Recovery in sight if there is no double dip in the US
It was clearly expected that the growth in Central Europe (CEECs) will be weaker in 2002 than in 2001 taking into account the world economy sharp slowdown. But the intensity and the shape of the recovery were uncertain. Based on the results of the last semester recently released what can be said for the end of the year and beyond ? In its last survey of the CEECs economic prospect, the WIIW* forecast an economic revival towards the end of the year which would be accentuated in 2003, and joined in that a certain consensus among most of experts. But if the rebound expected for the 2nd quarter does not occur, the German economy would rather move towards a U curve (slow recovery), even a W (double dip), if the American economy enter in a new recession, as forecast some experts. What could be the outcome for Central Europe?
On the external side, the exports trend shows that a bottom may have been reached in the last quarter. Admittedly the recovery is moderate, but sales abroad grow again and the WIIW (U curve scenario) envisages an average growth rate of approximately 5%, far from the 15% of last year. With imports growing by 1,5% on average, the external account contribution to the GDP would still be positive, except perhaps in Slovakia. The recent downside correction of the exchange rates in most CEECs should even ease the external pressures.
Industrial production has also passed its lower point (see graph). This confirm an unquestionable resistance from the German economic cycle, in particular due to the continuation of FDI flows to CEECs, but also supported by strong domestic demand (except in Poland). How do these two factors of resilience will act in the near future?
On the economic policy side, elections in Hungary, Czech Republic and Slovakia triggered accommodating fiscal policies which largely stimulated domestic demands. Real wages for example increased by more than 10% between January and June in Hungary (27% yearly rate in June alone !), thanks in particular to large public sector wage increase. But these economies cannot count any more on this engine with budgetary deficits sharply on the rise (6% expected in Hungary). Moreover, rationalization plans in most multinationals are spreading throughout the region, and could lead employment to drop.
Foreign investments (FDI) should according to the WIIW remain in 2002 in conformity with this year initial forecasts: approximately USD 16 bn, a little less than in 2001, USD 19 bn. Privatizations largely contribute to this, in particular in Slovakia and Czech Republic (3,5 bn expected). They would reach however only approximately 1 bn in Hungary – reinvested benefits excluded -, country which rely on greenfield investments primarily. On the domestic investment side finally, the fall is stabilized in Poland but still -4% is envisaged for 2003. Elsewhere, the capital formation would still continue to support growth this year and next. But the expected increase, +5% on average Poland excluded, could be insufficient with the EU convergence target, and make FDI all the more crucial for the next couple of months.
And where could lead the possible double dip scenario in the US ? First to a clear German new slowdown. And with more than 20% GDP share of the CEECs trade with their strong neighbor, it could lower by almost 1 % the regional GDP growth. Poland would be particularly affected. The other Visegrad economies are clearly the main beneficiaries of the German industry delocalisation. The Baltic countries are more in the nordic countries sphere. And Bulgaria or Romania are still on their own path: getting out of their old mess. The progress is not so negative right now.
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