Regional Economic Outlook and Regional Economic Issues Focus on CESEE

Transcription

1 Regional Economic Outlook and Regional Economic Issues Focus on CESEE IMF Macroeconomic Policy Seminar Vienna, June 13, 2018 Bas B. Bakker Senior Regional Resident Representative for Central and Eastern and Southeastern Europe

2 THE WORLD ACCORDING TO THE APRIL 2018 WEO 2

3 In CESEE, CIS recovering and non-cis growing strongly 10 Real GDP growth (Percent) Other CESEE CIS

4 GDP per capita is well above pre-crisis level (except Ukraine) 4

5 NON-CIS CESEE 5

6 Growth is rapid, and unemployment is falling sharply 7 Real GDP growth (Percent) 16 Unemployment Rate (Percent) 6 5 SEE EU SEE non-eu 4 Baltics CE Baltics 2 6 SEE EU 1 SEE non-eu 4 CE

7 Growth in the region is not as high as in the pre-crisis years Max Average Min Real GDP growth in CESEE excl. CIS (Percent) 2007 level

8 2 year average employment growth But employment growth in many countries is as high as during pre-crisis peaks. GDP growth vs. employment growth (Percent, 2 year average) 3.0 CE5 2.5 SEE Post-crisis Post-crisis Pre-crisis Pre-crisis year average GDP growth

9 Even if we exclude peak pre-crisis years: current growth is lower but employment growth higher than pre-crisis 6 GDP and Employment Growth in and (Average, percent) GDP Growth 2 Employment Growth SEE CE-5-3 SEE CE-5 9

10 Inflation, which was very low in has picked up recently 8 CPI Inflation (Percent) 6 4 CESEE excl. CIS 2 Euro Area

11 Energy and food prices played key role in pickup of inflation 40 Oil and Food Prices (Percent, Y/Y, 6 months moving average) Oil Price S&P Agricultural Commodities Nearby Index Jun-14 Dec-14 Jun-15 Dec-15 Jun-16 Dec-16 Jun-17 Dec-17 11

12 Growth in 2018 will continue to be strong External demand expected to remain strong in the next quarters Consumption is solid as employment is growing rapidly and wages are accelerating Investment further boosted by pick-up of EU funds 12

13 What will this imply for labor markets? 3 Employment and Working Age Population Growth in CESEE (Excl. TUR and CIS, percent) 2 Employment growth Working Age Population Growth and UN projection

14 In the EU NMS wage growth has accelerated, while it has remained more modest in the Western Balkans 18 Nominal Wage Growth (Percent, Y/Y) Q4 2015Q SRB MNE BIH MKD SVN SVK HRV LTU LVA POL EST CZE BGR HUN ROU 14

15 In Western Balkans unemployment rates are still very high and employment rates low 15

16 Unemployment is coming down rapidly and is now below pre-crisis levels in many countries 14 Cumulative Changes in Unemployment Rate (2008Q1=0, seasonally adjusted) LTU 6 EST LVA 4 SVK HUN 2 POL CZE HRV 6 4 SVN BGR 2 ROU MNE SRB BIH ALB* MKD 2017Q3: *For ALB 2012Q1=0 16

17 Wage growth Wage growth The wage Phillips curve is flat in Western Europe and steep in NMS countries Wage Phillips Curve (based on panel regression) Selected EU15 countries NMS countries Unemployment gap Unemployment gap Source: Spring 2018 Regional Economic Outlook for Europe 17

18 Rapid decline of unemployment suggests that GDP is growing faster than potential At some stage, labor market shortages will become constraint on growth Growth can only continue at this pace if productivity picks up 18

19 This would be the good time to create fiscal space and reduce structural deficits Particularly given that debt is much higher than pre-crisis levels General Government Debt (Percent of GDP) EST UVK BGR CZE LVA LTU ROU MKD BIH SVK POL SRB MNE HUN ALB SVN HRV 19

20 Unfortunately, many countries with too high structural deficits are reverting to pro-cyclical loosening 3 General Government Structural Balance (Percent of GDP) ROU HUN POL SVK BGR EST LVA HRV SVN SRB CZE LTU BIH 20

21 CIS 21

22 In , Russia and Ukraine suffered from shocks, and Belarus from spillovers Collapse of commodity prices Sudden stop in capital flows to Russia, result of sanctions on Russia Conflict in Ukraine Change in GDP (percent) Between Between Ukraine Belarus Russia 22

23 Foreign reserves (USD index, H1 2013=100) Reserves drawdown Exchange rate flexibility was unavoidable given the limited buffers Foreign reserves and XR depreciation (6-month moving averages) Depreciation RUS UKR 2016 BLR USD exchange rate (index, H1 2013=100) 23

24 but increased inflation and reduced real wages 30 CPI Inflation in European CIS (Percent, weighted average) max 1000 Average monthly wages (USD) RUS BLR 5 min 250 UKR Q1'2010 Q1'2012 Q1'2014 Q1'

25 Ukraine and Russia are now recovering (helped by rising oil prices) Real GDP growth in Russia, other CIS countries and changes in oil prices (Percent, y/y) BLR 5 RUS 25 5 RUS Oil prices (right axis) UKR

26 Moldova had a banking crisis in 2014 Three large banks collapsed as a result of their long-lasting abuse by the shareholder(s) Supervisory action was slow to come Supervisory forbearance increased the ultimate resolution costs to the budget 26

27 But is now also recovering Real GDP Growth in Moldova (Percent, y/y)

28 Near-term prospects show solid growth 4 Real GDP Growth Projections (Percent) RUS BLR UKR MDA 28

29 But growth is low in comparison to precrisis period 12 Real GDP Growth (Percent, 3-year moving average) BLR MDA RUS UKR

30 RISKS TO THE OUTLOOK 30

31 Since WEO was published we have seen Weaker than expected growth in euro area Increased market turmoil, both in Euro area periphery Emerging market countries 31

32 Since the WEO was published, growth in the EA in Q1 came in lower than expected 3.0 Real GDP Growth in Euro Area (Y/Y, SWDA) Mar-13 Sep-13 Mar-14 Sep-14 Mar-15 Sep-15 Mar-16 Sep-16 Mar-17 Sep-17 Mar-18 32

33 So far, consensus forecast for this year has not changed much Consensus Forecasts of Real GDP and CPI Inflation for Euro Area Real GDP Growth Forecasts CPI Inflation Forecasts Jan-17 Mar-17 May-17 Jul-17 Sep-17 Nov-17 Jan-18 Mar-18 May-18 33

34 For the USA, forecasts of growth and inflation have been increasing 3.0 Consensus Forecasts of Real GDP and CPI Inflation for USA Real GDP Growth Forecasts CPI Inflation Forecasts Jan-17 Mar-17 May-17 Jul-17 Sep-17 Nov-17 Jan-18 Mar-18 May-18 34

35 With a new government in Italy, interest rates in euro area periphery have been rising 8 10-Year Government Bond Yields (Percent) 7 6 Greece Portugal 2 1 Italy Germany 0 Jan-17 Apr-17 Jul-17 Oct-17 Jan-18 Apr-18 35

36 Currencies of large EM have been under pressure 105 Emerging Markets Currencies (May 2017=100) ARS/USD RUB/USD TRY/USD BRL/USD 60 May-17 Jun-17 Jul-17 Aug-17 Sep-17 Oct-17 Nov-17 Dec-17 Jan-18 Feb-18 Mar-18 Apr-18 36

37 Outside Russia and Turkey, currencies in CESEE have remained stable 106 Emerging Europe Currencies (May 2017=100) 104 CZK/EUR 102 PLN/EUR HUF/EUR RON/EUR May-17 Jun-17 Jul-17 Aug-17 Sep-17 Oct-17 Nov-17 Dec-17 Jan-18 Feb-18 Mar-18 Apr-18 37

38 THE FUTURE OF CONVERGENCE 38

39 Convergence has resumed (except in CIS) Real GDP per capita (Percent of Germany) CE-5 Baltics SEE EU CIS 20 SEE non-eu

40 But CESEE is still much poorer than Western Europe 40

41 Employment to population ratio in 2016 (Percent) As fewer people work and there is less capital per worker Capital per Worker vs. Employment to Population Ratio MDA RUS UKR POL SRB BGR ROU LTU SVK EST SWE CZE LVA HUN SVN HRV DEU DNK NLD AUT GBR PRT FIN FRA IRL BEL ESP ALB MKD MNE BIH TUR GRC ITA Capital per worker in 2014 (Thousands of PPP dollars) 41

42 Growth is slower than pre-crisis 10 GDP growth (Percent, 3 year moving average) Baltics SEE EU CE-5 SEE non-eu CIS

43 As investment rates are lower (except CIS) 35 Investment Rate (Percent of GDP, 3 year moving average) 30 Baltics 25 CE-5 SEE EU 20 CIS SEE non-eu* *Excl. MKD 43

44 Technological progress and efficiency advance much more slowly 7 TFP Growth (Percent, 5-year moving average) CIS Baltics SEE EU 1 0 CE SEE non-eu

45 Further exacerbated by the decline of the working age population 0.5 Working Age Population Growth (Population ages years, 5 year moving average) 0.0 SEE non-eu SEE EU CE-5 CIS -1.5 Baltics

46 Fall in TFP is a global problem 1.5 TFP growth (Percent, 5 year moving average) USA EU

47 Why has global TFP growth slowed? 47

48 Several interrelated factors have played a role To some extent measurement issues Weak corporate balance sheets, tight credit conditions which constrain investment in intangible assets An adverse feedback loop of weak aggregate demand, investment, and capital-embodied technological change Elevated economic and policy uncertainty 48

49 What can be done to boost TFP growth Address several problems Limited access to financial services (e.g. for SMEs) Infrastructural gaps Inefficient legal systems and other government services 49

50 Improve institutions, especially judiciary Judicial Independence, 2015 Impartial Courts, 2015 Below 25 percentile Between 25 and 75 percentile Above 75 percentile Source: World Economic Forum. Note: Worldwide distribution excluding LICs 50

51 Other institutional indicators also show a room to catch up to Western Europe World Governance Indicators, 2016 (Ranges from -2.5 (weak) to 2.5 (strong) governance performance) 51

52 BLR UVK BIH SRB MDA UKR RUS MNE ALB MKD SVN ROU BGR HRV CZE HUN LVA LTU SVK POL EST EU accession process should lead to improved institutions / completion of transition Average of Six EBRD Transition Indicators in EU countries non-eu countries Note: 2007 for Czech Republic. 52

53 Institutional reforms provide large efficiency gains Better institutions hold the promise of retaining emigration of skilled workers Effective protection of property rights provides stronger incentives for investment Institutions affect innovation and productivity through enhanced trust, cooperation, commitment, and contract enforcement 53

54 CONCLUSION 54

55 Concluding thoughts CESEE has done nicely in recent years with strong growth and rapidly declining unemployment Growth is not as high as pre-crisis The challenge will be to continue current growth rates Productivity growth will need to pick up; at some stage labor market will become constraint Reforms and improvements of institutions will help 55

56 Thank you