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Wednesday, 3 May 2000
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Press Release
ECE/GEN/00/17
Geneva, 26 April 2000
2000: Economic Growth All
Over
UN/ECE releases its first 2000
Economic Survey of Europe
For the first time
since 1990, average GDP growth for the year 2000 in western Europe is likely to exceed 3
per cent; for the transition economies of eastern Europe growth should return to an
average of 4 per cent or more, and the Baltic economies should emerge from recession with
an average growth rate of some 3 per cent. After a much better than expected outcome in
1999, growth is also likely to continue in Russia and the other CIS countries, although
here the prospects are more uncertain. This improved outlook for the European economies is
also set against a background of more optimistic forecasts for other parts of the world
economy and, not least, for continuing growth in the United States where, although a
slowdown is currently forecast, GDP is still expected to increase by some 4 per cent in
2000. These forecasts are among the issues discussed in the latest Economic Survey
for Europe, just released by the United Nations Economic Commission for Europe
(UN/ECE).
"However, it is important to stress
two points" says Paul Rayment, Director of the Economic Analysis Division of the
UN/ECE, "first, there is always a distribution of risk surrounding any forecast and
although this Survey believes the balance is now more favourable for growth in
Europe this does not mean that the downside risks are negligible; the possibility of a
crash in overvalued equity prices in the United States is a serious risk to the current
outlook, and there are uncertainties over the course of oil prices and of monetary policy
in the EMU. Secondly, not all the economies of the region enjoy the same prospects and
there are especially large differences among the transition economies. In particular much
of the region of south-east Europe is still beset by severe structural problems and the
consequences of several armed conflicts which have made the process of transition to a
market economy much more difficult than in central Europe."
Western Europe and North America
Highest expansion in
2000 since the early 1990s …
Against a background of improving
economic conditions in other regions of the world economy, the short-run economic outlook
for western Europe and North America is now quite favourable. In western Europe, the
cyclical recovery is expected to gain further momentum in the course of 2000, with real
GDP currently forecast to increase by slightly more than 3 per cent in 2000 (table 2.2.1).
This would be the largest increase since 1990, when there was a growth rate of 3.4 per
cent. In fact, in the absence of the downside risks discussed in the Survey a
somewhat stronger rate of growth than currently expected in Germany and Italy, the outcome
could be even better, possibly closer to 3.5 per cent. Performance in the euro and
non-euro areas of western Europe is expected to be similar. In the United States, the
consensus of forecasts is for the cyclical expansion to slow down from the high rates of
the final two quarters of 1999. Average annual growth in 2000 could still be some 4 per
cent, which includes, however, a significant statistical carry-over effect from 1999.
Broadly the same outlook is forecast for Canada. These forecasts imply a significant
narrowing of the growth differential between North America and western Europe in 2000.
This benign scenario could continue into 2001, especially if the cyclical upturn in the
various regions of the world economy leads, via the foreign trade channel, to a mutually
reinforcing process of economic growth.
… due to rapid expansion of
exports in western Europe …
In western Europe, the main
factor behind the strengthening recovery is likely to be the more rapid expansion of
exports. Apart from rising intraregional trade, this largely reflects the stronger demand
from emerging markets and developing countries where the rate of economic expansion is
also forecast to accelerate. Such a favourable export performance will contribute to the
strengthening of domestic demand. Private consumption will be supported by rising real
incomes, in turn the result of further gains in employment and higher real wage rates.
Business investment should be stimulated by rising capacity utilization rates and improved
sales prospects. Changes in stockbuilding will also make a small contribution to higher
output growth. The stronger growth of domestic demand, however, will lead to a rising
demand for imports and the change in real net exports should be broadly neutral in its
effect on economic growth in 2000. Among the four major economies, France and the United
Kingdom are likely to develop the strongest cyclical momentum, but growth is also
accelerating in Germany and Italy, where the business climate improved markedly in early
2000. Italy, nevertheless, is expected to continue to grow more slowly than most of the
other west European countries. The rate of economic expansion will remain quite strong in
the smaller west European economies.
Higher levels of economic activity in
western Europe will not only feed through to employment but should also lead to a further
decline of the unemployment rate. Inflation is expected to pick up slightly, a main
underlying assumption being that the rise in oil prices will peter out in the spring and
possibly be partly reversed later on in the year. Growth in labour costs is expected to
remain relatively moderate and to be largely offset by productivity gains. Fiscal policy
is set to maintain a broadly neutral stance, but many forecasters expect that the cyclical
upturn will lead to a further gradual tightening of monetary policy both in the euro area
and in the United Kingdom in order to meet the established inflation targets.
… and robust private consumption and business
fixed investment in the United States
In the United States, robust
private consumption and business fixed investment are likely to remain the mainstays of
economic growth, partly supported by continuing positive wealth effects. Exports are
expected to strengthen as a result of the more favourable international economic
environment. A slowdown in employment growth and less favourable financing conditions
associated with the tightening of monetary policy, however, should tend to dampen the
growth of household expenditures and fixed investment. Import demand should remain strong
but the changes in real net exports is likely to be considerably less of a drag on
domestic activity in 2000 than in the two preceding years. In view of the continuing
strength of economic growth, the unemployment rate should stay close to 4 per cent.
Inflationary pressures are still expected to remain rather moderate, given the assumptions
about developments in the oil markets and that increases in productivity should continue
to largely offset increases in labour costs. The slowdown in the rate of expansion in the
course of 2000 should bring the growth of demand somewhat closer to the lower rate of
potential output growth. This gradual transition of the economy towards a "soft
landing" has already been forecast for the last few years, but the continuing
strength of the cyclical upturn has been systematically underestimated.
Transition economies:
generally favourable short-term prospects …
The short-term
prospects for the transition economies at the beginning of 2000 are now considerably
better than they were in the middle of last year. Both domestic conditions (notably the
recovery of output and the improvement in domestic demand) and the external environment
(dominated by the cyclical upturn in western Europe) are much more favourable than they
were in 1999. The available official forecasts suggest that the governments in practically
all the transition economies expect positive GDP growth in 2000 and in most cases an
acceleration of the economic recovery (table 3.1.1). GDP in the ECE transition
economies as a whole should increase on average by some 3 per cent in 2000, which would
represent a record rate of growth for the region as a whole. Growth in eastern Europe is
expected to average close to 4 per cent; in the Baltic states the expectation is for an
average 3 per cent; and in the CIS countries as a whole, GDP could increase by more than
2 per cent.
The official GDP forecasts shown in table
3.1.1 are in many cases (especially in eastern Europe and the Baltic states) those
incorporated in the draft budgets for 2000 and in most cases were prepared in late 1999
when the strength of the incipient recovery was still not clear; consequently, some of
these forecasts may now be somewhat conservative. Indeed, the acceleration of the recovery
of output in some countries during the first months of 2000 (particularly in Hungary and
Poland) has already led to upward revisions of some of the forecasts.
In any case, strong and steady economic
growth can be expected to continue in Hungary, Poland and Slovenia, and these economies
are likely to preserve their leading positions in the ranking of east European growth
rates. The expected 2 per cent GDP growth in Slovakia reflects the continuation of a
cautious adjustment effort after the authorities abandoned an unsustainable expansionary
course in late 1998. In recent years, similar adjustments in Croatia and especially in the
Czech Republic have led to economic downturns. The authorities in both these countries
expect positive rates of GDP growth in 2000, although these are likely to remain
relatively low. An economic upturn is expected in the three Baltic states as well, but
their rates of growth are unlikely to return to those prevailing before the Russian
crisis.
After a generally weak performance in
recent years, the governments in a number of south-east European transition economies
(Albania, Bosnia and Herzegovina, Bulgaria, The former Yugoslav Republic of Macedonia and
Yugoslavia) expect relatively high rates of GDP growth in 2000. But even if these
forecasts materialize, in most cases they will only reflect recovery from a very low base;
the return of this region to sustained and high rates of economic growth still requires
major restructuring and large-scale new investment. In Romania, economic activity is
likely to remain weak in 2000 (the government expects only 1.3 per cent GDP growth). The
persistent macroeconomic imbalances in this country leave little room for economic policy
to manoeuvre, making strong growth unlikely in the short run.
… with fragile recovery in
Russia
The current recovery in Russia
hinges on a fragile equilibrium which is based on the post-crisis gains in competitiveness
(thanks to a large depreciation in the real exchange rate and a fall in real wages)
coupled with favourable external conditions (in the first place, high oil prices). The
economy remains highly vulnerable to a reversal in any of these conditions (for example, a
fall in oil prices); hence, the short-term economic outlook for Russia still remains
rather uncertain. Nevertheless, at present the Russian authorities are quite optimistic as
regards the short-term economic outlook. According to the budgetary projections, GDP is
expected to grow by some 1.5 to 2 per cent in 2000, and some Russian officials have
recently suggested that the rate of growth could be even higher.
Recovery in Ukraine has been underway
since the third quarter of 1999 and has continued during the first months of 2000.
However, in Ukraine, the uncertainties regarding the short-term outlook are probably even
greater than in Russia: if the authorities manage to avert a looming foreign debt crisis,
GDP might grow faster than envisaged in the official forecast (1 per cent for 2000); but
in the event of a debt crisis, the economy may sink back into recession. In Belarus, after
the setback caused by the Russian crisis, the authorities have set a relatively modest
growth target for 2000, which they hope to support with a new, export-oriented policy. The
return of the Republic of Moldova’s economy to growth will largely depend on the
success of a policy adjustment initiated by the government, the implementation of which
will also be a pre-condition for the resumption of IMF financing.
In general, the authorities in most of the
other CIS countries have set rather ambitious targets for 2000: GDP growth is envisaged to
accelerate in all the Caucasian economies as well as in most of the central Asian CIS
countries. The government of Turkmenistan is forecasting double-digit growth rate in 2000
but this will largely depend on success in increasing exports of gas. After a change in
policy in 1999, growth resumed in Kazakhstan in the second half of the year and the
economy appears poised to continue to grow in 2000 as well. It should, however, be noted
that in Kazakhstan (as well as in most of the other central Asian economies) the
relatively good GDP outcome for 1999 was largely due to an unexpectedly good harvest;
whether this can be repeated in 2000 remains to be seen.
The outlook for inflation in 2000 remains
quite favourable in most of the transition economies. In preparation for EU accession,
policy makers in Hungary and Poland are targeting further large cuts in the rate of
inflation in 2000. Lower inflation is also envisaged in Slovenia, after the minor price
shock caused by the introduction of VAT in 1999. In Slovakia the inflation rate is
expected to remain in double-digits, mostly reflecting the on-going process of
liberalizing regulated prices. The authorities in Romania are aiming at a substantial
reduction in the rate of inflation but it is still likely to remain among the highest in
eastern Europe. Inflation in the Baltic states in 2000 should remain within the range of
3-4 per cent, while in all the CIS countries for which such forecasts are available
inflation in 2000 is expected to be lower than in 1999.
… and more uncertainties in
South-East Europe
" The economic situation in
south-east European countries -- Albania, Bosnia and Herzegovina, Bulgaria, Croatia,
Romania, The former Yugoslav Republic of Macedonia, Yugoslavia -- remains very
fragile" stresses Paul Rayment, Director of the UN/ECE Economic Analysis Division. "The problem of the slow disbursement of committed funds will have to be overcome
– essentially by the donor countries - if we want a quick start to many projects and
a general improvement in expectations."
Although, the direct impact of the Kosovo
conflict was less than feared earlier in 1999, the damage was still significant and the
economies of south-east Europe moved from modest GDP growth in 1998 (1.3 per cent) into
recession (about -3 per cent). The improvement forecast for 2000 is largely a recovery
from this recession rather than the first signs of sustained economic growth. The current
account deficits have been large and persistent, with a consequent build-up of foreign
debt, unemployment rates average nearly 17 per cent, much higher than in central Europe,
and in conjunction with widespread job insecurity and discontent with living standards,
this makes it difficult to implement reforms that might worsen the social situation still
further in the short run. Domestic investment remains weak and foreign investment is not
attracted to the region in any significant quantity.
International efforts to assist the
economies of south-east Europe are now extensive but it is becoming increasingly clear
that they suffer from many of the same problems that have beset the assistance efforts to
most other transition economies ever since 1989. First, there is a large gap
between promises to provide assistance and its actual disbursement – this delays
action and creates disillusion in the region. Secondly, there is poor coordination
between the 29 countries and international organizations belonging to the Stability
Pact – resources are widely dispersed and inadequately coordinated both between
donors and with national programmes. Thirdly, there is also a confusion of
conceptual frameworks and approaches, and it is by no means obvious that the essential
differences between the trio of problems – development, transition and postwar
reconstruction – are clearly recognized. There is also a tendency for donors to
promote separate projects without placing them within a broader programme of development;
and sometimes projects reflect more the interests of their promoters than those of the
recipient countries.
The need for individual countries in
south-east Europe to draw up their own programmes for transition and development, which
would accurately reflect their specific problems and preferences, is one of the lessons
which this Survey has previously drawn from the highly successful Marshall Plan of
the late 1940s. These national programmes would then be discussed in a regional framework
to improve coordination, and to encourage cooperation wherever there are international
public goods, economies of scale and other externalities to be found.
The regional dimension is certainly
important and for a number of reasons. The very fact of increased efforts at regional
cooperation is a sign of increasing stability and security in the region and, as such, an
important step towards attracting foreign investment. But cooperation to remove trade
barriers and other obstacles to doing business across the region would also help to
overcome the difficulties of trying to attract FDI to a collection of small, low income
and fragmented markets. If foreign direct investors can envisage supplying a regional
market instead, the incentives to invest in the region are greatly increased; this will be
even more the case if the EU were to move quickly to remove all trade barriers to imports
coming from south-east Europe. Regional cooperation can also make it easier to deal with
black markets, organized crime and other activities which are subversive of market and
democratic institutions. The failure to deal effectively with these and other matters is
one reason why some of the better placed countries in the region are more keen to
disassociate themselves from "the Balkans" and seek directly closer bilateral
links with the EU.
The problem of coordinating national
programmes of development still needs to be addressed, and although a quick start to many
projects is crucially important there should be no illusions that the basic task, the
economic regeneration of the region, can be accomplished quickly. For western Europe, and
the EU in particular, the pursuit of economic regeneration and of stability and security
in the region will have to be a long-term commitment.
For further information please contact:
Economic Analysis Division
United Nations Economic Commission for Europe (UN/ECE)
Palais des Nations
CH - 1211 Geneva 10, Switzerland
Tel: (+41 22) 917 27 78
Fax: (+41 22) 917 03 09
E-mail: [email protected]
Website: http://www.unece.org/ead/ead_h.htm
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