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Romania
THE Romanian economy is forecast to grow by 5.4 per cent in 2005, before growth slows to 4 per cent in 2006 as a result of a policy tightening. The current-account deficit is expected to fall by one percentage point of the GDP per year in 2005-06. The IMF estimates the current-account deficit at the equivalent of 7.8-8.2 per cent of the GDP. However, the government faces formidable policy challenges in 2005 – having to manage a fiscal tightening, targeting inflation, capital-account liberalization, the re denomination of the Leu and the introduction of flat income and profit taxes.
Economists assume that a further policy tightening will be necessary in 2006 if fiscal policy proves insufficiently tight in 2005. With inflation overshooting the central bank’s 7.5 per cent target, the monetary authorities are under pressure to prevent the economy from overheating. Inflation, however, hit 8.5 per cent last month.
After a rocky start to economic reforms following the fall of communism about 15 years ago, Romania has also been catching up with other CEE states, many of which faced similar periods of overheating economies. In the meantime, however, the sharp appreciation of Romania’s currency has triggered calls from exporters for action to help them shore up foreign orders.
While Romania waits for a key European Commission report on entry in the EU, economists are concerned that an aggressive round of rate cuts, a flood of foreign investment and the nation’s new 16 per cent flat tax are fuelling a consumer boom. This has coincided with a sharp appreciation of the national currency, the leu, which has jumped 20 per cent over the last 12 months, as well as a dramatic worsening in trade.
Private consumption has zoomed by a projected 10 per cent this year and foreign investment is forecast to top $5 billion this year and next. Car sales have shot up by 67.2 per cent so far this year. This has helped to drive Romania towards an expected annual growth rate of about 5.5 per cent this year, one of the fastest expansion rates in Central and Eastern Europe (CEE).
There is little sign that the strong currency had badly impacted on a country’s exports, which are currently growing at more than 15 per cent a year. This is largely a result of robust foreign demand for steel, cars and auto spare parts. Over the last five years, exports have grown on average by 20 per cent a year. Signs are, however, starting to emerge that the bank’s rate-reduction agenda might be starting to have an effect, with the currency in recent weeks coming off the highs that turned into one of the world’s best performing currencies last year.
Economists are also expecting inflationary pressures to start to wind back next year. Consumer prices are forecast to slip to six per cent during the course of 2006 and economic growth is projected to edge down to about five per cent. But few analysts are expecting foreign investment flows to ebb as Romania prepares for the EU membership, scheduled for January 2007, especially with the government planning the sell of the nation’s biggest bank, Banca Comerciala Romanana (BCR).
Poland
POLAND is one of the poorest countries in the enhanced European Union as the Gross Domestic Product per capita constitutes about 45 per cent of the EU average. The structure of employment in Poland is less favourable in comparison to economically developed European countries. The percent of people employed in services is also lower. Since 1989 Poland has made a transition to free market economy.
From the beginning of the nineties, Poland went through the whole economic cycle, with the period of economic acceleration (1992 -1994), time of prosperity (mid 1990’s), economic slowdown (1999-2000) and stagnation (2001-2002). Since 2004 the GDP rate has become to increase and reached 4.8 per cent.
According to most forecasts, the Polish economy will grow at a slower rate in 2005 than in 2004. However, slower growth will be offset by increased investment spending. Experts say that the odds of achieving the five per cent GDP growth rate projected by the government in the 2005 budget are slim. Finance Minister expects the GDP to grow 4.5-5 per cent in 2005 and 4.8 per cent in 2006.
The National Bank of Poland says economic growth in 2005 should be in the 4.0-4.5 per cent range. The independent Centre for Social and Economic Research (CASE) expects the GDP growth in all of 2005 to reach four per cent, followed by 4.6 per cent in 2006. The European Commission also predicts a slowdown in the Polish economy; it recently reduced its GDP growth forecast for Poland in 2005. The economic growth in Poland has a jobless character and can be contributed to an increase in total factors productivity. In consequence, despite observed economic growth in recent years, employment years remained unchanged. At present the employment rate in Poland is the lowest among all EU member states. Poland has a very big budget deficit amounting to 58 per cent of the GDP.
Public finance reform and balancing public expenditure are the most serious economical challenges. The accession to the EU provides Poland with opportunities for development. Without public finance reform Poland will not be able to collect enough public sources for projects co-financed from the EU. Putting aside uncertainties about recent preliminary data, economists expect GDP growth of almost four per cent for 2005 as a whole.
The key influences will be a strengthening of private consumption while investment growth picks up moderately. Following soft results in late 2004, consumption should benefit from rising employment even though real wage growth remains subdued. Investment should continue to be supported by large FDI inflows alongside ample corporate liquidity.
Owing to slower demand in major markets and the 2004 zloty appreciation, export growth is likely to diminish modestly later in the year. But with import growth rising widen to over two per cent of the GDP, and the contribution of net exports to growth should turn negative.
Sustained strong growth of above five percent a year will require decisive macroeconomic policies to address the fiscal and employment problems and prepare for euro adoption. Without such clear policy directions, a pick-up in 2006 is likely to be shallow and short-lived, and thereafter prospects for medium-term growth much in excess of 3 ½ to four per cent would be limited.
Some economists say the real GDP expanded by 5.4 per cent in 2004, supported by robust export growth, but the Economist Intelligence Unit forecasts that weaker demand, both domestically and in Poland’s EU markets, will cause the GDP growth to slow to 3.8 per cent in 2005, before picking up to 4.3 per cent in 2006. Inflation is falling sharply and is now forecast to average 2.1 per cent in 2005 and 1.8 per cent in 2006.
