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.
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