THE heavily export dependent economies in the region would almost inevitably be dragged down by the rapid slowdown in Europe’s principal economic motor, the German economy. The Czech Republic, Hungary, Slovakia, Bulgaria and Romania all reported slower GDP growth in the second quarter, due in large measure to the disappointing performance of their German neighbour, central Europe’s most important trading partner.
As anticipated, the Hungarian results were especially weak. Analysts had widely predicted inter annual growth of just under 2.5, but in the end the result came in at 1.5 per cent. Even worse, the economy completely failed to grow in the second three months in the year, since quarter on quarter growth was effectively zero.
The increase in industrial activity which accompanied the increased demand for exports was only sufficient to compensate for the drop in internal demand at a time of near record export levels in many European countries. This is doubly worrying since the government, while continuing to reduce the deficit, has appropriated something like nine per cent of GDP from a one off pension move, paying down debt and, in addition, adding some support to this year’s spending programme. Mirroring what just happened in Germany, second quarter GDP growth in the Czech republic slowed from what had been the fastest pace in almost three years achieved in the first three months of the year, to a mere 0.2 per cent, the slowest rate of increase in two years.
Like many economies in the region, the Czech one is now strongly dependent on foreign demand for its products. Exports have surged back up and beyond pre-crisis highs, while industrial output has grown strongly. What makes the Czech case interesting is that neither the private nor the public sector is heavily indebted – public sector debt was only 41.3 of GDP in 2010. The country’s external debt was only 46.7 of GDP. The central bank policy rate is currently 0.75. The Koruna has gained nearly 2.4% against the euro so far this year, as compared with a decline of around 10 per cent in the Polish zloty. Some economists are talking of the Koruna as a potential safe haven alternative to the Swiss franc.
Romania has struggled far longer than any other CEE economy to emerge from recession, only grew by 0.1 in the second quarter, following a 0.7 per cent quarterly rate of increase in the first quarter. Romanian GDP is barely up from one year ago. And indeed is still something like 8.5 per cent below its pre-crisis peak.This is despite the fact that exports have been booming, and are now above the pre-crisis level. As per the regional pattern, domestic demand has not recovered and retail sales are falling. Construction is well down, and is unlikely to return to pre-crisis levels.
But Romania and the other countries suffer from an additional problem – they have significant external debt levels, and despite the activation of the Vienna initiative- they continue to suffer from very tight credit conditions. Total Romanian government debt is only just over 35% of GDP, while external debt is over 70 per cent of GDP. The country continues to run a significant current account deficit (4.2 of GDP in 2010). The inflation rate was exacerbated by a 5% VAT rise in July 2010 and the annual rate has now fallen back from eight per cent in June to 4.9 in July. Source Dawn.com.pk