UNUnited Nations Economic Commission for Europe

Press Releases 1997

[Index]

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.