[Index]
Russian
Geneva, 28 February 2003
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Not to be released before
4 March 2003, 00:01 GMT
Eastern Europe and the CIS are
set to preserve their growth momentum
in 2003
but risks are on the rise
UNECE releases
its Economic Survey of Europe, 2003
No.1
"The considerable uncertainties
surrounding the outlook for the global
and west European economies, and not
least the potential shock waves from
a possible war in Iraq, cast a long
shadow on the short-term outlook for
eastern Europe and the CIS" stresses
Mrs. Brigita Schmögnerová,
Executive Secretary of the United Nations
Economic Commission for Europe (UNECE)
commenting on the latest issue of the
Economic Survey for Europe
just released by the UNECE. "At the
same time, it must be acknowledged that
the east European and CIS economies
demonstrated surprising resilience to
the global slowdown in 2001 and 2002,
thanks to the strong growth of their
domestic demand and, in several cases,
their unexpectedly good export performance."
Despite some slowing down of activity
in eastern Europe and the CIS in 2002,
rates of economic growth in these regions
remained generally higher than those
in western Europe. Aggregate GDP in
the CIS grew by 4.8 per cent in 2002
due to the still significant momentum
from the previous year of rapid growth
and a continuing boom in some of the
Caucasian and central Asian countries
(table
1.1.3). The growth of aggregate
GDP in eastern Europe was lower (3.0
per cent) than in the CIS but was basically
unchanged from the previous year. This
fairly buoyant economic activity in
eastern Europe and the CIS reflected
in the first place a shift from external
to domestic sources of growth: the enduring
strength of domestic demand was one
of the main factors that prevented a
further weakening of output growth.
Such a pattern of growth, however,
is a mixed blessing for the east European
and CIS economies. On the one hand,
the resilience of domestic demand is
a sign of confidence in the future prospects
of these economies on the part of both
consumers and investors. This also reflects
the considerable progress that some
of these countries have made in their
market reforms, as evidenced by the
invitation to eight east European countries
to join the European Union in 2004.
But also in some of the CIS economies,
several years of strong growth have
contributed to rising incomes and levels
of welfare of the population, which,
in turn, have reinforced domestic support
for economic activity.
On the other hand, reliance on domestic
demand as the main engine of growth
is unlikely to be sustainable since
most of the region consists of small,
open economies. With few exceptions,
most east European and CIS economies
are characterized by chronic and large
current account deficits, accompanied
in some cases by fiscal imbalances (the
twin deficit problem); an excessive
shift towards domestically-driven growth
is clearly not an appropriate strategy
for keeping these deficits in check.
Although changes in real net exports
did not generally make a positive contribution
to GDP growth in 2002, one of the surprising
developments during the year was the
strength of east European exports in
the face of the persistent weakness
of economic activity in western Europe:
on average they grew faster than both
western import demand and total world
exports. Moreover, this was the second
consecutive year of such relative strength,
a consequence of which was an increase
in the east European share of west European
markets.
Several factors are likely to have
contributed to this outcome. Since the
start of economic transformation more
than a decade ago, a number of east
European economies have had massive
inflows of FDI, a significant part of
which have been undertaken by large,
export-oriented multinational companies.
These new and expanding capacities exploit
the comparative advantages of these
economies in low-cost labour (particularly,
low-cost skilled labour) as well as
their proximity to the major markets
of western Europe. This fundamental
competitive edge appears to have been
one of the factors that allowed east
European exporters to continue to gain
export market share in some particular
products despite the weakness of western
demand.
In a period of global economic slowdown
- as was the case in 2001 and 2002 -
the importance of eastern Europe's comparative
advantage may have been amplified by
the global squeeze on profit margins,
which has likely prompted multinationals
to accelerate the relocation of part
of their global production volumes to
lower cost countries, including some
east European economies. At the same
time eastern Europe itself is under
pressure from countries offering even
more competitive conditions for labour
cost-saving or located nearer to other
major markets, as suggested by the recent
relocation of some production lines
from eastern Europe to destinations
in south-east Asia.
Overall, the rising market shares
of east European exporters are a medium-term
development reflecting transition-related
changes in the international division
of labour. Due to the nature of their
underlying comparative advantage and
the existing differences in labour costs,
the east European economies are likely
to gain further market shares in west
European and global markets in the short-
to medium-run. In the longer run, however,
comparative advantage is not static
and as development and income levels
in eastern Europe start to catch up
with those in the industrialised countries,
new sources of international competitiveness
will have to be developed via the accumulation
of physical and human capital.
Despite the generally unfavourable
external environment, net capital flows
into eastern Europe generally rose in
2002, largely due to changes in international
investors' perception of relative risk
in emerging markets. The upturn reflects
changes in two main flows: larger volumes
of FDI, and a surge in short-term capital
flows which, in net terms, changed direction
from 2001. At the same time, privatization,
which has been a major attraction for
FDI in eastern Europe in recent years
and an important source of financing
of current account deficits, is nearing
its end in most of these countries.
The elimination of this convenient source
of financing implies the need for alternatives
or for an adjustment in the external
balances of some countries.
On balance, the downside risks, which
have been escalating steadily since
the final months of 2002 and the beginning
of 2003, are probably not fully acknowledged
in the official forecasts for the year
(table
1.1.3), some of which were formulated
last autumn in the context of preparing
the 2003 budgets. The widening fiscal
imbalances in some central European
economies also pose a risk to their
future growth. The countries acceding
to the EU will need to make additional
fiscal adjustment in order to comply
with the EU's fiscal rules. The required
fiscal tightening will inevitably restrain
growth of domestic demand and hence
overall economic growth in these countries.
Although some governments have recently
lowered their forecasts, the official
outlook for most countries in eastern
Europe and the CIS remains fairly optimistic
about growth prospects in 2003. These
forecasts imply aggregate real GDP growth
in eastern Europe of close to 4 per
cent in 2003 and in the CIS by almost
4½ per cent. In Poland, after
a sharp downturn in 2001 and a slow
recovery in 2002, the budget for 2003
is based on the assumption that recovery
will gain momentum in 2003 with GDP
growing by 3.5 per cent; most independent
analysts, however, envisage GDP growth
in the range of 2 to 3 per cent. In
the other central European countries
(the Czech Republic, Hungary, Slovakia
and Slovenia), GDP growth in 2003 is
expected to remain relatively moderate,
between 3 and 4 per cent. By contrast,
strong growth (with GDP rising by some
5-5½ per cent) is expected to
continue in 2003 in the three Baltic
states, the fastest growing region of
eastern Europe for the last three years.
Moderate to strong growth (with GDP
increasing in most cases by some 4 to
5 per cent) is forecast for the majority
of the south-east European economies
but the economic situation - as well
as the risks to the outlook - differ
considerably across countries.
Russia's budget for 2003 was based
on a set of macroeconomic projections
whereby, under different assumptions
about the external environment (in the
first place, the price of crude oil)
the rate of GDP growth was expected
to be in a range of between 3.5 and
4.4 per cent. The most recent forecasts
by independent analysts are even more
optimistic, suggesting GDP growth of
between 4 and 5 per cent. However, recent
developments do not point in the same
direction. Thus, while world oil prices
surged to a two-year high in the early
months of 2003 (a development which
will benefit both Russian exporters
and the economy at large), the significant
weakening of the dollar (in which oil
is priced) against other major currencies
is likely to be detrimental. While the
policy of moderate real exchange rate
appreciation has facilitated Russia's
recent disinflation, it is also likely
to have contributed to the slowdown
in industrial output in the last quarter
of 2002. These somewhat conflicting
trends indicate the uncertainties that
surround the short-term outlook for
the Russian economy.
Ukraine's recovery also lost some
momentum in 2002 and GDP growth is expected
to remain moderate (at some 4 per cent)
in 2003. Apart from the weakening demand
for Ukrainian exports in both Russia
and western markets, this reflects a
continued tightening of monetary policy
with the central bank focusing its efforts
on achieving a fast rate of disinflation.
Some moderation in GDP growth is also
expected in Kazakhstan but, according
to official forecasts, GDP should nevertheless
grow by some 6 per cent in 2003, underpinned
not only by the strength of the oil-related
industries but also by a continuing
recovery in other sectors of the economy.
Moderate to high rates of GDP growth
are expected elsewhere in the CIS in
2003, with official forecasts ranging
between 4 and 7 per cent (table
1.1.3).
For further information please contact:
Ref: ECE/GEN/03/P04