The Future of Growth in CESEE

Transcription

1 The Future of Growth in CESEE Presentation at EBRD London, 13 February 2018 Bas B. Bakker Senior Regional Resident Representative for Central, Eastern and Southeastern Europe

2 CESEE had a very deep crisis in 2008/09 15 GDP growth (Percent) 10 5 CE-5 Baltics CIS SEE EU SEE non-eu

3 albeit with significant cross-country differences 3

4 In most CESEE countries, GDP per capita is well above pre-crisis levels 4

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

6 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 CE-5 2 SEE Post-crisis Post-crisis Pre-crisis Pre-crisis year average GDP growth 6

7 Unemployment is coming down rapidly and is now below pre-crisis levels 14 Cumulative Changes in Unemployment Rate (2008Q1=0, seasonally adjusted) SRB 8 EST LTU 6 LVA 4 SVK HUN 2 POL CZE 8 HRV 6 4 SVN BGR 2 ROU MNE BIH ALB* MKD 2017Q3: *For ALB 2012Q1=0 7

8 Despite this rapid fall, in , inflation was very low in CESEE even lower than in Western Europe 8 CPI Inflation (Percent) 6 4 CESEE excl. CIS 2 Euro Area

9 In 2017 inflation picked up 8 CPI Inflation (Percent) 6 4 CESEE excl. CIS 2 Euro Area

10 Energy and food prices played key role in resurgence of inflation 40 Oil and Food Prices (Percent, Y/Y, 6 months moving average) Oil Price Food and Beverage Price Index

11 However, wage growth has also notably accelerated over the past two years 18 Nominal Wage Growth (Percent, Y/Y) Q3 2015Q MNE BIH MKD SRB POL HRV LVA SVN CZE SVK LTU EST BGR HUN ROU 11

12 Outlook for Western Europe is for continued recovery and low interest rates 5 Real GDP Growth in Euro Area (Percent) 4.5 Euro Area Policy Rate and Its Forecast (Percent) ECB Survey of Professional Forecasters

13 This makes it likely that rapid growth will continue. Question: What will it imply for the 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 According to WEO estimates, output gaps in most countries are now closed 14

15 Outside the labor market, there are no signs of overheating Inflation is modest Current account deficits remain low and capital inflows are low Credit growth does not much exceed GDP growth 15

16 Tightening labor markets and low inflation may continue to co-exist in the near future Much of inflation in CESEE depends on Food and energy prices Imported inflation Exchange rate appreciation in some countries may keep inflation low 16

17 Pre-crisis, inflation really picked up only in , when oil shock added to tight labor markets 7 CPI Inflation in CESEE (Percent, excl. CIS)

18 Even if rapid growth of wages does not lead to pick-up of inflation, it may still affect the economy If firms absorb rising labor costs, profit margins will decline Decline of profit shares will Reduce investment Reduce competitiveness 18

19 Low inflation does not necessarily mean that growth is sustainable In pre-crisis years we overestimated potential output growth in advanced countries because core inflation remained low Output Gap in and Potential Output Growth in Advanced Economies: , percent Output Gap WEO Fall 2017 WEO Fall WEO Fall WEO Fall Potential Output Growth

20 IMPLICATIONS FOR CYCLICAL POLICIES 20

21 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 ALB SRB MNE HUN SVN HRV UKR 21

22 Unfortunately, many countries are reverting to pro-cyclical loosening 3 2 General Government Structural Balance (Percent of GDP) ROU POL HUN SVN HRV EST SRB SVK BGR LVA LTU BIH CZE 22

23 Monetary policy will only be an option in countries with floating exchange rates They can let exchange rate appreciate They can raise interest rates Countries with fixed exchange rates or the euro have the most challenges: Nominal interest rates are likely to stay low (in line with ECB rates) Real interest rates will then decline as inflation/wages pick up 23

24 Pre-crisis, countries with floating exchange rates found it easier to keep inflation low 12 CPI Inflation (Percent) 10 Fixers Floaters Note: Fixers include BGR, EST, HRV, LVA, LTU, SVN and SVK. Floaters include CZE, HUN, POL and ROU. 24

25 and were able to mitigate the boom-busts. 10 Real GDP Growth (Percent) Fixers Floaters Note: Fixers include BIH, BGR, EST, HRV, LVA, LTU, SVN and SVK. Floaters include ALB, CZE, HUN, POL, ROU and SRB. 25

26 IMPLICATIONS FOR STRUCTURAL POLICIES 26

27 Potential output growth is well below pre-crisis levels. Potential Output and GDP Growth (Percent) 6 CE-5 GDP growth, 3 year moving average 8 SEE EU GDP growth, 3 year moving average Baltics GDP growth, 3 year moving average Potential output growth 4 2 Potential output growth Potential output growth

28 Why has potential GDP growth slowed? TFP growth has slowed That means same investment yields less output increase Lower return on investment leads to decline of investment, further reducing growth 28

29 To understand this, let s look at Solow- Swan growth model In Solow-Swan growth model, long-term growth depends on n+g n=growth of working age population g=growth of labor augmenting technological progress (which is equal to TFP growth/labor share) 29

30 According to Solow-Swan, in long term, GDP growth does not depend on investment rate Higher investment rate without increase in n+g will initially lead to higher GDP growth rate But as capital-output ratio rises, growth rate falls back to old level (Of course investment rate does matter for income levels) (Government investment may boost TFP and be better for growth than government consumption) 30

31 What would we expect to happen if n+g slows down? Lower GDP growth If investment rate unchanged, capital-output ratio will rise and return on capital will drop Investment will likely fall in response to drop in returns, which will further reduce GDP growth (in the short term) So we would expect both lower growth and lower investment This is precisely what happened. 31

32 n+g has slowed down 12 Working Age Population + Labor Augmenting Technological Growth (Percent, 5 year moving averages) CE5 Baltics SEE EU 0-2 SEE non-eu

33 Much of this reflects lower TFP growth 6 TFP Growth (Percent, 5-year moving average) SEE non-eu Baltics SEE EU 2 1 CE

34 But working age population growth has come down as well 0.5 Working Age Population Growth (Population ages years, 5 year moving average) SEE non-eu CE-5 SEE EU -1.5 Baltics

35 Output growth has slowed and investment rates are lower 10 GDP growth (Percent, 3 year moving average) 33 Investment Rate (Percent of GDP, 3 year moving average) Baltics SEE EU CE-5 Baltics SEE EU SEE non-eu CE SEE non-eu* *Excl. MKD 35

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

37 Why has global TFP growth slowed? 37

38 Several interrelated factors have played a role Measurement issues may have played a role, but most of TFP slowdown seems genuine Weak corporate balance sheets, combined with tight credit conditions, have undermined TFP growth, partly by constraining investment in intangible assets in distressed firms. An adverse feedback loop of weak aggregate demand, investment, and capital-embodied technological change seems to have afflicted the advanced economies. Elevated economic and policy uncertainty may have further weakened TFP growth, partly by tilting investment away from higher-risk, higher-return projects. 38

39 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 39

40 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 40

41 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 41

42 TFP matters, because CESEE is still poorer than Western Europe Real GDP per capita (Percent of Germany) CE-5 Baltics SEE EU CIS 20 SEE non-eu

43 Continued convergence will necessitate faster TFP growth Faster TFP growth will not only raise GDP growth directly; it also increases the return on investment Increasing capital/labor without higher TFP will boost capital output ratio and lower return on capital 43

44 Capital-output ratios in many CESEE countries are no longer low compared with Western Europe 3.5 Capital Output Ratio (Percent) 3.0 DEU EST HRV BGR

45 Employment to population ratio in 2016 (Percent) Even though capital per worker is still low. 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) 45

46 Concluding thoughts CESEE has done very nicely in recent years with strong growth and rapidly declining unemployment The challenge will be to continue this rapid growth Labor markets have tightened, and are likely to tighten further if strong growth continues If TFP growth does not pick up, growth cannot continue at this pace 46

47 Thank you

48 Supplemental slides

49 Solow-Swan rehash Output depends on the capital stock, employment, and labor-augmenting technological progress: Y t = K t A t L t 1 The labor force grows at rate n: The rate of technological progress is g: L t = L(0)e nt A t = A(0)e gt The capital stock is determined by investment minus depreciation: ሶ K t = sy t δk(t) 49

50 Long-run equilibrium Long-Run Equilibrium Path The growth rate of capital is: dy Y dk K = n + g = n + g The capital output ratio is: K Y = s n + g + δ The return on capital is: r = Y K = (n + g + δ) s 50

51 Labor augmenting technological progress can be deduced from TFP growth In the Solow-Swan framework we have: Taking logs and differentiating we get: Y t = K(t) (e gt L t ) 1 dy Y = dk K + 1 dl L + 1 g Total factor productivity growth is typically derived as: g TFP = dy Y dk K 1 dl L It follows that: g = g TFP 1 51

52 Raising K/L without raising TFP will lead to decline in return on capital Y t = K t α A t L t 1 α Return on capital depends on capital output ratio r = α K Y Capital output ratio depends on capital labor ratio and TFP K Y = (K L )α 1 A Low K/L does not necessarily mean low K/Y it can also mean low TFP 52