intra-EU dispatches and arrivals in the case of NMS). NMS exports jumped by more than 20% in current euro terms, somewhat faster than imports (+18%), yet their aggregate trade balance slightly deteriorated (in fact foreign trade contributed positively to GDP growth in Poland only). theless, the export sector of NMS is strengthening - not least thanks to sustained reforms and large FDI inflows in the past few years - and their integration in the European and world economy is increasing. Today, 86% of NMS exports and 72% of imports represent intra-EU trade. Given the high (and rising) export surpluses of Russia and Ukraine - in both cases swelled by rising world market commodity prices - the trade contribution to growth has been positive in these countries as well. After the takeover of EU external trade policies upon accession, especially intra-NMS trade (preliminary estimates suggest an increase by 30% in 2004) and extra-EU trade are booming. Altogether, the NMS enjoy a surplus in trade transactions with the EU, an achievement attributable largely to the high and growing surpluses of the Czech Republic, Hungary and Slovakia (and to a lower deficit in Poland); the separate effect of trade with the EU on GDP growth was most likely positive. In Southeast Europe, trade integration is (with few exceptions such as Bulgaria) still rather low and many countries in the region suffer from huge trade and current account deficits which may not be sustainable (particularly in Bosnia and Herzegovina, and Serbia). The EU accession of eight Central and East European countries on 1 May 2004 has brought few surprises and may generally be considered a success. The accession was well prepared and managed. The direct economic effects of accession on the NMS are difficult to identify economic growth, especially of industry, had speeded up already before May 2004, a temporary increase of inflation was soon successfully contained and domestic currencies strengthened. Net transfers from the EU budget were negligible (less than 1% of NMS GDP), yet inflows of FDI picked up in 2004 again - albeit remaining below the peak of 2000-2002. The GDP growth outlook is fairly robust barring major external shocks, the NMS are expected to grow by 4-5% annually in the coming years (the Baltic States will continue to enjoy even somewhat higher growth) thus maintaining their speed of nominal and real convergence to the 'old' EU. Inflation is converging to eurozone levels as well. The shadow side of this fairly upbeat forecast is the labour market where no substantial reduction of unemployment is expected. Estonia, Lithuania and Slovenia (all already participating in the ERM II) may adopt the euro in late 2006 or early 2007, with the remaining 'high-deficit' NMS following suit during 2008-2010.Also the economic outlook for Southeast Europe is more encouraging now than in the recent past GDP growth will accelerate in most countries (without recurring inflation), but unemployment will remain high. As far as the integration prospects of this region are concerned, Bulgaria and Romania will become EU members in 2007, followed by Croatia in 2008 and with Macedonia the next candidate. The coming two years will be crucial also for the remaining countries of the Western Balkans as a number of exceptionally difficult issues will have to be solved (in Bosnia and Herzegovina, Serbia, Montenegro and Kosovo). If everything goes well (and there are a lot of caveats) the whole region could be in the EU around 2015. However, by that time the issue of Turkey's EU membership will have to be finally decided and a possible application of Ukraine (as well as Moldova) for EU membership will have to be dealt with. In addition, the enlarged EU will simultaneously have to clarify its relations with Russia. These challenging developments will doubtlessly require a new (and this time much more radical) reform of the whole system of EU institutions.
This wiiw report reviews the economic situation in the new EU member states, in the countries of Southeast Europe, in Belarus, Russia and Ukraine as well as in China. For each country, it provides a ...forecast relating to GDP growth, inflation, unemployment and current accounts in 2004 and 2005. The report is supplemented by an analysis of the challenges posed by European integration. The signs of a robust economic upswing in most countries of Central and Eastern Europe are overwhelming. Industrial output, construction, foreign trade and quarterly GDP figures confirm this development. The economic recovery in the 'old EU' (EU-15) has bolstered improvements in the business climate of Central and Eastern Europe. Moreover, in most of the countries in the region, economic growth has outstripped that in the EU-15; it is thus more in line with the comparatively positive growth figures recorded by the global economy as a whole. Central and Eastern Europe, together with Russia, Ukraine and China (the latter country has been included for the first time in our report), create every impression of having integrated fully into the global economy and added to its dynamics. That notwithstanding, if we disregard China, the other countries' contribution to global value-added is minimal. The major new feature is that (in addition to Cyprus and Malta) eight countries in Central and Eastern Europe joined the European Union on 1 May 2004 the so-called New Member States (NMS-8) - the Czech Republic, Estonia, Hungary, Latvia, Lithuania, Poland, Slovakia and Slovenia. A challenge to the enlarged Union's (EU-25) decision-making ability looms large. In the next two years the EU-25 will have to agree on a common financial perspective for the period 2007-2013. Enlargement has substantially widened income disparities within the EU; advancing towards cohesion has thus become a much more arduous undertaking. Enlargement of the euro zone poses another challenge. Of the NMS-8, only Estonia and Lithuania currently meet all the Maastricht convergence criteria. A brief study of foreign trade data reveals that in the Baltic States, foreign trade deficits are very high for goods even more so than for services. The NMS in Central Europe have a much better track record in this respect - or at least, they have re established their good record by recently introducing a series of currency depreciations. In many respects, the South-East European countries awaiting EU membership are heterogeneous. Three of them, Bulgaria, Croatia and Romania, have acquired candidate status; their economies are characterized by relatively high growth. Economic recovery is also visible in West Balkan countries, in spite of political and structural problems. High growth in many of the low-income transition countries should not divert attention away from the shortcomings that still persist to a varying degree. Financial relations between the different types of economic agents are still unsound; the business infrastructure is not fully developed in terms of legislation, public administration and the judiciary system; high unemployment and the lack of social security are a seedbed for poverty, widespread petty crime and political instability. Finally, despite high GDP growth, structural distortions still characterize both Russia and Ukraine, whose economies continue to rely heavily on exports of crude oil as well as raw materials and semi-finished goods.
