PlanEcon Forecasts Solid Growth in 2001 for Central and Eastern Europe, But Growth in 2002 Will Be Even Better

After a stellar 2000, PlanEcon projects GDP growth to slow in Central and Eastern Europe in 2001, but to then accelerate in 2002. Despite the slowdown in growth in 2001, with the exceptions of Poland and Macedonia, the region is still projected to have another good year, but next year is projected to be even better once Poland, the largest economy in the region, enjoys more rapid growth.

After a great 2000, we project economic growth in Central and Eastern Europe will be more mixed in 2001 and 2002. The year 2000 was the best year since the mid-1990s for the region's economies. Aggregate regional GDP rose 3.8% as every country in the region recorded economic growth. This year economic prospects are more disparate. Growth in aggregate output in Central Europe is slowing. Poland is going through its roughest patch since emerging from its transition recession in 1992. Growth is projected to fall from 4.0% in 2000 to only 2.6% this year and is projected to run only 3.8% in 2002. Many of Poland's economic problems are self-inflicted: they stem from an illadvised mix of very tight monetary policy, a floating exchange rate, and a failure to keep its fiscal house in order. Structural problems in coal mining, the steel industry and agriculture as well as large numbers of new entrants to the labor market pose substantial challenges to the next government's economic policy team. Because of these problems and the tension between Poland's Monetary Policy Council's emphasis on rapidly reducing inflation and the probable next government's more relaxed view of fiscal policy, we project much lower growth rates for Poland in our medium-term forecast than the 7% annual rates enjoyed in the mid-1990s.

We project that Hungary, which has been Central Europe's star performer for the past few years, will also report lower growth this year. Last year, Hungarian GDP rose 5.2%; this year, we forecast GDP growth will fall to 4.7%. For 2002, we project a still strong 4.6% growth rate. Although still admirable, prospects for 5% plus GDP growth, rates that the current government had hoped to achieve, are receding. Hungary has chosen to adopt a new exchange rate and monetary policy regime. The fluctuation band for the forint has been widened from plus or minus 2.5% to plus or minus 15%. As monetary policy is no longer dictated by the crawling peg exchange rate regime, the Hungarian monetary authorities now have much more discretion. They have chosen to set very aggressive targets for reducing inflation, targets that in Hungary's full-employment economy are unlikely to be met without a sharp deceleration in growth in aggregate demand, given that nominal wage growth has been in double-digits and considering Hungary's history of relatively high inflation. As a consequence, Hungary's rates of growth are projected to be slower this year and next than in 2000.

Slovenia, which had its best year yet in 1999, with GDP growth of 5.2%, registered a slowdown in growth to 4.6% in 2000. It is experiencing a further reduction in growth this year as increases in exports slow. We are projecting growth of 4.3% this year and 4.4% in 2002. In contrast, the news from the two Central European laggards, the Czech Republic and Slovakia, is much better this year. The Czech Republic is enjoying its first year of rapid economic growth since 1996. We are projecting a rate of 4.4% for the year compared to 2.9% in 2000. Slovakia, which suffered a slowdown in economic growth a year or so later than the Czechs, is also enjoying accelerating economic growth, but not to the same extent as the Czechs. In contrast to the Czech Republic, Slovakia is still struggling with very high rates of unemployment. These rates are dropping slowly. Slovakia has also not attracted the very large inflows of foreign direct investment (FDI) enjoyed by the Czech Republic, although inflows increased markedly as the current government has pushed state asset sales to foreign strategic investors. Consequently, we are projecting Slovakia's GDP to rise by 4.2% this year after growth of 2.2% in 2000. Both countries are projected to enjoy even more rapid growth next year: we forecast 5.1% for the Czech Republic and 5.3% for Slovakia in 2002.

In short, with the exception of Poland, Central Europe will continue to enjoy solid economic growth in 2001. However, lower growth rates in Hungary, Poland and Slovenia will pull overall growth to 3.4%, below the 3.9% experienced in 2000. Growth in all the countries except Hungary is projected to accelerate in 2002. Prospects for the Balkans are more mixed in 2001 as well. The big disappointment is obviously Macedonia. After enjoying a stellar 2000 as GDP rose 5.1%, economic output is falling this year as civil strife has led to a flight of domestic capital from the denar to foreign currencies and commercial activities have been disrupted by the conflict. Increased military spending is also creating substantial fiscal problems. Although the IMF and other international financial institutions are assisting the Macedonian government to keep the denar stable and to finance increased budgetary expenditures, the economy could suffer a very sharp decline in fourth quarter 2001 and in 2002 if the current cease fire falls apart. We are projecting a decline in GDP of only 0.8% this year under the assumption that the NATO operation is successful. We are forecasting economic growth of 5.1% again in 2002, presupposing that ethnic differences are subdued and that the EU provides substantial assistance to the country. The other Balkan economies are avoiding the disastrous turn of events in Macedonia. However, we are projecting slower rates of growth for most of the smaller economies this year. For Albania, Bosnia, and Yugoslavia, we are forecasting a drop in growth rates of a percentage point or two. Reductions in aid in Albania and Bosnia are slowing growth in these two countries. For 2002, we project a further slowdown in growth in Bosnia and Albania to a still rapid 7.0% to 7.5%. In contrast, Yugoslavia is unlikely to receive large infusions of aid until late in the second half of the year so Yugoslav growth will be constrained by domestic sources of growth and by export performance. Because aid will be slow in coming, we project a fall in growth in GDP from 7.0% in 2000 to 5.4% this year for Yugoslavia. Growth is projected to accelerate to 6.2% in 2002. Bulgaria will also experience slower growth this year, 5.1%, compared to 5.8% in 2000 as export growth slows. Growth in Croatia is likely to be no worse, but little better than in 2000, when the country emerged from recession. GDP growth of 3.7% in 2000 was better than expected, but meager increases in exports in the first half of the year, high unemployment, and reductions in real wages for government employees will keep growth from accelerating dramatically in 2001. In 2002, we forecast 4.3% growth for the country.

The largest Balkan economy is projected to grow more rapidly this year than in 2000. We are projecting Romania's GDP to surge by about 6%, up from 1.6% in 2000. Despite the electoral victory of the former Communists last fall and the creation of a new, leftist government, Romania is enjoying the fruits of the restructuring and privatizations of the last four years. In addition, the new government has taken a much more disciplined approach to economic policy than expected. Budget deficits are being kept under control and the authority of the central bank has been kept intact. The largest cloud on the horizon is the current account deficit, which has widened sharply in the first part of this year. However, in light of buoyant export growth and declining inflation, we project continued strong growth next year as well.