Macroeconomic overview
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The transition countries have continued to show robust growth. This has been driven by strong domestic demand, which has in turn been spurred by real growth in credit and wages. Domestic demand and high energy prices are, however, putting pressure on inflation throughout the region. Moreover, domestic savings are currently insufficient to cover investments, resulting in large current account deficits, especially in countries that are not rich in natural resources. At the same time, foreign direct investment is projected to taper off slightly from the levels recorded in 2004–05. In 2006, several countries’ currencies have come under pressure in foreign exchange markets. This reflects a more critical assessment by foreign investors of vulnerabilities in the region’s emerging market economies. Furthermore, central banks in the United States, the eurozone and Japan have recently raised their interest rates, making investments in these countries more attractive.
Central banks across the region have been trying to grapple with the problems of rapid development of the financial sector combined with rising inflation. Many central banks have decided to raise interest rates, to introduce stricter regulations on minimum reserves or to initiate other anti-inflationary measures. Against this backdrop, fiscal policy has generally been too loose to stem domestic demand effectively. The case for more restrictive fiscal policies is becoming more pressing in view of the long-term implications of ageing populations, which will put significant pressures on public budgets in the future.
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