South East Europe booming

  • Introduction of euro boosts business in Slovenia
  • Bulgaria and Romania benefit from imminent EU accession

Amidst a positive international economic environment, Central and Eastern Europe will be able to build on the economic successes of previous years again in 2006. South East Europe is especially notable because of its outstanding growth rates. The reasons for the strong upward trend are clear: growing consumer demand, robust investment and sound growth in exports are supporting countries in South East Europe in particular. With average economic growth of over 6 per cent, 2006 is ending on a very positive note in this region. The winners of 2006 include future EU members, Romania and Bulgaria.

This is the main outcome of the CEE Quarterly report, the new publication from UniCredit New Europe Research, analysing macroeconomic developments in the region.

On the edge of the euro-zone
In Slovenia, which will be the first CEE country to introduce the euro in 2007, the economic boom stems from buoyant investment which increased year-on-year by 7.6 per cent in the first half of 2006.

“In Slovenia, sustained strong domestic demand has prompted us to upgrade our forecasts for 2006 and 2007. We now anticipate the economy will grow by 4.7 per cent this year,” explained Debora Revoltella, Chief Economist for Eastern Europe at the UniCredit Group. However, industry is also operating at full speed as a result of robust demand from abroad, and in the first eight months of 2006 increased on average by 7 per cent compared to the previous year.

Slovenia will also be able to maintain this pace of economic growth in the coming year. The introduction of the euro in 2007 is set to bring with it advantages for exports. The government’s privatisation plans should also provide an additional boost. Real GDP growth is therefore forecast to stand at 4.3 per cent in 2007. Higher energy prices and the introduction of the euro are, however, also likely to push prices moderately upwards. After 2.5 per cent average in 2006, a consumer price rise to 2.9 per cent is expected in the coming year.

EU accession supports economic trend
The growth forecasts for Bulgaria and Romania, which will join the EU at the start of 2007, are also positive. In Romania, the sharp rise in gross domestic product in the first half of 2006 was attributable to strong consumption and investment. The economy is expanding by an annual average of 7.2 per cent in real terms in 2006 as a result of lively households demand, reconstruction work following the flood disaster and strong direct investment.

The present upward trend in the economy is also reflected in the improved labour market. The rate of unemployment fell in September to 5 per cent. Nevertheless, the slowdown in inflation continued in 2006 and even reduced to 5.5 per cent in September, its lowest level for 16 years. In Romania, the key growth driver will remain robust investment activity. The increase inflow of funds from foreign direct investment as well as EU subsidies will ensure sustainable development.

With growth of 6.6 per cent in real terms in the second quarter of 2006, Bulgaria recorded its strongest economic growth since the start of the transition phase. An increase in GDP of 5.7 per cent is forecasted for the full year in 2006. Public finances are on a sound footing. Thanks to a strict fiscal policy, the state budget will close 2006 with a record surplus of over 3 per cent of GDP.

The high trading deficit and ongoing strong inflationary pressures remain weak points. Bulgaria will continue to benefit from strong domestic demand as well as from its international image as a low-wage country. Labour-intensive sectors, such as the electronic industry and utilities, could profit in particular from Bulgaria joining the EU.
The strict controls by the EU Commission and associated potential sanctions should ensure the implementation of the necessary reforms in the next three years. “The catching-up process is worthwhile in any case for both countries. Optimistically, the next step could be the introduction of the euro in Bulgaria in 2010 and possibly in Romania shortly thereafter,” summarised Debora Revoltella. 

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