Investment-led growth in the CESEE countries: a base effect or signs of a paradigm shift

The period since the outbreak of the crisis corresponds roughly to the time-span estimated as the average time it takes for countries to recover from an economic crisis induced by a deep financial crisis.

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THE VIENNA INSTITUTE FOR INTERNATIONAL ECONOMIC STUDIES (WIIW)


MARIO HOLZNER

MARIO HOLZNER

DIPLOMAT ECONOMIST at THE VIENNA INSTITUTE FOR INTERNATIONAL ECONOMIC STUDIES (WIIW)

The impact of the external environment on developments in the countries of Central, East and Southeast Europe (CESEE) will be characterised by the following features over the next couple of years:

  • A relatively subdued recovery in the euro area and more rapid growth in the United States and other advanced economies;
  • Gradual reform processes relating to EU governance and policy coordination and their contribution to the recovery of the banking sector and economic activities;
  • Uneven growth at the global level with Asian and other emerging economies displaying comparatively high growth rates;
  • A gradual shift of US monetary policy (‘tapering’) and its ripple effect on international financial flows, revealing the vulnerability of a sub-set of emerging economies with weak current accounts and debts accrued over previous years;
  • Commodity prices and energy price developments remain flat (implications of the current Ukraine crisis and related developments with Russia not accounted for).

 

Five to six years have elapsed since the global financial crisis erupted; it is now time for Europe to set out on the path to recovery. The period since the outbreak of the crisis corresponds roughly to the timespan which Carmen Reinhart and  Kenneth Rogoff estimated as the average time it takes for countries to recover from an economic crisis induced by a deep  financial crisis ‘(see their widely discussed study This Time Is Different: Eight Centuries of Financial Folly (Princeton  University Press, 2009)’. In fact, the advanced economies are expected to record positive growth in both 2014 and 2015. This holds true for the euro area which is expected to grow at 1.2% in 2014 and 1.8% in 2015 after having gone through a period of recession in 2012 and 2013 – with GDP growth rates of - 0.7% and 0.4%, respectively. This is in contrast to the United States which started out on the road to recovery at an earlier stage, registering growth rates of 2.8% in 2012 and 1.9% in 2013 and is expected to grow at close to 3% in 2014 and 2015.

 

The current external economic environment appears to favour growth in the CESEE countries. With even the economies of Southern Europe, such as Spain and Italy, emerging from recession (see Figure 1) in tandem with world output growth picking up speed from its current level of 3.0% and rising to expected rates of 3.7% in 2014 and 3.9% in 2015 (International Monetary Fund, World Economic Outlook WEO Update, January 2014), the mild recovery in the euro area will engender a  global economic climate that also favours growth in the CESEE countries. Three factors, however, will restrain European growth at its current low level.

  • the lack of progress in dealing with the issue of ailing European banks, linked as it is to the very slow progress  towards establishing a banking union in the euro area, where bank consolidation remains almost wholly within the purview of national authorities;
  •  the persistent nature of the fiscal consolidation process which has – in the eyes of policy-makers – taken on even  greater urgency on account of the ever increasing levels of debt resulting from low growth and the periods of recession in previous years; and
  • the disinflationary – in some countries deflationary – climate that acts as a drag on both deleveraging and spending.

 

  

 

 

Over the past few quarters GDP growth in Central, East and Southeast Europe (CESEE) has been rather weak. That notwithstanding, in the course of 2013 most CESEE countries registered an upward movement in economic activity compared to the previous year, when the region suffered the second dip in the double-dip great recession. Those developments also tracked the fragile recovery in the euro area. In the first quarter 2012, almost half of the CESEE economies re-entered negative territory year-on-year; by the fourth quarter, average growth was close to zero. From the first to the final quarter 2013, the  average annual economic growth rose from 1% to 2%. Preliminary figures for the fourth quarter 2013 suggest that almost all CESEE countries have returned to positive territory, the most notable exception being Croatia stuck at the bottom of the  regional league. Both economies had been constantly shrinking since the fourth quarter 2011. The top performers in 2013 were the economies on the fringes of Europe, such as Kazakhstan, Latvia and Turkey. The three countries registered growth rates of some 4-5% that might however prove unsustainable, at least in the case of Turkey, confronted as it is by a sell-off in emerging markets.

 

With the exception of the Baltic countries and the European periphery, household consumption has been flat. In the Baltic countries, a wage rebound is fuelling household expenditures. Moreover, this trend is likely to continue in the years to come, as Baltic governments have announced their intention to raise minimum wages and unfreeze public sector wages and pensions in an attempt to make up for the misery suffered under the previous harsh austerity measures. In other former Soviet republics, current consumption growth is partly creditfuelled. Consumption was high in 2013; it is also expected to continue to lead GDP growth throughout our forecast period 2014-2016 − albeit at a somewhat slower rate compared to previous years. This projection holds only partly true for Turkey, which, having registered strong consumption growth in 2013, will have to rely more on net exports in 2014 and beyond, following a marked devaluation of the national currency in recent months. However, in all the other CESEE economies, private consumption has stagnated or even dropped over the past few quarters. Even though future quarters might bring some improvement, overall private consumption will not necessarily lead the way out of the slump.

 

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