Eastern Europe - Resilience and recovery
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Mai 2011 |
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JOAN HOEY - Senior Analyst, Central and Eastern Europe
THE ECONOMIST INTELLIGENCE UNIT |
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JOAN HOEY
Senior Analyst, Central and Eastern Europe
THE ECONOMIST INTELLIGENCE UNIT
Eastern Europe was the emerging-market region that was hit the hardest by the global crisis in 2009. There was a steady, if unspectacular, recovery in most of the region in 2010, and this is set to continue in 2011.
Exports and industrial output have generally been performing well. However, business and consumer sentiment in the region is fragile, and currency and bond markets are vulnerable to contagion from troubles in the Euro zone. Moreover, the recovery in a number of countries, particularly in the Balkans, is lagging. Real GDP in eastern Europe as a whole increased by 3.4% in 2010 after having plunged by almost 5.7% in 2009. Growth is expected to pick up to 3.9% in 2011. That will compare well with growth in the developed world, but will again be below the rate of expansion in other emerging-market regions and below what eastern Europe achieved in the years before the crisis.
World real GDP growth is forecast to decelerate in 2011 to 4.2% at purchasing power parity (PPP) exchange rates and 3.2% at market exchange rates, from estimated growth of 4.8% and 3.8%, respectively, in 2010. Emerging markets will continue to lead the recovery, whereas growth in leading developed markets will remain sluggish. Global growth is unlikely to return any time soon to the pre-2008 trend rate, as it will be constrained by the after-effects of the crisis in 2008-2009.
Trends in the Euro zone remain a critical driver of activity in many transition economies, including Romania. The Euro area’s sovereign debt crisis has implications for the economic outlook. Rising concerns over the sustainability of the region’s public finances means that fiscal tightening will come sooner and be stronger than might otherwise have been the case. Some countries tightened policy already in 2010, and austerity measures will be implemented throughout the region in 2011.
The Euro area crisis is not over
Although there has been some improvement in sentiment in the Euro zone in recent months, it would be premature to suppose that the Euro zone has emerged from its crisis. The large debt burdens and loss of competitiveness affecting peripheral Euro zone members that caused the markets to lose confidence in their solvency and ability to grow are still there. It remains to be seen whether European policymakers can reverse this.
Despite the crisis, the Euro zone has been recovering from recession. Germany especially has performed well, although its growth will now inevitably slow from the fast rate achieved in 2010. We forecast that GDP growth in the Euro area will again reach 1.7% in 2011, the same as in 2010.
Output trends in some economies in the Commonwealth of Independent States (CIS) continue to be closely tied to international oil prices. The price of oil has shot up to levels not seen since mid-2008 in response to the political turmoil in the Middle East and North Africa (MENA). The increase in the political risk premium will lead to higher oil prices in the first half of 2011, on average to more than USD 100/barrel. Even before the political unrest, oil prices were expected to be higher in the first half of 2011 because of strong consumption growth, particularly in emerging markets, and loose global liquidity conditions, which have been encouraging investment into the oil market and other commodity markets.
As long as actual physical disruptions in supply are limited only to Libya, the price should ease in the second half of 2011. The outlook for Saudi Arabia is vital to a sanguine view of the oil market, in which the price does not stay above USD 100/barrel for a prolonged period. Given the speed and unexpected nature of events that have already taken place in the region, one can hardly place much confidence in the prediction that Saudi Arabia will remain unaffected.
According to the Economist Intelligence Unit, there are 55 authoritarian states in the world, including some of the world's largest oil producers and exporters. Autocracies account for more than one-half of global oil exports. Of the world's 20 largest oil exporters, 12 are authoritarian states. According to a measure of the vulnerability of these states to political revolts, in addition to Libya (where a revolt is under way), three other states – Iran, Algeria and, notably, Saudi Arabia – are considered to be at high risk of political revolt.
The outlook for most energy-importing economies in the CIS is still dependent to a significant extent on Russia. Despite the large decline in most CIS countries' share of trade with Russia in recent years, Russian import demand has continued to make an important contribution to economic activity in the subregion. The sharp decline in Russian real GDP in 2009 thus had a serious impact on these economies, through a decline in trade flows and, crucially for some CIS economies, declining labour remittances.
Averaged over the transition countries, annual weighted import demand in each country's 20 main trading partners fell dramatically in 2009, by an estimated 14.8% (the worst situation since the start of the transition). All subregions experienced a drop in external demand in 2009. Worst hit were the Baltic countries, where average export demand fell by 18.4% in 2009. There was a recovery to an estimated 10.4% growth in the transition region in 2010, but this isexpected to slip to growth of 6% in 2011. This compares with average growth of above 10% per year in 2000-2007.
The risks to the global economy remain significant. The greatest risk to our forecasts continues to stem from concerns about fiscal and financial sector sustainability in the developed world, which will remain a source of market turbulence. Although market sentiment towards the Euro zone has improved, no solution to the solvency crisis in the European periphery is in sight. Plans by policymakers for a more comprehensive response to the region’s debt burdens (this could include a larger bail-out fund, new powers for the fund to buy government bonds in the open market, and initial discussions towards greater fiscal coordination) have contributed to a decline in government bond yields in Spain and Greece. Although a new plan for addressing the crisis is expected in the coming weeks, we expect this to be little more than another patch – enough to satisfy markets that Euro zone leaders are taking the crisis seriously, but not enough to provide a solution. A lasting solution would require an acceptance of the need to restructure the debt of weak peripheral sovereigns and the recapitalisation of the region’s banks.
Resilience mixed with vulnerability
Much of Eastern Europe has shown considerable resilience in the face of the Euro zone crisis. Such resilience stands in sharp contrast to developments in the Euro area’s southern periphery and Ireland. Some of the countries at the centre of the Euro area debt crisis, such as Greece and Portugal, have poor growth prospects and therefore only a slim chance of climbing out from under a mountain of public and private debt. Ireland and Spain may be slightly better placed, but also face an enormous task to win back the confidence of financial markets.
There were genuine fears that Eastern Europe could suffer from a domino effect, with the problems that hit Greece and Ireland spilling over into currency crises in Eastern Europe. However, this has not happened, even though the region remains less popular than other emerging markets (for example, Asia) with international investors. The currency markets appear to be convinced, at least for now, that the east-central European states do not share the debt and spending problems of Greece, Ireland, Portugal and Spain.
Latvia is the only country in the region with fiscal problems as severe as those in the troubled Euro zone countries. Its deficit is slightly larger than that of Portugal, although still smaller than in Spain, Greece and Ireland (bank bail-outs pushed the Irish deficit to more than 30% of GDP in 2010). Other countries in the region are typically running deficits of 4-8% of GDP, which, even if in need of correction, have not caused runs on currencies.
The levels of public debt in central and Eastern Europe compare well with those in the troubled Euro zone members. The exception is Hungary, where public debt, nearing 80% of GDP, is higher than in Spain and similar to that in Portugal. The rest of the region has debt comfortably below 60% of GDP, and well below the levels seen in the Euro zone casualties.
The main difference, however, is in levels of private debt. This has hit 192% of GDP in Portugal and 234% in Ireland. Central Europeans are poor and underbanked by comparison, keeping private debt levels down to 55% of GDP in the Czech Republic, for example, and just 42% in Romania. However, Hungary is again a little worrying, with private debt worth 71% of GDP, and Latvia has some serious problems, with private debt amounting to 109% of GDP.
Latvia is not the only country that remains potentially vulnerable. Signs that east European governments are straying from the path of fiscal consolidation could lead to adverse market reactions. Examples include the Hungarian government's decision to all but dismantle the private pension system and take control of monetary policy, and the Polish government's complacency over fiscal consolidation. Poland has promised to reduce its deficit to less than 3% of GDP by 2013, and faces large EU fines if it fails to do so. However, with an election looming in 2011, it has done little so far, and has consistently avoided the central questions over reforming its inefficient welfare system and agricultural support system.
Business sentiment is fragile
The dynamism of the German economy in 2010 has been a crucial engine of recovery in many economies in central Europe. However, the German economy will slow in 2011. Stimulus packages are being phased out and the inventory-building cycle has ended. There is little prospect of a strong recovery in foreign direct investment (FDI) inflows to the region. Credit conditions are still generally tight, and in many countries fiscal tightening is on the agenda.
The economic crisis revealed structural weaknesses in public finances, and budget deficits increased sharply, replacing previously large current-account deficits as the main source of vulnerability for many east European economies. Substantial fiscal consolidation is required. This is now well under way in some countries, but might have to be accelerated if market sentiment towards the region sours.
The region’s recovery remains at risk from possible banking sector problems. There are question-marks about the state of west European banks’ portfolios, and a lot of the uncertainty affects the investment plans of these banks in Eastern Europe. Although fears that foreign banks would make large withdrawals of capital from the region have so far proved unfounded, there is still a risk that a new bout of financial difficulties in Western Europe could lead to parent banks diverting capital to their home markets. Furthermore, under any scenario, lending by these banks in the region will be much more subdued than in the past. The Greek crisis poses particular risks in this regard for several Balkan economies.
