Growth Slowdown in the CEECs Mainly Due to Poland,
Impact of a Prolonged Weakened EU Growth Could be Severe

In its new growth forecast for the CEE region for 2001/2002 and 2003, the WIIW takes into account the deteriorating business climate in the West. Until very recently, the growth of the transition economies was fuelled mainly by exports as the world economy was booming and the global demand for goods (CEECs) and commodities (Russia, Ukraine) produced in the region was strong. This favourable external climate started to deteriorate already before the September terrorist attacks in New York and Washington. The current even more pronounced deterioration of the business climate in Western Europe and the USA is worrying. EU GDP growth expectations for 2001 and 2002 have been scaled down and fears of an outright recession in Germany have become acute.

This series of gloomy news has implications for the transition economies, and the latest WIIW forecast for the region has been revised accordingly. The expected average GDP growth in the CEEC-7 in 2001 will be just 2.8% – about ½ percentage point less than forecast half a year ago. But this downward revision results mainly from developments in Poland where the interruption of growth turned out to be more dramatic than expected. Among the other CEECs, only Hungary’s GDP growth in 2001 was reduced markedly (from 4.8% to 4%). On the other hand, the recovery in the Czech Republic has been even a bit stronger than originally expected. The projected growth for the CEEC-4 thus remains the same as during 2000 (3.7%). With 4% GDP growth both Bulgaria and Romania are on track, and the current growth slowdown in Russia (to 5%) has come not unexpected (see Table).

What about the future? A protracted weakening of the West European economy would definitely not leave the transition countries unaffected. An inspection of recent industrial output trends shows a clearly declining tendency in the region as a whole. In Poland, there are even signs of a recession. Nevertheless, most CEECs have so far been spared the full impact of adverse effects of the recent weakening of EU growth – at least until the September WTC attacks. The big question is what will happen in the future. Assuming a recovery in the US and Western Europe in the second half of 2002, the CEEC economies may survive the global growth setback without much damage. WIIW’s relatively upbeat forecast may be substantiated not only by the recent impressive competitive gains. In addition, most CEECs now report expanding domestic demand, which is thus taking over the growth stimulus from declining net exports. With the notable exception of Poland (and here mainly for domestic reasons), there are no signs of any marked deceleration of GDP growth yet – despite definitely weaker external demand. In contrast, the latter does play a major role in the growth slowdown forecast for Russia.

In most transition countries imports are growing faster than exports and external balances are deteriorating again. This is a side effect of rising domestic demand and appreciating currencies. Apart from the transfer-dependent Balkans, the current account deficit increased dramatically in Slovakia in the course of 2001. The expected decline of energy prices should help to alleviate this in 2002 and, at the same time, will lead to a reduction of the huge current account surpluses in Russia. Inflation is in the single-digit range in nearly all CEECs (except Romania) and declining nearly everywhere. But unemployment in the whole region is stubbornly high, and in several countries even increasing. Of course, should Western Europe’s growth stay sluggish for a longer time (or even turn into a recession) then the CEECs will eventually suffer as well. The main victim could easily be the climate for enlargement in the EU, and this just at a time when accession negotiations are entering their final and most difficult phase.

Barring a longer period of stagnation or even a recession in the EU, the WIIW expects most CEEC economies to grow by about 3% to 4% on average in both 2002 and 2003 – only marginally less than during 2000-2001 (Table). A stagnation of GDP is forecast for Poland next year, and this largely for domestic economic policy reasons. Here, the expected change in fiscal policy may stimulate a weak recovery in 2003. In Russia, economic growth will further slow down in 2002 (to some 3%) mainly on account of declining net exports due to a combination of lower energy prices and growing imports. The latter are fuelled by expanding private consumption and investments – both enhanced by the strongly appreciating currency. A creeping effect of more reforms and higher investments may result in an acceleration of Russian GDP growth in 2003 (when the scheduled debt service will reach its peak: USD 19 billion).

Experience from the past few years suggests that fluctuations in GDP growth in the CEECs are increasingly linked to the business cycle in Western Europe (particularly Germany). A prolonged downturn in Western Europe could reduce growth in the CEECs by 0.5 to 1.5 percentage points, depending on the depth and duration of the slowdown. Altogether, the rate of catching-up of the transition countries would remain practically unchanged – about 2 percentage points per year in both 2002 and 2003.

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