The Vienna Institute Monthly Report 1999/10
SUMMARIES

Czech economy: A hint of recovery
Rising real wages are pushing private consumption upwards and stimulate the GDP growth positively. Unless there is a drop in the exchange rate to far below an average of about 37 CZK/EUR, foreign trade is likely to foster growth as well. Gross fixed investment will decline still further due to the critical financial situation in many enterprises.
 

Hungary: Waiting for a turnaround in the EU business cycle
The period of accelerating economic growth came to an end in the last quarter of 1998. Export-led expansion continued this year, but at a lower rate than earlier. Just as the recent growth slowdown was triggered by the weak performance of Hungary’s main export markets in the European Union, the improving outlook there promises a return of higher growth rates for the last months of 1999 and the next year. The recent episode of slowdown, however, made the duality of the Hungarian economy (booming foreign-owned engineering sector vs. other sectors coping with problems) again more explicit.
 

Something is rotten in the state of Poland
Despite lower growth, the current account deficit has become very high. Poland's vulnerability to possible current account and currency crises has increased markedly. The three fundamental reforms (regional administration, health care, pension system) started at the beginning of 1999 have proved costly failures so far. They ignited general discontent and have endangered public finances. Changing fiscal policy stipulates cuts in budgetary expenditure, a lower overall tax burden on high incomes and higher (indirect) taxation of low incomes. Internal (and external) demand for Polish products is likely to stay weak.
 

Slovakia: Austerity package not yet successful
The higher than expected GDP growth in the first half of 1999 was mostly fuelled by the rise in exports in the wake of the currency depreciation. The earlier investment boom, supported mostly by foreign borrowing, resulted in a ‘twin deficit’, and the new cabinet has been forced to adopt a strict austerity policy. Weaker economic performance and increasing financial troubles of the enterprise sector have adversely affected the banks, which require radical restructuring; the three state-owned banks are to be privatized. Despite a slight reduction of the current account deficit (to 8% of GDP) the country’s external position remains very vulnerable. As a result of the austerity packages currently employed, GDP growth will decelerate to 2% in 1999 and may stagnate in 2000. The deficit of the central government will fall slightly to 2% of GDP. Due to weaker domestic demand and the weaker currency, the external position may improve in the coming years.
 

Slovenia: GDP growth driven by domestic demand
The period prior to the introduction of the VAT in July was characterized by strong domestic demand. As a result GDP grew by 4.5% during the first half of 1999. For the whole year we expect a 3-3.5% increase. The high trade deficit, caused partly by rising imports in anticipation of the VAT, entailed a remarkable current account deficit – which will however remain a temporary phenomenon. Price rises after the introduction of the VAT remained within the limits envisaged by the authorities. In 2000 economic growth should accelerate due to improved conditions in the major export markets.
 

Russia: Signs of economic recovery amidst deteriorating politics
The Russian industry is recovering. Also, last year’s devaluation has led not only to higher inflation but to growing trade and current account surpluses as well. Domestic demand remains depressed though investments may finally bottom out. Banks are paralysed and the country has de facto defaulted on its debts. With escalating political conflicts prior to the presidential elections, no major economic policy initiatives are to be expected in the final months of the Yeltsin period.
 
 
 

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