The first of a series of economic forecasts for emerging market economies published yesterday by the University of Michigan’s William Davidson Institute predicts that Central and Eastern European economies are now so well-integrated with the developed economies of the West that they share its danger of sliding into deflation.
The Institute says countries throughout the region show strong signs of deflation. The Czech Republic, Lithuania, and Poland are on the borderline of having deflation now, and the Institute projects these countries will come even closer to crossing that line. “The region’s deflation is a worrisome sign that the contagion that threatens developed countries has begun spreading to emerging markets,” says the Institute. “Since emerging markets such as those measured by the Davidson Institute Emerging Markets Forecast (DIEMF) are typically on a different trajectory from mature economies, deflation in the region could be an important warning sign for the global economy. “
The good news is that the Baltic states, Russia, and Ukraine will experience GDP growth that is about one-third higher than most earlier projections had anticipated. The latest indicators from these countries paint a striking picture of current and future expansion, as compared to the dwindling rates in developed countries. Importantly, the FSU is on track for strong growth despite the continuing decrease in the price of oil. The FSU is also demonstrating an internally-driven engine of demand and trade. This stands in contrast to the Central European economies, whose fortunes have become much more tied to Western Europe-and whose performance is affected accordingly.
In Central Europe, only two countries, the Czech Republic and Hungary, are bucking what appears to be a region-wide quagmire of unemployment. Unemployment in Poland and Slovakia stands at 18 percent and shows no sign of improvement. Ukraine and Russia have much better employment levels, but this appears to be largely because they have still not completely de-regulated the industrial sector, and continue to have substantial underutilized labor capacity in the work force. The Czech Republic and Hungary, by contrast, have achieved healthy employment levels through continued economic dynamism. The unemployment rates are good signs for investors, however. Taken together with the strong growth rate in the region and the lack of inflation, the strong pool of available labor bodes well for investments to pay off.
The Davidson Institute Emerging Markets Forecast (DIEMF) was released formally for the first time yesterday, after more than a year of field testing.