Recovery: Limp and Battered

For 2011 the wiiw central scenario envisages further improvements in the economic performance of those countries that were still stagnating or contracting in 2010 (Bulgaria, Latvia, Romania, Croatia, Macedonia and Montenegro). However, in those countries that performed reasonably well in 2010 (such as Poland and Slovakia), growth will not accelerate all that much. At a later juncture GDP growth rates will stabilize throughout the region, but they will not return to the levels recorded prior to 2007. The relatively rapid growth in terms of the global output expected in 2011 will not of necessity translate directly into equally robust growth across the countries of Central, Eastern and South-east Europe (CESEE). Growth is expected to remain anaemic – less than 2% and imbalanced - in the euro area, which will remain the CESEE countries’ major trading partner. In 2011, net exports will play an essential and positive role in maintaining GDP growth in many new member states (NMS) where domestic demand continues to be languid (e.g. Czech Republic, Hungary and Romania). In countries whose exports depend on energy and raw materials (Russia and Ukraine), net exports will contribute negatively to overall GDP growth (as imports will also rise owing to currency appreciation). In the few countries remaining, net exports will assume a neutral role in generating GDP growth. At a later stage, the contribution of net exports is expected to drop on a fairly universal scale, reflecting a revival in domestic demand (both consumption and investments) and a deterioration of trade balances. All in all, continuation of growth in 2011 in the CESEE region hinges decisively on foreign demand. In the case of Russia, Kazakhstan and (to a lesser degree) Ukraine, an unpredictable slump in the world-market prices of, and demand for, energy carriers and metals would slow down growth substantially. In the case of the remaining CESEE countries, a renewed weakness of growth in the euro area could well mean immediate cuts in their exports. Those cuts could possibly trigger a new slump in their overall GDP growth. Although quite unpredictable, a renewed growth slowdown in the euro area cannot be ruled out. Failure to resolve the euro area debt crisis in an orderly manner – and in the very near future as well – may lead to another financial-cum-real crisis in the euro area; once again it could spill over to the NMS and the Western Balkan countries. A still greater risk looms large as well should the institutional cohesion of the euro area (and of the whole EU) weaken, the NMS are likely to lose out – both economically and politically. The CESEE region is still included in a larger group of countries that of the ‘emerging markets’. However, the economic performance of the CESEE countries is increasingly at variance with that of the remaining ‘emerging markets’. In terms of overall dynamism, the CESEE countries (in particular the NMS) are looking increasingly similar to the euro area – yet without having achieved the euro area’s levels of development. In most cases, the CESEE countries’ relatively close association with the European Union was to all intents and purposes inevitable. However, that irresistible association (implying a relatively rapid external liberalization of the CESEE countries’ trade and capital flows, for example) may have also borne some unwelcome consequences. One of these consequences may have been their losing out to those ‘emerging markets’ whose external opening up has been much more gradual and cautiously controlled. Various scars left by the 2008-2009 recession, be the victims productive capacities, balance sheets of banks, firms and households or labour markets, will gradually have to heal. In the interim, those scars will impair the growth of household consumption and fixed investment in the business sector in 2011 and afterwards. Moreover, attempts at serious fiscal consolidation, which in many countries would be either untimely or not really necessary, will have an additional impact on the rate of domestic demand growth. In all likelihood, however, in many countries fiscal consolidation will be relatively gradual – also on account of electoral concerns. Accelerating inflation is another challenge. Although to date inflation has been essentially exogenous to most CESEE countries – driven by rising energy and food prices – it could provoke more restrictive monetary policies. These, in turn, could support high capital inflows (carry trade) and even stronger nominal appreciation of national currencies in the countries with flexible exchange rates. A decline in cost-competitiveness and worsening in net exports (in tandem with larger current account deficits) could also ensue in countries with fixed exchange rates owing to inflation differentials with respect to the eurozone. The fact that unemployment is expected to return rather slowly to pre-crisis levels could, however, reduce the dangers of wage-driven inflation and induce more accommodative monetary policies. In conclusion, growth in the CESEE region is expected to stabilize, yet remain rather unimpressive in the coming years - the proviso being that external conditions are not disrupted once again.