PRESS RELEASE NOT TO BE RELEASED BEFORE 2006 02 22, 12.00 A.M.

Economic Outlook for Central, East and Southeast Europe: Private Consumption and Flourishing Exports Keep the Region on High Growth Track

In its new forecast for Central, East and Southeast Europe, The Vienna Institute for International Economic Studies (wiiw) analyses the current economic situation in the region as well as development prospects for 2007 and 2008. Short country surveys for Albania, Bosnia and Herzegovina, Bulgaria, Croatia, the Czech Republic, Hungary, Macedonia, Poland, the Slovak Republic, Slovenia, Serbia, Montenegro, Romania, Russia, Ukraine and Turkey (as well as China) are added. An annex contains indicators of competitiveness as well as projections of per capita GDP for these countries until 2015.

Fast economic growth continues in most New EU Member States (NMS). Growth in Bulgaria and Romania was also accelerating throughout 2006. Everywhere, except Hungary, GDP growth has been driven predominantly by domestic demand. External trade, which significantly boosted GDP growth in a number of NMS in 2005, has been losing significance and continues to be a drag on growth in Bulgaria and Romania. wiiw growth forecasts of GDP in individual NMS in 2007 and 2008 are looking very good (see Table). It is expected that household consumption will rise strongly again. Growing employment and wages, as well as remittances of migrant workers contribute to higher consumer spending. Investment is expected to remain strong. With the exception of Hungary, fiscal policies will not interfere with real growth. The slight deceleration of growth in the EU-15 is not likely to restrict the growth of both NMS exports and their overall GDP too much. However, rising imports will reduce the contribution of trade to GDP growth. Unlike the ‘old’ NMS, Bulgaria and Romania will be running very high current account deficits and rely on rising private foreign debt in order to finance consumption and investments.

The risk of making big errors in growth forecasts for the ‘old’ NMS is fairly low. Their fundamentals are nowadays much sounder than in the past (Hungary being temporarily an exception). The rates of inflation are quite low and firmly under control. Incentives for potentially destabilizing speculative capital flows are weak. Nominal currency appreciation is likely to continue, signifying the NMS’ economic strength rather than potential weakness. The estimates of GDP growth rates for Bulgaria and Romania are less certain. Both countries are growing turbulently. But, as in the Baltic countries, their growth is to a large extent induced by booming household consumption which is credit-driven and fed by excessive imports.

The Balkan economies continue to grow despite political risks and external shocks. Consumption is the main source of growth, with investments increasingly contributing. External balances remain strongly negative. Price and exchange rate stability is manageable because of productivity growth and downward pressure on wages. The sustained growth is supported by foreign investments. Fast rising prices of assets and declining interest rates due to strong credit expansion are proving worrisome for the central banks. These challenges are met with a tightening of monetary policy.

Risks emanate from political problems and doubts about the process of EU integration. The major risk is connected with the Kosovo status. If this is managed well and if other political problems are addressed that will make it possible for all the countries in the region to either sign association agreements with the EU or continue or start negotiations on membership in the EU, rather positive economic news should be coming out from the Balkans. Overall, the outlook for growth is good however prospects for stability are risky. The region as a whole should be included in the EU by 2015, except perhaps for Kosovo and Turkey.

In Turkey, GDP growth should accelerate and stability improve over the medium run. The risks connected with the possible reduction of emerging markets’ attractiveness to investors are not altogether negligible. In the longer run, a disappointment in the prospects for EU accession may have important negative consequences.

Russian economic growth is driven by surging private consumption, recently also by investments. The economic outlook remains positive with both consumption and investments (including FDI) growing rapidly. However, we expect growth to settle between 5% and 6% in the coming years. With more oil and gas money as well as power consolidation at home, Russia’s selfconfidence will grow further.

In Ukraine, GDP growth accelerated markedly in 2006; macroeconomic imbalances were largely avoided and the ‘gas price shock’ reasonably well digested. Inflation apart, the country’s short-term economic outlook is good. Despite the persistent stand-off between the president and the prime minister, the country is now living through a period of its greatest political stability since the ‘orange revolution’.

In China, GDP growth is driven by investment and an exploding trade surplus but supported by private consumption as well. Prospects remain good but a slight deceleration of growth may occur, due to a certain slowing down of investment and government policies to contain the trade surplus.

'Private Consumption and Flourishing Exports Keep the Region on High Growth Track' wiiw Research Report no 335, by Leon Podkaminer, Vladimir Gligorov et al., February 2007

134 pages including 49 Tables and 19 Figures (in color).

The Report comprises two regional overviews and seventeen brief Country Reports on the following transition countries: Albania, Bosnia and Herzegovina, Bulgaria, Croatia, the Czech Republic, Hungary, Macedonia, Poland, Romania, Russia, Serbia, Montenegro, Slovakia, Slovenia, Ukraine, Turkey and China.

Available in hard copy (EUR 70.--) or in PDF (EUR 65.--) from wiiw's website, (Individual Country Reports, only in PDF: EUR 10.-- each.) Orders can also be sent to fax +431 5336610-50 or to email .

wiiw, 22 February 2007

Univ.Doz. Leon Podkaminer, Tel 533 66 10 – 34, E-mail:

Prof. Vladimir Gligorov, Tel. 533 66 10 – 23, E-mail:

Dipl.-Ing. Peter Havlik, Tel. 533 66 10 – 15, E-mail:

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Overview developments 2005-2006 and outlook 2007-2008
GDP / Consumer prices / Unemployment, based on LFS1) / Current account
real change in % against previous year / change in % against previous year / rate in %, annual average / in % of GDP
2005 / 2006 / 2007 / 2008 / 2005 / 2006 / 2007 / 2008 / 2005 / 2006 / 2007 / 2008 / 2005 / 2006 / 2007 / 2008
forecast / forecast / forecast / forecast
Czech Republic / 6,1 / 5,9 / 5 / 5 / 1,9 / 2,5 / 2,5 / 3 / 7,9 / 7,3 / 6,7 / 6,5 / -2,1 / -4,4 / -4,4 / -4,0
Hungary / 4,2 / 4,0 / 2,7 / 3,1 / 3,6 / 3,9 / 6,3 / 3,5 / 7,2 / 7,5 / 7,9 / 7,8 / -6,8 / -6,2 / -4,9 / -4,1
Poland / 3,5 / 5,8 / 5,3 / 5 / 2,1 / 1,0 / 1,8 / 2 / 17,8 / 15 / 14 / 13 / -1,7 / -1,9 / -2,0 / -2,0
Slovak Republic / 6,0 / 7,5 / 7 / 7 / 2,7 / 4,5 / 3 / 2 / 16,2 / 13,5 / 12 / 11 / -8,6 / -7,3 / -4,9 / -5,1
Slovenia / 4,0 / 5 / 4,5 / 4,4 / 2,5 / 2,5 / 2,6 / 2,3 / 6,6 / 6,3 / 6 / 6 / -2,0 / -2,6 / -2,2 / -1,5
NMS-5 2)3) / 4,4 / 5,6 / 4,9 / 4,8 / 2,4 / 2,1 / 2,8 / 2,5 / 14,1 / 12,1 / 11,5 / 10,8 / -3,2 / -3,6 / -3,3 / -3,1
Bulgaria / 5,5 / 6,2 / 6 / 5,5 / 5,0 / 7,3 / 5 / 5 / 10,1 / 9 / 8 / 7 / -11,3 / -15,8 / -13,5 / -13,3
Romania / 4,1 / 7,5 / 6,5 / 6 / 9,0 / 6,6 / 6 / 6 / 7,1 / 7 / 7 / 7 / -8,7 / -10,7 / -12,7 / -11,0
Estonia / 10,5 / 11,5 / 9,5 / 8,4 / 4,1 / 4,4 / 4,2 / 4,6 / 7,9 / 5,8 / 5 / 4,5 / -10,5 / -12,9 / -10,5 / -9,6
Latvia / 10,2 / 11,7 / 8,9 / 8 / 6,7 / 6,8 / 5,8 / 5,4 / 8,7 / 6,7 / 6,2 / 6 / -12,4 / -15,8 / -17,4 / -16,6
Lithuania / 7,5 / 7,4 / 7 / 6,5 / 2,7 / 3,8 / 4,6 / 3,3 / 8,3 / 5,8 / 5 / 5 / -7,0 / -8,8 / -9,4 / -9,1
NMS-10 2)3) / 4,7 / 6,2 / 5,4 / 5,2 / 3,6 / 3,2 / 3,5 / 3,2 / 11,9 / 10,3 / 9,8 / 9,3 / -4,6 / -5,5 / -5,6 / -5,2
EU-15 3) / 1,5 / 2,6 / 2,2 / 2,3 / 2,1 / 2,2 / . / . / 7,9 / 7,5 / 7,2 / 6,9 / -0,12 / -0,67 / . / .
EU-25 2)3) / 1,8 / 2,9 / 2,5 / 2,6 / 2,1 / 2,2 / 2,2 / 1,9 / 8,8 / 8,0 / 7,6 / 7,3 / -0,31 / -0,87 / . / .
EU-27 2)3) / 1,8 / 3,0 / 2,6 / 2,6 / 2,3 / 2,3 / 2,3 / 2,0 / 8,7 / 8,0 / 7,6 / 7,3 / -0,39 / -0,99 / . / .
Croatia / 4,3 / 4,5 / 4,4 / 4,4 / 3,3 / 3,2 / 3 / 2,9 / 12,7 / 11,5 / 11 / 10,5 / -6,4 / -8,9 / -8,1 / -7,3
Macedonia / 3,8 / 3,5 / 4 / 4 / 0,5 / 3,2 / 3 / 3 / 37,3 / 36 / 35 / 35 / -1,4 / 2,0 / -1,9 / -1,8
Turkey / 7,4 / 5,0 / 5,5 / 6,5 / 8,2 / 9,6 / 7 / 5 / 10,3 / 9,8 / 9,5 / 9 / -6,4 / -8,9 / -8,4 / -7,6
Albania 4) / 5,6 / 4,8 / 5 / 5,5 / 2,4 / 2,3 / 2 / 2 / 14,2 / 13,9 / 14 / 14 / -7,4 / -10,5 / -8,5 / -6,5
Bosnia and Herzegovina 4)5) / 5,5 / 5,3 / 5,7 / 5,5 / 2,9 / 7,4 / 4 / 2 / 44,2 / 31,1 / 30 / 30 / -21,8 / -19,8 / -17,5 / -15,8
Montenegro / 4,3 / 4,5 / 5 / 5 / 2,3 / 3,0 / 3 / 3 / 30,3 / 30 / 30 / 30 / -9,1 / -17,1 / -15,0 / -15,0
Serbia / 6,2 / 5,8 / 5 / 5 / 16,2 / 11,6 / 10 / 10 / 20,8 / 22 / 23 / 24 / -8,6 / -9,8 / -9,9 / -9,5
Russia / 6,4 / 6,7 / 5,4 / 5 / 12,5 / 9,8 / 8 / 7 / 7,2 / 7,2 / 7 / 6,5 / 10,9 / 9,8 / 6,5 / 5,2
Ukraine / 2,6 / 7 / 6 / 5,5 / 13,5 / 9,1 / 10 / 8 / 7,2 / 6,6 / 6,5 / 6,4 / 3,1 / 0,0 / -2,1 / -2,7
China / 10,4 / 10,7 / 10,5 / 10 / 1,8 / 1,5 / 1,8 / 1,6 / . / . / . / . / 7,2 / 7,6 / 7,9 / 7,5
Source: wiiw (February 2007); Eurostat; forecasts for EU-15 and the Baltic States: European Commission (Autumn 2006).

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