EMBARGO
Not to be released before
9 December 2003, 00:01 GMT
The short-term economic
outlook for Western Europe, North America,
Eastern Europe and CIS
UNECE releases the
Economic Survey of Europe, 2003
No. 2
Geneva, 5 December 2003 - There
are increasing indications of a strengthening
global economic recovery during 2003.
This is reflected in improved business
and consumer confidence, favourable
profit expectations in international
equity markets and rising indicators
for industrial and services activity,
as emphasized in the Economic Survey
of Europe just released by the
United Nations Economic Commission for
Europe (UNECE).
There are marked regional
variations in economic growth in 2003.
The United States has remained the main
engine of global economic growth. But
there was also a surprisingly strong
rebound of economic growth in Japan
and growth has also been strong in Asian
emerging markets, notably China. In
contrast, Western Europe is much behind
in the international business cycle,
though economic activity picked up somewhat
in the third quarter. In Eastern Europe
and the CIS, growth has remained buoyant
despite the deteriorating external economic
environment, which was offset by the
robust growth of domestic demand.
Economic growth is
expected to strengthen in all major
regions of the global economy in 2004,
with a continued significantly below
average performance in Western Europe.
Growth in Eastern Europe will continue
to be considerably stronger than in
Western Europe.
The sustainability
of the global recovery hinges notably
on an improved situation in the labour
markets, for which there are currently
only tentative indications. But there
are other major downside risks related
to the realignment of exchange rates
of major currencies and the large external
imbalances in the world economy.
(i) Western
Europe and North America
In the United States,
the recovery gained considerable momentum
in 2003, driven mainly by expansionary
monetary and fiscal policies and the
gain in price competitiveness stemming
from the depreciation of the dollar.
In late September 2003, when the Survey
was finalized, real GDP in the United
States was forecast to increase by somewhat
more than 2.5 per cent in 2003 compared
with the preceding year. But against
the background of the buoyant growth
in the third quarter of 2003, it is
now expected that the outcome will likely
be some 3 per cent. The stronger cyclical
momentum will carry over into 2004,
when real GDP is expected to rise by
some 4 per cent (table
1). Against this background, baseline
forecasts assume a gradual withdrawal
of the sizeable monetary stimulus in
the course of 2004.
In the euro area,
economic activity is expected to remain
very sluggish in the second half of
2003. This reflects persistently weak
domestic demand and the restraining
effects on exports of the sizeable real
appreciation of the euro in an international
economic environment, which is still
relatively weak. Forecasts of growth
in the euro area have been lowered to
a mere 0.5 per cent in 2003. This very
modest outcome reflects not only persistent
economic stagnation in Germany but also
a pronounced cyclical slowdown in France
and Italy and in several of the smaller
economies in the euro area (table 1).
Economic growth in the remaining three
EU members outside the euro area should
remain significantly above the euro
area average. Taking into account the
performance of the non-EU economies,
real GDP in Western Europe is expected
to increase by just 1 per cent in 2003.
Overall, the prospect
is for a relatively lacklustre cyclical
upturn, supported by low interest rates,
the favourable impact of falling inflation
on real personal disposable incomes
and household spending, some inventory
rebuilding, and the expected gradual
improvement of the external environment.
Given the weak rate of output growth,
however, the situation in the labour
markets will hardly improve and this
will dampen consumer confidence.
Against this background,
current forecasts are for only a moderate
acceleration of economic growth in the
euro area in 2004, to an average annual
growth rate of somewhat less than 2
per cent. For Western Europe as a whole,
the national forecasts add up to an
aggregate growth rate of 2 per cent,
reflecting the continuing stronger cyclical
momentum outside the euro area.
Can the
recovery be sustained?
The improved global
economic outlook is dependent on the
United States maintaining its role as
the engine of growth for the world economy.
The problem with this scenario is that
it will accentuate the already huge
external imbalance of the United States
and increase the risks of disruptive
adjustments of capital flows and exchange
rates of the major currencies. This
points to the need to create a more
conducive environment for growth of
domestic demand in the rest of the world
to better accommodate the external adjustment
process in the United States. While
the depreciation of the dollar is part
and parcel of the necessary adjustment
required of the United States, the burden
has so far fallen disproportionately
on the euro area, given the exchange
rate policies pursued in Asian economies.
On the other hand, persistent weakness
of euro zone domestic demand also puts
disproportionate emphasis on the dollar
exchange rate as a means of adjustment.
There are several
other important downside risks facing
the United States economy. The recovery
has so far not led to any significant
improvement in the labour market, and
a continued "jobless recovery" could
erode consumer confidence and dampen
household spending, which has been the
mainstay of economic growth even during
the cyclical downturn. Consumer spending
could also be adversely affected by
a further rise in long-term interest
rates, especially given the very high
levels of household debt. This could
trigger an end to the housing boom with
concomitant downward pressure on house
prices and adverse wealth effects. In
any case, rising interest rates are
bound to restrain consumer spending,
inter alia, because of their adverse
effects on mortgage refinancing, which
has been a major source of additional
spending power over the past few years.
Rising long-term interest rates would
also affect business investment, the
future strength of which is in any case
uncertain because of the considerable
margins of excess capacity. A weaker
than expected recovery would also risk
frustrating the currently optimistic
profit expectations, reflected in the
surge in equity prices during the first
three quarters of 2003, with associated
risks of negative wealth effects on
aggregate demand.
In the United States,
both monetary and fiscal policy have
responded forcefully to the progressive
weakening of economic activity. The
federal funds rate is now only 1 per
cent and it is clear that the margin
for conventional monetary policy measures
to stimulate economic activity is now
largely exhausted. The fiscal position
has deteriorated significantly, leaving
little scope for additional expansionary
measures and raising concerns about
its sustainability in the medium and
longer term. There is also the persistent
risk of adverse reactions in the capital
markets to the large "twin deficits"
with concomitant negative effects on
interest-sensitive expenditure.
In the euro area,
there is still scope for a further relaxation
of monetary policy, and this is desirable
in view of the moderate outlook for
growth, forecasts of inflation falling
below 2 per cent, and the fact that
the earlier relaxation of monetary policy
was largely offset by the sizeable real
appreciation of the euro. As regards
fiscal policy, at the current juncture
it would be counterproductive to prevent
the automatic stabilizers from operating
fully and to enforce procyclical policies.
Although it has to
be acknowledged that insufficient effort
was made during the good years to bring
public finances in line with the Maastricht
criteria, and so provide a cushion against
adverse shocks, the present is hardly
an appropriate time to make up for previous
sins of omission.
(ii) Eastern
Europe and the CIS
Having demonstrated
resilience to the global slowdown, Eastern
Europe and especially the CIS are poised
to remain the most dynamic parts of
the UNECE region. However, the outlook
for 2003 as a whole in Eastern Europe
has deteriorated somewhat since the
assessments made at the beginning of
the year. The more optimistic expectations
about the economy of the euro area failed
to materialize and in some east European
economies growth has fallen below expectations.
Growth in many of the region's economies
in 2003 was predominantly consumption-led
but this may prove to be unsustainable
unless the recent modest recovery in
business fixed investment gains momentum
and leads the way to a healthier structure
of output growth accompanied by further
productivity improvements and job creation.
There are uncertainties about export
growth in the short run in view of the
dim prospects for a west European recovery
and the increasingly strong competitive
pressures coming from Asian producers.
According to the most
recent forecasts, aggregate GDP in the
east European region is expected to
increase by 3.6 per cent in 2003 as
a whole, compared with the 3.9 per cent
forecast at the beginning of the year
(table
2). This mainly reflects the lowering
of forecasts in some of the central
European economies, in particular the
Czech Republic, Hungary and Slovenia
(prompted, in turn, by their worse than
expected performance in the first half
of the year). Growth forecasts were
lowered also in Estonia and Romania.
In other countries such as Bosnia and
Herzegovina and Serbia and Montenegro,
GDP growth for the year as a whole is
also expected to fall short of earlier
forecasts. In contrast, Poland's economy
(with a considerable weight in aggregate
regional output) has been recovering
faster than expected, and there has
been a slight upward revision in the
GDP forecast for the year as a whole.
Similarly, the official forecasts for
Lithuania and for Latvia have also been
raised.
The speed of the recovery
in the CIS region in the early months
of 2003 has prompted upward revisions
of growth forecasts. According to the
latest estimates, aggregate GDP in the
CIS should grow by 6.3 per cent in 2003
as a whole, substantially above the
4.4 per cent forecast at the beginning
of the year (table 3). Russia's GDP
is expected to grow by some 6 per cent
(or even more) in 2003, which is 1.5
percentage points above the January
forecast. Growth forecasts have been
raised in many of the other CIS countries,
in particular Armenia, Kazakhstan and
Ukraine, among others. If the present
rates of growth continue through the
end of the year, the growth of aggregate
GDP in the CIS in 2003 as a whole may
well exceed these revised forecasts.
The east European
forecasts for 2004 generally assume
a more favourable external environment
than in 2002 and 2003, and in particular
a more solid recovery in Western Europe.
Consequently, the rate of growth of
the region's aggregate GDP is expected
to rise to 4.4 per cent (table
2).
In central Europe
it is expected that the strengthening
of west European import demand, coupled
with the positive effects of EU accession
on business and consumer sentiment may
well lead to stronger growth next year.
The Polish forecasts for 2004 envisage
an acceleration of GDP growth to some
5 per cent, based on the assumption
of a further strengthening of the export-led
recovery in the manufacturing sector
and a notable revival of private fixed
investment. In Hungary, the expected
strengthening of GDP growth (to 3.5
per cent) presupposes improved competitiveness
and profitability resulting from wage
moderation and rapid productivity growth,
leading to a stronger recovery of business
investment and a revival of FDI inflows.
The forecast also assumes a significant
tightening of fiscal policy - in order
to deal with the twin deficit problem
- while rising net exports are expected
to offset the expected deceleration
of private and public consumption. In
Slovakia solid growth is expected to
continue next year building on dynamic
external demand, the confidence-enhancing
effects of EU membership, and structural
reforms focused on improving the fiscal
position and providing better work incentives.
The forecast of GDP growth in the Czech
Republic in 2004 is more cautious (2.8
per cent) in view of the difficult policy
choices related to the threat of unsustainable
twin deficits.
The forecasts for
the Baltic States in 2004 are sanguine,
with rates of GDP growth expected at
around 6 per cent, comparable to those
in recent years. Growth in south-east
Europe is expected to pick up to 4.6
per cent, although differences in performance
among the individual countries are likely
to remain considerable.
There are, however,
serious downside risks to these rather
optimistic forecasts. In the short run,
the most serious risk for east European
growth in general would be another delay
to recovery in Western Europe. In addition,
if the efforts to consolidate public
finances in central Europe fail to arrest
the current fiscal expansion, this may
provoke a tightening of monetary policy
(driven by the policy effort of meeting
the Maastricht targets), with negative
consequences on economic activity. In
the longer term, growth in the region
will be decisively influenced by the
progress achieved in implementing key
structural reforms, particularly of
the financial, labour and product markets.
In the CIS, some moderation
of growth rates is expected in 2004,
with aggregate GDP increasing by some
5 per cent (table
3). This reduction in the average
rate of GDP growth reflects expectations
of some slowdown in the region's largest
economies (in the first place, Russia),
which, in turn, is largely related to
uncertainties surrounding the external
environment. The government agencies
responsible for preparing economic forecasts
for Russia produced a range of scenarios
for 2004, with the expected rate of
GDP growth ranging from 3.8 per cent
to 5.2 per cent, depending on the future
of world oil prices. The latest forecasts
are more optimistic, suggesting that
the rate of GDP growth rate should be
in the upper end of this range or even
higher. Russia's public finances are
expected to continue to remain in surplus
(which as of next year will be allocated
to a special stabilization fund), while
monetary policy will remain moderately
expansionary, trying to strike a balance
between the policy goals of gradual
disinflation, on the one hand, and the
prevention of a strong real appreciation
of the rouble, on the other. Real GDP
in Ukraine is forecast to grow by 4.8
per cent in 2004, which - in contrast
to Russia - is at the lower end of the
earlier range of forecasts. Economic
growth should remain strong (at around
7 per cent) in Kazakhstan, albeit below
the average pace for the period 2001-2003.
Rates of GDP growth ranging between
4 and 7 per cent are expected for most
of the other CIS economies.
For further information
please contact:
UNECE Economic
Analysis Division
Palais des Nations
CH - 1211 Geneva 10, Switzerland
Phone: +41(0)22
917 24 92
Fax: +41(0)22 917 03 09
E-mail: [email protected]
Web site: http://www.unece.org/ead/survey.htm
Ref: ECE/GEN/03/P11