UNEVEN ECONOMIC PERFORMANCE AND PROSPECTS IN THE ECE REGION IN 1996-1997
15 April 1997
MODEST ECONOMIC RECOVERY IN WESTERN EUROPE, A RETURN TO
SIGNIFICANT GROWTH IN THE BALTIC STATES, BUT SLOWING GROWTH IN
EASTERN EUROPE AND A DEEPENING SLUMP IN THE RUSSIAN FEDERATION
UN/ECE releases its Economic Survey of Europe in 1996-1997
The United Nations Economic Commission for Europe (UN/ECE) in its latest issue
of the Economic Survey of Europe presents a detailed analysis of the economic
situation in the ECE region and the short-term outlook for western economies and
the countries of eastern Europe, the Baltic states and the Commonwealth of
Independent States (CIS).
Chapter 1, which is included in this press release, provides a brief overview of the
economic situation in western Europe and in the transition economies and
underlines a number of policy questions of relevance in the ECE region.
Chapter 2 reviews the macroeconomic situation in the western market economies.
Chapter 3 analyzes the macroeconomic developments in the
transition economies, including detailed analyses of their total and
intra-regional merchandise trade, external financial positions and
integration into the international capital markets.
Chapter 4 addresses the economic situation in Central Asian
economies of the ECE region and their progress toward a market
economy.
A pre-publication version of the Survey, which will be submitted to the
forthcoming fifty-second session of the ECE Commission (21-24 April), will be
made available to ECE member Governments and the media in a restricted
quantity. The final version will be published in May.
For any further information please contact:
Division for Economic Analysis and Projections
United Nations Economic Commission for Europe (UN/ECE)
Palais des Nations
CH-1211 Geneva 10, Switzerland
Tel: ++ (4122) 9172718
Fax: ++ (4122) 9170309
E-mail: [email protected]
Chapter 2 The western market economies
Economic activity in western Europe picked up again
in the course of 1996, but for the year as a whole the annual
increase in real GDP was only 1.9 per cent compared with 1995,
when there was an equivalent growth rate of 2.6 per cent. (If
Turkey is excluded from the regional aggregate the annual
output growth amounted to only about 1.5 per cent in 1996.)
In the United States, growth forces gathered renewed momentum
and real GDP rose by 2.4 per cent in 1996 compared with an
annual growth rate of 2 per cent in preceding year. In Japan,
the impulses associated with the fiscal stimulus of late 1995
were a major factor in the significant acceleration in the
rate of economic growth to 3.6 per cent in 1996, the highest
among the major seven economies. In the event, real GDP in
the industrialized countries rose by 2.3 per cent in 1996,
slightly higher than in 1995 (2.1 per cent).
Cyclical positions continue to diverge
significantly. The United States is on the plateau of a long
cyclical upswing, whereas in many west European countries,
notably France, Germany and Italy, cyclical growth forces
remain weak and a sustained upswing is not yet in sight.
Viewed from the demand side there continues to be a
split cycle in western Europe: economic growth is largely
export-led - mainly reflecting impulses from outside the
region - while domestic demand growth has been relatively
weak. Domestic demand was supported by lower interest rates,
while exports benefited from the appreciation of the US
dollar. The upswing in the United States continued to be
broadly based, supported by private consumption, business
fixed investment and export growth.
Although exports were a mainstay of economic
activity in 1996, there was, nevertheless, a significant slow
down in the volume of merchandise trade in western Europe,
which, in the main, goes on account of the significant
deceleration in growth of domestic demand. As a consequence,
import demand rose by only some 2.5-3 per cent, and this had
significant negative repercussions on the export performance
of the transition economies. Growth in trade flows slowed
down also in other regions of the world economy, and world
trade expanded only by some 5 per cent in volume terms in
1996, compared with an increase of some 9 per cent in 1995.
The overall weak output growth meant that there was
hardly any improvement in the serious labour market situation
in western Europe. The bulk of the additional output in 1996
came from higher productivity. Employment rose by only about a
quarter of one per cent in 1996, while the average annual
unemployment rate remained stubbornly above 10 per cent,
broadly unchanged from 1995. In sharp contrast, labour market
conditions remained very tight in the United States in 1996.
Employment rose by about 1.5 per cent (on a full-time
equivalent basis) and the average annual unemployment fell to
only 5.4 per cent, corresponding to slightly more than half of
the average west European rate.
Inflation has continued to decline in western
Europe. The average annual increase in the consumer price
index was only 2.4 per cent in 1996, the lowest in thirty
years. In the United States, inflationary pressures and
inflationary expectations have remained strikingly moderate in
spite of the quite high degree of factor utilization. The
average annual inflation rate amounted to 3 per cent in 1996,
about the same as in preceding year.
Weak cyclical conditions and moderate inflation
rates generally led some shift in the stance of monetary
policy in western Europe towards supporting economic growth in
1996, which was reflected in a concomitant decline in short-term interest rates. In the United States, the stance of
monetary policy was slightly eased in January 1996, but it
remained unchanged in the remainder of the year. There was a
moderate tightening of monetary policy in late March 1997
against the background of indicators pointing to accelerating
demand growth and a continuing surge in equity prices. Long-term interest rates fell, in nominal terms to relatively low
levels in many west European countries in the course of 1996,
a tendency which continued in early 1997. In the United
States, nominal long-term rates started to rise in late 1996,
partly in anticipation of a tightening of monetary policy.
Fiscal policy in western Europe has continued to be
marked by efforts to meet the Maastricht convergence criteria
for government budget deficits and gross debt. For most
countries this has meant maintaining a tight policy stance in
view of the fact that actual deficits and debts have been -
and still are- significantly above the target values. On
average, the general government budget deficit averaged 4.3
per cent of GDP in 1996 down from 5.1 per cent in 1995. In the
United States, tight expenditure control and strong growth in
tax revenues on account of the robust economic activity
entailed that the federal government budget deficit fell to a
level corresponding to only 1.4 per cent of GDP, the lowest
ratio since 1974.
There is a broad consensus that the moderate
recovery which gradually unfolded in western Europe in the
course of 1996 will continue in 1997. According to forecasts
made at the turn of the year, real GDP will increase by about
2.5 per cent in 1997. Such forecasts imply that there will be
hardly any significant improvement in the labour markets.
Unemployment is set to remain high and broadly unchanged from
its level in 1996. In the United States, the expansion has
now entered its seventh year. The renewed momentum has led to
an upgrading of growth forecasts. Instead of a slight slow
down, most of the recent forecasts point to a broadly
unchanged rate of growth or even a moderate acceleration. Real
GDP is expected to rise by some 2.5-2 per cent in 1997. For
the western industrialized countries combined, real GDP is
expected to rise by 2 per cent in 1997, the same as in 1996.
Chapter 3 The Transition Economies
In many respects, 1996 was a disappointing year for
the transition economies. Economic growth in eastern Europe
slowed more than expected; in Russia, the slump in output
deepened rather than bottoming out; the expected boost to
activity resulting from the ending of economic sanctions
against Yugoslavia has been slow to materialize; there were
major economic setbacks in Bulgaria and Romania; and in
Albania an economic crisis developed into a state of political
and social chaos in which the government lost control of large
parts of the country.
On the other hand, there was also notable progress in
many areas. Growth remained relatively strong in the leading
reformers of eastern Europe where the process of economic
restructuring also advanced; there was a return to significant
growth in the Baltic states; and for the first time since the
breakup of the Soviet Union there was positive growth in a
majority of the CIS member countries.
Economic growth in eastern Europe decelerated in 1996
to 4 per cent from 5 per cent in 1995, while in the Baltic
states it increased to 3 per cent from 1 per cent in the
previous year; growth rates from 3 to 7 per cent prevailed in
most of these countries. In contrast to the previous year,
robust and growing domestic demand - both private consumption
and fixed investment - was generally the main determinant of
growth. Economic policy on the whole maintained domestic
macro-economic balance; inflation further slowed in most
countries, but there was a strong tendency of deteriorating
external balances.
There was, however, a marked worsening in the
economic health of the transition countries of south-eastern
Europe. In Bulgaria, the deep crisis provoked by erratic
economic and financial policies resulted in a 10 per cent drop
of GDP and year-on-year inflation exceeding 300 per cent.
Although relatively strong growth was registered in Romania in
1996, it was the result of loose macro-economic policies which
by the end of the year necessitated powerful corrective
measures, and a fall of GDP is now expected for 1997. These
developments, and the crises that broke out in Albania in
1996, underlined in a dramatic fashion the fragility of the
transition process. There were setbacks also in other
countries in this region. These developments raise important
issues regarding the sustainability of the process of economic
transformation not only for policy makers in all the
transition economies but also for those countries and
institutions in a position to provide assistance.
In the CIS region there was positive GDP growth in
seven countries in 1996, compared with just two in 1995, but
this was concentrated mainly in the smaller CIS countries.
Contrary to hopes and some expectations, output in the two
largest economies - the Russian Federation and Ukraine - did
not begin to recover in 1996. In Russia the decline in GDP (6
per cent) was even larger than in 1995 and in Ukraine it
remained in the double-digit range. But there were
encouraging signs of recovery or near recovery in an
increasing number of CIS countries and these may indicate that
the end of the transformational recession in the CIS may be
approaching.
Unemployment has continued to rise in the transition
countries. While there was some improvement in a number of
east European countries, in others unemployment rates started
rising again, especially towards the end of the year and in
early 1997; the unemployment rate in eastern Europe was just
under 12 per cent at end-1996. In the Baltic states and in
the CIS countries, the rate of officially registered
unemployment (6 per cent at the end of 1996) has risen
steadily, but understates the true state of affairs
(unemployment on the standard ILO definition), which is
probably quite similar to that in eastern Europe.
The process of disinflation was one of the best
achievements of the transition economies in 1996. Consumer
price inflation fell further or remained stable in all
transition countries with few exceptions. However, more rapid
growth in real wages, compared to productivity, slowed down
the disinflation in eastern Europe. The most significant
progress on the inflation front was done in the majority of
the CIS countries where stabilization policies have started to
produce results.
The growth of exports from the transition countries
slowed very markedly in 1996, reflecting in part slow growth
of their main markets in western Europe, but also weakening
competitiveness of their tradeable goods sectors. Imports, on
the other hand, generally expanded at high rates, if also
somewhat slower than last year, in response to strong domestic
demand for consumer and investment goods (except in Russia,
where imports fell).
As concerns the geographical composition of trade,
three developments in exports were among the more important in
1996. First, the fall of exports to the developed market
economies; second, the faster than average rate of growth of
east European and Baltic exports to CIS countries and the
continuing recovery of intraregional trade; and third, a rapid
expansion of exports towards developing countries in the CIS
region. On the import side, developments were quite
different: imports from developed market economies kept rising
faster or declined less than overall imports, while imports
from CIS countries into the east European and Baltic region
rose only slowly or at below-average rates; but the fastest
growth rates were generally registered in imports from
developing countries.
Rather diverse commodity developments were
characteristic for eastern Europe's and Baltic states'
exports, where exports of some commodity categories (beverages
and tobacco, machinery and transport equipment and some
consumer manufactures) continued to expand at a respectable
pace, while the relatively poor overall export performance of
these countries was caused primarily by a drop in exports of
intermediate products and crude materials. The most
substantial increase in the dollar value of imports was for
machinery and transport equipment.
As far as the commodity composition of trade of the
CIS region is concerned there have been few changes since
these economies opened up to non-CIS markets: in general,
exports remain concentrated on a few categories of primary
goods and fuels, while imports are dominated by agricultural
products, prepared foodstuffs, and machinery and equipment.
This concentration on a few commodities even strengthened in
1996.
Trade balances of most transition countries
deteriorated in 1996. The aggregate of the east European and
Baltic countries' trade deficits rose from under $24 billion
in 1995 to over $37 billion in 1996. Most of the CIS
countries also moved into deficit, although on a much smaller
scale than eastern Europe (most of the deficits were less than
$1 billion), but all of them were dwarfed by another rise in
the Russian surplus, from $31 billion in 1995 to over $37
billion, or 9 per cent of GDP, in 1996.
Widening trade deficits resulted in an increase in
the aggregate current account deficit of eastern Europe, from
$1.4 billion in 1995 to $13.5 billion in 1996. However, the
surplus on services rose to nearly $5 billion. The current account
deficits of the Baltic states and the European members of the CIS
(excluding Russia) also increased in the first three quarters of
1995. A majority of European transition countries posted
comparatively large current account imbalances, often in excess
of 5 per cent GDP, but there were virtually no problems in
financing them.
The Russian Federation was the only country with a
large current account surplus, which amounted to $10 billion in
the first nine months of 1996. Its large merchandise trade
surplus was partially offset by deficits on services and factor
incomes.
The debt burdens of countries in the region generally
diminished, although those of some of the low-debt countries
increased due to increased foreign borrowing.
Many transition economies have significantly increased
their access to the international capital market. By end March
1997, thirteen countries had been rated by the international
credit rating agencies, of which seven countries have been rated
investment grade. Overall, these countries raised a record $9.8
billion in medium- and long-term funds in the international
markets in 1996 and their initial public offerings (IPOs) doubled
to $1.4 billion. Since receiving an international credit rating
in November 1996, Russia has raised some $5 billion in bonds,
syndicated loans and equity issues.
Despite the countries' greater international borrowing, (net) capital flows into eastern Europe fell from $24 billion in
1995 to 15 billion in 1996. Foreign direct investment remained
the largest sources of capital, but short-term and various
unrecorded flows remained important. The Baltic states also
attracted more capital.
Foreign direct investment flows into the European
transition economies fell from a record $11.6 billion in 1995 to
$9.5 billion in 1996. Some decline had been expected given the
exceptional sales of several large companies to strategic
investors in 1995 (primarily in Hungary and the Czech Republic).
FDI flows remained relatively modest in 1996, only a few
countries managed to attract larger flows than in 1995. Poland
emerged as the main recipient of FDI in the region. However,
Hungary and the Czech Republic still receive more FDI on a per
capital basis and have accumulated more FDI since the beginning
of the decade.
The outlook for 1997 is for some further slowing of GDP
growth in eastern Europe - to some 3 per cent, reflecting
moderate slowing in the central European countries and falls, as
a result of tough stabilization programmes, in Bulgaria and
Romania. In the Baltic states, a strengthening of the moderate
recovery to perhaps 4 per cent GDP growth is expected. Balance
of payments constraints may necessitate some bridling of growth
in a number of these countries. Assessing the short-term outlook
for the CIS economies remains extremely difficult. In Russia,
the government (and some outside observers) expect a modest
upturn finally to occur in 1997, but this is still widely doubted
by economic analysts in the country who on average would seem to
see a standstill as an achievement. Much depends on whether the
problem of payment, wage and tax arrears can be resolved in a
non-inflationary way. In Ukraine, the economy is still in deep
depression, but might bottom out in 1997. In other CIS
countries, the recovery seen in many last year is expected to
continue.