Recovery - in low gear across tough terrain
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Mai 2011 |
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PETER HAVLIK - Deputy Director
THE VIENNA INSTITUTE FOR INTERNATIONAL ECONOMIC STUDIES (wiiw) |
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Rahlgasse 3 A-1060 Vienna, Austria
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+43-1-533 66 10 - 22
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Website
www.wiiw.ac.at
PETER HAVLIK
Deputy Director
THE VIENNA INSTITUTE FOR INTERNATIONAL ECONOMIC STUDIES (wiiw)
The Central, East and Southeast European countries (CESEE) countries have been recovering from the crisis. The majority of them reported positive GDP growth in 2010; only in Latvia, Romania, Croatia and Montenegro did the economy continue to contract – albeit less dramatically than in 2009 when the crisis peaked.* However, nowhere will the growth predicted for the years to come be as high as before the crisis (Table 1).
Among the various factors which could possibly explain the depth of the crisis and the intensity of recovery (such as the share of industry and exports in GDP, various characteristics of the banking system, FDI penetration, institutional factors, most of which were not very conclusive during the crisis period owing to statistical and other problems), the exchange rate regime seems to have played a more prominent role. Transition countries with a flexible exchange rate regime tended to master the crisis better than those with a more rigid regime, be it countries with a peg or currency board or those such as Slovenia already using the Euro.**
Of course, neither the exchange rate regime nor, for that matter, any other economic factor in isolation can explain the severity of the crisis or the strength of the ongoing recovery. Many other, frequently interacting forces have been at play, not all of which are clearly evident or easily captured by the analysis. An obvious and robust factor positively correlatingwith the intensity of the recent ‘growth reversal’ is the ‘base year’ effect.
Figure 2a shows trends in CESEE exports immediately before and after the crisis. The abrupt drop in export values across the board after September 2008 was steepest in Russia and Ukraine. In both countries (as well as in Kazakhstan) negative demand effects were compounded by adverse price developments. The exports bottomed out in January 2009 and, by the end of 2010, they had more than recovered in nominal euro terms compared to the pre-crisis period. On average, exports in both in the NMS and the Southeast European region appear to have recovered more sharply than they grew before the crisis. Exports thus played a major role in the recovery of the CESEE countries and in that sense, they did indeed ‘prevail over austerity’: an issue raised in the previous wiiw forecast from July 2010.
Despite the weaker GDP growth and performance differences between individual countries mentioned above, industry in the CESEE countries bounced back markedly in 2010 (Figure 2b). This rebound stands in sharp contrast to the situation in the construction sector, which even in 2010 continued to fall quite dramatically in most CESEE countries. Disappointing developments in the construction industry signal a fragility of current recovery as well as a generally cautious attitude on the part of both households and firms towards the strength and sustainability of the current recovery. The growth of credits to the non-financial private sector remains very slow; government spending on construction and investments is generally restricted. The only expanding source of financing in construction and investment, at least as far as the NMS are concerned, has been transfers from the EU budget. Indeed, the highly uncertain prospects for both the construction industry and fixed investments (of which construction outlays usually form a major part)*** represent one of the key downward risks to our present regional economic forecast. In contrast to the robust export upswing during 2010, the performance of key components in domestic demand – vs. the performance of both household and government consumption, and especially that of gross fixed investments – was weak even during the recovery phase. A reduction of fixed investments more or less across the board is obviously associated with the drop in construction activities mentioned above.
Taking all three main components of GDP demand together, we obtain the following broad picture for the economic growth in the CESEE region as a whole over 2010: a generally modest economic recovery resulting by and large from a strong rebound in terms of exports, while domestic demand components — final consumption of households and especially fixed capital formation — continued to decline (with above mentioned exceptions). Furthermore, in most CESEE countries the replenishment of stocks apparently contributed to mitigating the decline in investments and/or helped to foster GDP recovery in 2010. The exceptions to this growth pattern were Croatia and Macedonia (in terms of the positive effect of changes in inventories), as well as Poland, Turkey, Russia and Ukraine (in terms of the positive contribution of net exports to GDP growth). Needless to say, data on inventories for 2010 are very preliminary; they will likely be subject to correction (together with errors and omissions).
INTERRUPTED CATCHING UP PROCESS EXPECTED TO RESUME SOON
Looking ahead to the next 2-3 years, the general expectation for the CESEE region (assuming the above outlined baseline development scenario for the global economy, and especially that of Western Europe) is that there will be a gradual (yet unspectacular) strengthening of economic growth, in most cases rarely exceeding 4% p.a. The GDP growth will become more broadly based, with the former (2010) predominant role of external demand (net exports) weakening somewhat: slower export growth will be accompanied by the expansion of imports, resulting in a diminished or even negative contribution of net exports to GDP growth as of 2011. Simultaneously, both household consumption and, in particular, gross fixed investments over the period 2011-2013 will finally recover in all CESEE countries and contribute positively to GDP expansion.
