Global slump hits Eastern Europe

Economic growth is likely to be sluggish in Eastern Europe this year as a global slowdown lowers foreign investment in the region, the Vienna Institute for Inter-national Economic Studies warned last week.

The institute estimated that seven ex-communist countries - Poland, Hungary, the Czech Re-public, Slovenia, Slovakia, Bulga-ria and Rumania - will see their GDP grow by an average of 1.9 percent in 2002, two percentage points lower than its previous estimate.

Most countries in the region will in fact see their economies grow by 3 percent to 3.5 percent in 2002 and around 4 percent in 2003.

But Poland, which makes up 50 percent of the region's GDP, will drag down the average with zero growth predicted in 2002 and a gain of 1 percent in 2003.

In the first-quarter of 2002 "capital formation (investment) weakened, or contracted," said institute economist Leon Podkaminer.

"This does not augur well for economic growth in the medium-term because Eastern Europe depends on foreign investment," he said.

He added that "acceleration in 2003 is possible, provided the business climate improves in the European Union," a market that takes nearly 70 percent of the region's exports.

"The average rate of catching-up vis-a-vis the EU will stay at about two percentage points per year," he said.

For two years Eastern European countries have seen higher growth rates than their western neighbors.

"The worldwide decline of foreign direct investment in 2001 passed without any major direct impact on the transition countries," said Gabor Hunya, another institute economist.

"But due to the stagnation of the leading economies and the loss in market value of a number of transnational corporations, investment plans for 2002 were scaled back," he added.

"In the Central European transition countries, the inflow of foreign direct investment in the first three months of 2002 was just about one-half of the previous year's level," said Hunya.

For the rest of the year, foreign direct investment should reach $3.5 billion in the Czech Republic, down 30 percent from 2001.

Hungary is forecast to see $1 billion of foreign direct investment in 2002 compared with 2.4 billion the year before and Poland $6 billion, down from $8 billion in 2001.

Slovakia and Slovenia, which are engaged in large-scale privatization programs, will attract more investors, while Bulgaria and Rumania will remain stable at levels that Hunya says are relatively low.

The slump experienced by Western firms in the transition countries has had a social impact, as companies compensate for the slowdown with "rising labor productivity, achieved primarily through cuts in employment," according to the institute.

In Poland, unemployment is expected to reach 19 percent this year, compared with 15 percent in 2000. Hungary and the Czech Republic will be better off, with unemployment forecast no higher than 8.2 percent and 9.5 percent respectively, up slightly from previous years.

Throughout the region inflation seems to be under control at between 3 percent and 7 percent, with the exception of Rumania, which will see inflation of 25 percent in 2002, compared with 35 percent in 2001.

Current account deficits, set to reach 4 percent of the region's GDP overall, could upset markets if foreign investments and exports continue weak.