Macroeconomic overview
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Average economic growth in the transition region reached 6.9 per cent in 2006 (compared with 5.8 per cent in 2005), the highest level since the start of transition. This has been underpinned by strong domestic demand, high FDI and significant remittances from workers abroad, along with a rapid expansion in lending by foreign and domestic banks. Global demand and oil and gas prices remained high, as reflected in strong export growth. As a result, unemployment rates and poverty levels have fallen. In most central European countries, unemployment levels are now below the average EU level. Throughout the transition region, rising prosperity has become particularly manifest in demand for housing, leading to booming construction and sharp increases in housing prices.
At the same time pressure on the economy is becoming apparent throughout the region in the form of wage and price inflation and rising external imbalances. While exports have remained strong, the competitiveness of the Baltic states and several countries in south-eastern Europe is at risk. Against this background, monetary policy has gradually been tightened, although it remains loose in some cases. Fiscal policy has so far been unable to ease inflationary pressures and widening external imbalances, and is in many countries expected to fuel already overheating economies in 2007.
The global financial turmoil caused by problems in the US sub-prime mortgage market from August 2007 is expected to make external finance dearer, which may help overheated economies in the transition region to cool down. In a less benign scenario, countries with high external funding needs may experience a stronger than expected economic downturn.
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