Keeping a close eye on 2007

Despite being strong in 2006, economic growth in the European Union's new member states is likely to slacken off slightly in 2007, says a World Bank report published last Thursday.

According to the report, real GDP growth improved throughout the region in 2006, in spite of several countries experiencing currency appreciation against the euro and the dollar, and the eurozone seeing a moderation in growth. However, in 2007 the CEE region will move closer to its potential output level, which will cause a corresponding easing in growth.

Heating up

The report also highlighted a tendency towards higher inflation in the region in the coming year, although it was optimistic about Poland's situation. "While inflation remains well under control in Poland and the Czech Republic, other countries are struggling," said the report.

"In the Baltic countries and to some degree Bulgaria and Romania, strong wage and credit growth are leading to overheating and significant inflationary pressures." The report went on to say that a weakening currency in the middle of 2006 had added to price pressures in Hungary, which had not been helped by regulated price and indirect tax increases. "2007 will bring another round of regulated price increases for most of the EU8+2 countries, with the impact likely to be most pronounced in Hungary, the Czech Republic, Estonia, Lithuania and Romania," said Thomas Blatt Laursen, a lead economist for the region at the World Bank and the report's main author.

On the other hand, Laursen pointed out that the sharp decline in oil prices in recent months could help reduce inflationary pressures in the region.

Deficit drawback

Last year's strong growth figures and good tax revenues were not enough to offset increasing fiscal deficits in most countries in the region, adding to fears of overheating. Poland and Bulgaria, however, were able to improve their fiscal balances. Most countries in the region plan to reduce or consolidate their deficits in 2007.

Poland's current account deficit also held up well in the face of a broad increase across the region, which were near or exceeding 10 percent in some countries. Foreign-direct investment covered Poland's and the Czech Republic's deficits as well as most of the deficits in Hungary, Bulgaria and Romania.

Borrowing boom

In a special topic, the World Bank report looks at the impact of rapid credit expansion in the region. "In some countries, an outright credit boom has contributed to large macroeconomic imbalances, potential asset market bubbles, and significant vulnerabilities that call for a more determined policy response," says the report. It recommends closely monitoring the situation, especially in the Baltic States, Romania and Bulgaria.