Macroeconomic performance and prospects
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The transition countries of central eastern Europe and the Baltics (CEB), south-eastern Europe (SEE) and the Commonwealth of Independent States (CIS) continue to show a remarkable resilience despite continuing weakness in much of the global economy. For the second year in a row, a sustained recovery in the global economy did not materialise in 2002. Global growth in 2002 was a mere 3 per cent, reflecting continued sluggishness in the US and EU economies, an ongoing recession in Japan and turmoil in some emerging markets, particularly in South America.
The pace of the global recovery slowed further at the beginning of 2003 amid rising uncertainty caused by the conflict in Iraq and continued volatility in equity markets. However, a consensus is now emerging that a sustained upturn may start towards the end of 2003 and gain further momentum in 2004. Unfortunately, in the EU, the transition countries’ main export market, growth is unlikely to pick up until next year.
Against this backdrop, the transition economies recorded solid growth of 3.8 per cent in 2002. The expansion was primarily fuelled by rapid growth in domestic demand. A factor behind this resilience may be the continuing progress with institutional reforms and economic restructuring (see Chapter 2), which has raised competitiveness and boosted household and business confidence. Falling unemployment across the region has underpinned growth in private consumption, which together with public demand and growing investment has helped offset the dampening effects from abroad.
The outlook for 2003 is again relatively favourable. The EBRD expects the transition economies to expand by 4.7 per cent this year. Growth in the CEB economies is forecast to reach 3.3 per cent, spurred by a continued rise in private consumption, strong investment and a recent pick-up in exports. Some of the same factors also underlie economic expansion in SEE, where growth rates should be around 3.9 per cent. The CIS economies are expected to grow by about 6.2 per cent, fuelled primarily by the continued strength in oil prices, but also by a rapid growth in industrial production and by the recovery in investment in nonoil sectors.
However, reliance on domestic demand in CEB is not a viable growth strategy in the long term if strong domestic demand is driven by unsustainable government budget deficits. In the four largest CEB economies, public expenditure which has driven recent demand growth has contributed to rapidly rising fiscal deficits. The costs of meeting the standards set by the EU’s acquis communautaire further complicate fiscal management for the eight CEB countries that will accede to the EU in 2004. EU accession in May 2004 underpins the growing confidence in the future prospects of these economies. However, the difficulty now facing these countries is to balance recent surges in fiscal expenditure with the budgetary and monetary restraint required to achieve medium-term sustainability and, eventually, to qualify for full membership of the eurozone. With fiscal deficits at worryingly high levels in the larger central European countries, and lack of action so far to remedy this, many of these countries may wellrequire long transition periods before they can achieve accession to the eurozone under current rules.
Increased economic integration also poses important challenges in SEE, not only for the accession candidates– Bulgaria and Romania– but also for the western Balkans countries– Albania, Bosnia and Herzegovina, FYR Macedonia, and Serbia and Montenegro. They need to take advantage of the enhanced Stabilisation and Association Process (SAP) with the EU, as affirmed at the recent summit for the western Balkans in Thessaloniki, and push forward with the institutional reforms needed for increased integration into the enlarged EU market. However, even these countries have to continue efforts to keep macroeconomic imbalances in check to ensure increased convergence with EU markets.
For the CIS countries, strong reliance on exceptionally favourable prices for natural resources is a high-risk and unsustainable growth strategy. The CIS countries that are rich in natural resources have not done enough to advance economic diversification and to decrease their dependence on a narrow commodity sector. Their vulnerability to resource price movements consequently limits their medium-term growth prospects.
In the other CIS economies, the lack of regional cooperation, evident in widespread artificial barriers to trade and transit, and the continued dependence on a single export market, Russia, restrict their growth potential. Sustainable diversified growth throughout the CIS also hinges on more rapid progress in structural reform and institution-building and on the reversal of the alarming decline in educational and training standards over the past decade.
The macroeconomic performance of the region and its medium-term challenges are described in more detail in this chapter. An annex provides tables on the main macroeconomic indicators and includes forecasts from a variety of institutions for growth and inflation in 2003 and 2004 (see Annex 3.1).
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