Global Biz

Eastern European economy stumbles forward in 2009

(Xinhua)
Updated: 2009-12-25 18:56

BEIJING: Eastern and Central Europe, the high-speed economic locomotive in Europe and in emerging markets, was forced to take a brake in the past year due to the global economic downturn.

Most of the countries in the region suffered a sharp decline in gross domestic product (GDP), and took on huge fiscal deficits and high unemployment rates. A Chinese analyst says the regional economy stumbled forward in a slow way in 2009.

Meanwhile, an improved economic environment in the European Union (EU) and an increase in exports would help lift clouds of recession in those countries, but at different speeds, analysts told Xinhua.

WORST-HIT COUNTRIES

After years of growth, Latvia, Estonia and Lithuania saw a decline from 2008 that continued until 2009. The Baltic countries and Hungary have become the worst-hit countries in the region by the crisis, said Zhu Xiaozhong, an expert at the Chinese Academy of Social Sciences.

The above countries run "higher external debt levels and have limited fiscal and exchange rate responses to the slowdown," UniCredit Group's analysts said.

The Baltic countries' GDP shrank 19 percent, 15.6 percent and 14.2 percent, respectively, in the third quarter of this year, according to EU's statistics agency, Eurostat.

On one hand, the governments of the Baltic countries have been forced to slash expenditures, including reducing employees' wages, educational and medical funds, relief payment and pensions. On the other hand, the three governments carried out tax reforms that would help increase government revenues in a bid to restrain the deficits.

The Latvia government sought international donations under the premise of reining in its ballooning deficit.

In December 2008, the EU, International Monetary Fund (IMF), World Bank and Nordic countries agreed to back Latvia with rescue financing worth 7.5 billion euros (US$11 billion). Meanwhile, Latvia committed to slashing 500 million lats (US $1.06 billion) each year until 2012 to meet EU-set rules on public deficits.

In Lithuania, the government has implemented new tax reforms and launched a 1.5-billion-dollar bond to raise funds.

However, the measures brought heavy burdens to the enterprises and led to poorer living standards for people, analysts said.

Latvia's unemployment rate reached 15.3 percent in November, the highest figure in the EU, and Estonia 12.8 percent, Lithuania 11.7 percent, according to data released by the countries' labor and employment sectors.

Hungary was another country hard hit by the crisis, although a combination of rescue packages from the IMF and EU eased the financial difficulties there. Still, the country's public sector debt rose above 80 percent in 2009 and the private sector was heavily indebted in foreign currencies.

Not even Christmas shopping has the power to compensate the Hungarian retail sector for a year of losses, with household consumption expected to drop by 7 percent for 2009, economic think tank GfK Hungaria reported recently.

Households have been trading down -- buying lower-cost products, and replacing highly processed ready-to-eat meals with food made from scratch, GfK Hungaria reported, adding that the downshift in quality was true for the entire economy, not just the retail sector.

UniCredit Group analysts predicted two consecutive years of contraction for Hungary's economy, with positive prospects only in 2011.

"SECOND GROUP"

The economies of Bulgaria and Romania also suffered bad hits in 2009, but fared better than the Baltic countries and Hungary, analysts pointed out.

"Countries such as Bulgaria and Romania belonged to the second group in emerging Europe," said Zhu.

The Bulgarian government revised the forecast of its GDP for 2009 to a decline of 4.9 percent from the previous estimate of a 6.3-percent drop, attributing the revision to the quick curbing of the state's fiscal problems.

The IMF expected the Balkan country's GDP to fall 6.5 percent this year and 2.5 percent next year. The EBRD forecast that Bulgaria's GDP would fall by 1.5 percent next year, following a 6-percent drop this year.

In view of the good results, officials believed that 2009 would end with a small deficit of up to 500 million leva (US$382 million) or 0.75 percent of GDP. The government has also approved an austerity budget for 2010 and will target a zero gap in a bid to speed up euro zone entry and to beat the recession.

However, the World Bank painted a gloomy picture of the Bulgarian economy for 2010 in a recent report.

"Although more modest than the expected impact in other countries, the (Bulgarian) labor market is again an important transmission channel, particularly among workers in the construction sector," the report said.

Declining remittances underpin about a quarter of the overall poverty increase, and a much larger share of the rise in extreme poverty, the report noted, adding that the unemployment rate would reach 12 percent from this year's 9 percent.

From January to November, new car sales had a 52 percent decline than the same period last year, and the price fell down 25 percent, said the Union of the Importers of Automobiles in Bulgaria.

Some say Bulgaria is going through its first recession in 12 years after a three-year lending boom stalled and foreign investment dried up,

In Romania, the economy has shown signs of a gradual recovery with good industrial production performance and a slight increase in exports.

The country's industrial production grew 0.2 percent in October compared with September, while the annual decline moderated to 1.5 percent, driven by strong performances of capital goods and the current use goods industries and by growing demand from Western Europe.

"The industry started to recover and there are clear signals that the decline halted," Lucian Croitoru, adviser to the central bank's governor, told Xinhua. "The main part of Romania's exports came from manufacturing industry and there are positive signals in Western economies."

With economic activity picking up for Romania's main trading partners, the performance of the industrial sector was likely to continue improving, said Nicolaie Alexandru Chdesciuc, senior economist at ING Bank Romania.

"The EU consolidated its share in Romania's foreign trade to 75 percent of total exports and 73 percent of total imports, pointing to the important role played by a gradual economic recovery of the major European markets in Romania's 2010 economic growth," Chdesciuc said.

However, political crises caused the depreciation of the national currency and added inflationary pressures, analysts say.

The annual inflation stood at 4.7 percent, above the central bank's target, beating analysts' expectation of 0.4 percent.

The contraction in corporate deposits of foreign currencies suggested that the economic activity remains downbeat, Chdesciuc said

The Finance Ministry has tapped about 2.6 billion lei (605 million euros) through the sale of one-year and five-year papers in national currency and attracted about 2.2 billion euros (3.19 billion dollars) from the local market.

EU balance of payment support, low public sector debt levels and long term growth potential supported by EU funds would help the country to compensate the risks of high budget deficit and get out of the recession next year, analysts say.

BELLWETHER

The economies of Poland and the Czech Republic appear to be in a relatively good position, Zhu said. Poland, the largest of the EU's eastern members, enjoyed the best economic situation in the region, Zhu noted.

The Organization for Economic Cooperation and Development (OECD) forecast recently that Poland's economy would grow by 1.4 percent in 2009 and by 2.5 percent in 2010.

The Polish central bank predicted the GDP would be 1.3 percent in 2009, 1.8 percent and 3.2 percent in 2010 and 2011, respectively, which would possibly retain Poland's leading position in the EU.

Polish Economy Minister Waldemar Pawlak said earlier that his country would continue positive economic growth and thus maintain its unique position in the EU.

Data has shown that the country's unemployment rate was controlled at 11-percent level from the previous estimate of 12.8 percent. The exchange rate meanwhile, was kept at the level of one dollar equaling 2.8 zlotys.

Marin Mrowiec, chief economist at Bank Pekao, said Poland's economy managed to stay above water "due to relatively loose 2008 fiscal policy and a relatively smaller export sector."

The quick growth in the coming two years can be credited mainly to investments co-financed by the EU and ongoing preparations for the EURO 2012 soccer championships, according to the OECD.

The Czech Republic had also better recovery prospects than most of the Eastern and Central European countries and would be able to pull out of recession sooner, analysts said.

The Czech Statistic Office announced the country's GDP declined 4 percentage points in the third quarter, which was a 0.8 percentage point increase from the previous quarter. Some economists optimistically said the recession has already ended in the country and the recovery would come next year.

Czech's foreign trade surplus reached 17.5 billion crowns (about US$1 billion) in October, and 135 billion crowns (US$7.7 billion) estimated for the whole year, which accounted for 3.5 percent of the GDP.

Analysts said the positive figures profited from the improved economy of the EU, especially neighboring Germany.

Despite the positive figures and signals, problems still remain, analysts warned, saying the major troubles are weak industry orders, the difficult fiscal situations of many enterprises, and increasing unemployment.