With fixed investment investments projected to still account for about one half of the rate of economic growth in 2005 and 2006 across Europe, Bank Austria Creditanstalt anticipates a U-shaped economic trend in Central and Eastern Europe: in 2005, GDP will fall slightly, to 4.3 per cent in the new EU member states and 4.8 per cent in the candidate countries; in 2006, growth will rise to 4.5 per cent and 5.6 per cent, respectively.
Growth in the new European Union will come primarily from the eight new member states, whose economic development is spurred by private consumption and will be bumped even higher in the coming years by private investment. These candidate nations will see their development supported further by low interest rate levels and the favourable business outlook in connection with EU membership. Bank Austria Creditanstalt proceeds from the assumption that investment growth in the eight new member states will accelerate to an average of 8 per cent or more in 2005/2006. “Poland will see particularly strong growth,” says Marianne Kager, Chief Economist of Bank Austria Creditanstalt.
Conversely, the growth of private consumption, which was the main factor driving economic growth in most countries in the region in the past few years, will slow down as a result of the moderate reduction of budget deficits to 4.3 per cent of GDP in 2005 and 3.7 per cent in 2006. In view of plans to join the euro area, the countries may be expected to pursue the relatively cautious fiscal policy which led to a reduction of the public sector deficit in the new member states to an average of 4.8 per cent of GDP in 2004 (2003: 5.7 per cent of GDP).
The increase in consumer prices, which reached an average of just over 4 per cent in 2004, will fall to 3.5 per cent in 2005 and 3 per cent in 2006, against the background of a more favourable external price environment compared with the previous year and the continued strength of local currencies. Despite impressive progress made by Romania in reducing inflation, the average rate of inflation in the three candidate countries will be significantly higher, reaching 6.6 per cent in 2005 and 5.2 per cent in 2006.
Overall, the current account deficit of the eight candidate countries will remain at an average of about 4.5 per cent of GDP in 2005/2006. However, structural shifts in the components of the current account will continue. Since the opening of CEE started, the trade balance – the largest component by volume – had the strongest influence on current account trends. An increase in the trade deficit was always accompanied by an increase in the current account deficit and vice versa. The deficit on visible trade regularly exceeded the amount of the current account deficit.
“These traditional relationships have shifted over the past two years: in both 2003 and 2004, the current account deficit in the new EU member states was higher than the trade deficit,” says Marianne Kager. Moreover, the current account deficit increased, while the deficit on visible trade fell to an estimated 3.5 per cent of GDP, thus more than halving compared with the peak figure at the end of the 1990s (1999: 7.6 per cent of GDP).