EMBARGO
Not to be released before
22 February 2005, 00:01 GMT
Outlook for 2005:
Continued growth in Europe and the CIS
but at significantly different speeds
UNECE launches its Economic
Survey of Europe 2005 No. 1
Geneva, 18 February
2005 - The short-term outlook for
Europe and the CIS is for economic growth
to continue in 2005, albeit at significantly
different rates in the major subregions.
The euro area will continue to lag behind
the other major regions of the world economy.
Within Europe, central and eastern Europe
will continue to perform significantly
better than the euro area. Economic growth
will weaken somewhat in the CIS, but average
rates will remain well above the European
average.
A favourable
global context in 2005
The international economic context
is expected to remain favourable for Europe
and the CIS in 2005. The average annual
rate of expansion of the global economy
is forecast to be some 4¼ per cent
in 2005, down from 5 per cent in 2004,
which was the fastest growth in three
decades. World merchandise trade will
increase in volume terms by 8 per cent
in 2005, strong but below the 10.5 per
cent achieved in 2004.
The United States and
China will remain the principal engines
of global growth. Rapid growth rates are
also expected to continue in other Asian
emerging markets and Latin America.
In the United States,
real GDP is forecast to increase by some
3.5 per cent in 2005, down from 4.4 per
cent in 2004 (table
1). Overall, economic activity will
be supported by the continued, albeit
moderating strength of domestic demand.
Exports should be stimulated by the depreciation
of the dollar and by strong external demand
in the USA’s major markets in Asia
and the Americas. The Federal Reserve
is expected to continue gradually raising
short-term interest rates to move monetary
policy closer to a neutral stance during
2005. But monetary policy is expected
to be still accommodative during 2005.
Fiscal policy will be slightly restrictive
in 2005.
A moderate rate
of recovery in the euro area
For the euro area, real GDP is forecast
to increase on average by 1.8 per cent
in 2005 (table
1). Positive growth in the rest of
the world will continue to support exports,
which remain the mainstay of growth. This
moderate rate of economic expansion will
be associated with only small gains in
employment. The average annual unemployment
rate in the euro area will be 8.9 per
cent in 2005, unchanged from 2004. Inflation
is expected to fall slightly below the
ECB’s 2 per cent threshold.
The stance of fiscal
policy is expected to be broadly neutral
(possibly even slightly restrictive) both
for the euro area and western Europe as
a whole in 2005. In view of the fragility
of factors of domestic growth and the
dampening effects of the stronger euro
on domestic economic activity and inflation,
monetary policy in the euro area is likely
to continue to “wait-and-see”.
The ECB is expected to leave interest
rates unchanged in 2005, but there is
scope for countering a possible weakening
of the recovery by lowering interest rates,
particularly as the stronger euro will
dampen imported inflation.
For western Europe
as a whole, the annual rate of economic
growth will be some 2¼ per cent,
reflecting the slightly stronger growth
momentum in countries outside the euro
area. Among the four major west European
economies, average annual growth will
remain significantly below 2 per cent
in Germany and Italy. Economic activity
is expected to be stronger in France and
the United Kingdom, with real GDP increasing
by nearly 2 per cent and by 2.5 per cent,
respectively.
The average annual rate
of economic expansion in the European
Union (EU-25) will be 2.2 per cent
in 2005, masking significantly stronger
growth in the aggregate of the ten new
member States compared to the EU-15.
Continued strong
growth in central Europe and the Baltics
Economic growth should remain
strong in central Europe and the Baltic
States (EU-8). Although GDP growth has
started to decelerate in the EU-8 countries,
recent economic sentiment indicators suggest
a favourable short-term outlook. In 2005,
the average rate of growth in the EU-8
may slow down somewhat compared with 2004
but, at some 4½ per cent, will
remain considerably above the average
of western Europe (table
1). A noticeable surge in greenfield
FDI projects should accelerate the ongoing
process of restructuring and boost exports.
Further fiscal consolidation is envisaged
in some countries in 2005 but its dampening
effect on domestic demand should be marginal.
…and in
south-east Europe
Most of the south-east European
economies are also set to maintain
strong rates of growth in 2005 but the
unusually high rates achieved in some
countries in 2004 will be difficult to
sustain. Overall, domestic demand is set
to remain buoyant, and should provide
solid support to economic activity in
these countries. Better financial intermediation
and rapid credit expansion will continue
to fuel demand and output growth. In the
event, real GDP is forecast to increase
by somewhat more than 5 per cent in 2005
compared with the preceding year (table
2). If Turkey is excluded from the
regional aggregate then the average annual
growth rate will be slightly lower. However,
given the ongoing enterprise restructuring
in many parts of the region the increases
in employment are likely to be small.
CIS maintains
dynamic growth
Economic activity in the CIS
as a whole may lose some steam in 2005,
but aggregate GDP is nevertheless expected
to expand by some 6.5 per cent (table
2). Decelerating growth rates will
prevail in all the large CIS economies
– Belarus, Kazakhstan, Russia and
Ukraine – following the evolution
of external factors such as commodity
prices and demand in the region’s
main markets. Domestic demand in the CIS
should generally remain buoyant but its
effect on domestic economic activity will
depend on the responsiveness of domestic
supply. The macroeconomic policy stance
should remain broadly neutral in the large
economies, with the possible exception
of Ukraine where some fiscal tightening
can be expected. While in the short run
there may be some further improvement
in the labour markets, many CIS economies
still have to address the challenge of
restructuring as labour adjustment has
in general been lagging behind that in
output.
Downside risks
are dominating
The baseline short-term outlook
for the global economy is relatively favourable.
But the global outlook is surrounded by
risks, which continue to be predominantly
on the downside.
-
A major uncertainty
is the likely development of the international
oil markets. Oil prices remain subject
to potential upward pressure from
actual or threats of supply disruptions.
- The fact that
the global economy continues to rely
so much on the United States as a
major engine of growth evidently makes
the outlook very vulnerable to a more
pronounced slowdown of the United
States economy. This is all the more
so, because the necessary correction
of the large fiscal and current account
imbalances that have developed in
the United States economy will hardly
be possible without a more or less
pronounced slowdown of domestic demand
and output growth.
- The huge United
States current account deficit has
been an important downside risk for
the global economy for several years,
given that it could trigger sudden
and sharp changes in the direction
of international capital flows, which
would adversely affect economic activity.
The orderly reversal of the deficit
is a major challenge for policy makers
both in the United States and other
major economies.
- Downside risks
are also related to uncertainty about
the strength of personal consumption
spending in the United States, given
that the savings rate fell to a very
low level in 2004 and that the wealth
effects from rising house prices may
start to wane in 2005. To this adds
the uncertainty about the outlook
for the labour market.
- Long-term interest
rates in the international capital
markets have remained at unusually
low levels in the recovery so far,
reflecting, inter alia, the persistence
of moderate inflationary expectations,
a weak supply of corporate bonds (a
reflection of balance sheet consolidation)
and the massive purchase of United
States treasury bills by Asian central
banks. A stronger than expected rise
in long-term interest rates could
be caused by the fading of these factors
but also by increasing concerns in
financial markets about large fiscal
deficits, with a consequent dampening
effect on economic growth.
- Other risks to
the outlook include a possible hard
landing in China, which has become
an important source of demand for
goods and services produced in the
rest of Asia and other regions of
the world economy.
Euro area recovery
remains vulnerable to adverse external
shocks
In the euro area, given its present
strong reliance on export growth, the
recovery is very vulnerable to a more
pronounced weakening of global growth
than is currently forecast. A further
sharp appreciation of the euro could considerably
dampen growth prospects with even the
risk of economic growth stalling in 2005.
A potential upside risk
is that business investment may respond
more favourably than anticipated due to
the continuation of favourable financing
conditions and improved profitability.
But the probability of this occurring
is not very high given the overall moderate
rate of economic expansion.
High house prices
are a matter of concern
In some west European countries
(France, Ireland, Spain, United Kingdom),
the downside risks also include a possible
sudden and pronounced reversal of the
rise in house prices, with consequent
negative wealth effects and, in turn,
severe repercussions on private household
consumption and the overall rate of economic
growth.
Central and
eastern Europe: external and internal
imbalances pose risks
The main external risks to the
outlook for central and eastern Europe
include a possible sharp deceleration
of economic growth in major western European
markets and significantly higher than
expected energy prices. If imported inflation
continues to rise, this may prompt a more
restrictive policy stance, with negative
implications for economic activity.
A number of economies
in this region still face important macroeconomic
policy challenges such as large fiscal
and current account deficits. Forthcoming
elections in several countries carry the
risk of pre-election increases in public
spending, which could undermine policy
credibility and probably result in monetary
tightening, lower inflows of FDI and reduced
competitiveness. The most pressing policy
challenges facing the new EU member States
are to achieve sustainable fiscal consolidation
and implement structural reforms for job-rich
growth.
CIS: vulnerabilities
stemming from the strong reliance on commodity
exports
The short-term outlook for the
CIS will be strongly influenced by developments
in the markets for oil and other primary
commodities. On current forecasts, commodity
prices will remain at high levels in 2005.
But any sharp fall would have adverse
effects on export revenues and overall
economic activity. The main structural
weakness of the CIS economies remains
their high dependence on exports of natural
resources and low value added products,
implying a high degree of vulnerability
to external shocks. In addition, there
are already signs, especially in Russia,
that the loss of competitiveness associated
with real exchange rate appreciation (the
“Dutch Disease”) is becoming
a burden on local producers and is choking
off aggregate domestic economic activity.
The capacity of macroeconomic policy to
address these negative developments is
fairly limited. Unless local producers
manage to counteract them at the micro
level through further restructuring, there
are likely to be negative repercussions
on output growth in the affected countries,
especially in their manufacturing industries.
The long-term growth prospects of the
CIS economies thus hinge on their success
in diversifying their economies and implementing
key reforms in product and financial markets.
Despite the overall
relatively favourable short-term growth
prospects for Europe and the CIS, there
are a number of important issues that
need to be addressed by economic policy
to ensure that the basic conditions are
in place for sustained and robust growth
in the medium- and longer term
(see Press Release ECE/GEN/05/P05).
For further information
please contact:
UNECE Economic Analysis Division
Palais des Nations
CH - 1211 Geneva 10, Switzerland
Phone: +41(0)22 917 20 84
Fax: +41(0)22 917 03 09
E-mail: [email protected]
Web site: http://www.unece.org/ead/ead_ese_new.htm
Ref: ECE/GEN/05/P04