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
THE WORLD ACCORDING TO THE APRIL 2018 WEO 2
In CESEE, CIS recovering and non-cis growing strongly 10 Real GDP growth (Percent) 8 6 4 2 0 Other CESEE CIS -2-4 -6-8 -10 2001 2003 2005 2007 2009 2011 2013 2015 2017 3
GDP per capita is well above pre-crisis level (except Ukraine) 4
NON-CIS CESEE 5
Growth is rapid, and unemployment is falling sharply 7 Real GDP growth (Percent) 16 Unemployment Rate (Percent) 6 5 SEE EU 14 12 SEE non-eu 4 Baltics CE-5 10 3 8 Baltics 2 6 SEE EU 1 SEE non-eu 4 CE-5 0 2-1 2012 2013 2014 2015 2016 2017 2018 0 2011 2012 2013 2014 2015 2016 2017 2018 6
Growth in the region is not as high as in the pre-crisis years 15 10 5 0 Max Average Min Real GDP growth in CESEE excl. CIS (Percent) 2007 level -5-10 -15-20 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 7
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 2.5 2.0 1.5 1.0 0.5 Post-crisis 2013 2014 2012 2017 2016 2015 2018 2005 2007 2006 1.5 0.5-0.5-1.5 Post-crisis 2014 2013 2012 2015 2017 2018 2016 Pre-crisis 2006 2007 2005 2004 0.0-0.5-1.0-1.5 2003 2002 2004 Pre-crisis -2.5-3.5-4.5 0 2 4 6 8 0 2 4 6 8 2 year average GDP growth 2002 2003 8
2002-04 2015-17 2002-04 2015-17 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 2002-04 and 2015-17 (Average, percent) GDP Growth 2 Employment Growth 5 4 1 0 3 2-1 1-2 0 SEE CE-5-3 SEE CE-5 9
Inflation, which was very low in 2015-16 has picked up recently 8 CPI Inflation (Percent) 6 4 CESEE excl. CIS 2 Euro Area 0-2 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
Energy and food prices played key role in pickup of inflation 40 Oil and Food Prices (Percent, Y/Y, 6 months moving average) 30 20 Oil Price 10 0-10 -20 S&P Agricultural Commodities Nearby Index -30-40 -50-60 Jun-14 Dec-14 Jun-15 Dec-15 Jun-16 Dec-16 Jun-17 Dec-17 11
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
What will this imply for labor markets? 3 Employment and Working Age Population Growth in CESEE (Excl. TUR and CIS, percent) 2 Employment growth 1 0-1 -2 Working Age Population Growth and UN projection -3 2005 2007 2009 2011 2013 2015 2017 13
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) 16 14 12 10 8 6 4 2017Q4 2015Q4 2 0-2 SRB MNE BIH MKD SVN SVK HRV LTU LVA POL EST CZE BGR HUN ROU 14
In Western Balkans unemployment rates are still very high and employment rates low 15
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) 14 14 12 10 8 LTU 6 EST LVA 4 SVK HUN 2 POL 0-2 -4-6 2007 2010 2013 2016 CZE 12 10 8 HRV 6 4 SVN BGR 2 ROU 0-2 -4 2007 2010 2013 2016 12 10 8 6 4 2 0-2 -4 MNE SRB BIH ALB* MKD 2017Q3: -12.2 2008 2010 2012 2014 2016 *For ALB 2012Q1=0 16
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
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
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. 90 80 General Government Debt (Percent of GDP) 70 60 50 40 2017 30 20 2007 10 0 EST UVK BGR CZE LVA LTU ROU MKD BIH SVK POL SRB MNE HUN ALB SVN HRV 19
Unfortunately, many countries with too high structural deficits are reverting to pro-cyclical loosening 3 General Government Structural Balance (Percent of GDP) 2 1 0-1 -2 2016 2018-3 -4-5 ROU HUN POL SVK BGR EST LVA HRV SVN SRB CZE LTU BIH 20
CIS 21
In 2014-15, 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 0-2 -4-6 -8-10 -12-14 -16 Change in GDP (percent) Between 2013-16 Between 2013-15 Ukraine Belarus Russia 22
Foreign reserves (USD index, H1 2013=100) Reserves drawdown Exchange rate flexibility was unavoidable given the limited buffers 120 110 100 Foreign reserves and XR depreciation (6-month moving averages) Depreciation 2014 2013 90 80 70 2016 2015 RUS 2014 60 50 2016 UKR 2016 BLR 2015 2014 40 30 20 2015 20 30 40 50 60 70 80 90 100 110 USD exchange rate (index, H1 2013=100) 23
but increased inflation and reduced real wages 30 CPI Inflation in European CIS (Percent, weighted average) max 1000 Average monthly wages (USD) 25 20 750 15 RUS 500 10 BLR 5 min 250 UKR 0-5 2004 2006 2008 2010 2012 2014 2016 0 Q1'2010 Q1'2012 Q1'2014 Q1'2016 24
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) 20 100 20 15 75 15 10 50 10 BLR 5 RUS 25 5 RUS 0 0 0-5 Oil prices (right axis) -25-5 UKR -10-50 -10-15 -75-15 -20 2005 2008 2011 2014 2017-100 -20 2005 2007 2009 2011 2013 2015 2017 25
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
But is now also recovering 16 14 12 10 8 6 4 2 0-2 -4-6 Real GDP Growth in Moldova (Percent, y/y) 2011 2012 2013 2014 2015 2016 2017 27
2017 2018 2019 Near-term prospects show solid growth 4 Real GDP Growth Projections (Percent) 3 2 1 0 RUS BLR UKR MDA 28
But growth is low in comparison to precrisis period 12 Real GDP Growth (Percent, 3-year moving average) 10 8 6 4 2 0-2 -4-6 BLR MDA RUS UKR 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 29
RISKS TO THE OUTLOOK 30
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
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) 2.5 2.0 1.5 1.0 0.5 0.0-0.5-1.0-1.5 Mar-13 Sep-13 Mar-14 Sep-14 Mar-15 Sep-15 Mar-16 Sep-16 Mar-17 Sep-17 Mar-18 32
So far, consensus forecast for this year has not changed much 2.6 2.4 Consensus Forecasts of Real GDP and CPI Inflation for Euro Area 2.2 2.0 2018 Real GDP Growth Forecasts 1.8 1.6 2018 CPI Inflation Forecasts 1.4 1.2 1.0 Jan-17 Mar-17 May-17 Jul-17 Sep-17 Nov-17 Jan-18 Mar-18 May-18 33
For the USA, forecasts of growth and inflation have been increasing 3.0 Consensus Forecasts of Real GDP and CPI Inflation for USA 2.8 2018 Real GDP Growth Forecasts 2.6 2.4 2.2 2.0 1.8 1.6 2018 CPI Inflation Forecasts Jan-17 Mar-17 May-17 Jul-17 Sep-17 Nov-17 Jan-18 Mar-18 May-18 34
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 5 4 3 Portugal 2 1 Italy Germany 0 Jan-17 Apr-17 Jul-17 Oct-17 Jan-18 Apr-18 35
Currencies of large EM have been under pressure 105 Emerging Markets Currencies (May 2017=100) 100 95 90 85 80 75 70 65 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
Outside Russia and Turkey, currencies in CESEE have remained stable 106 Emerging Europe Currencies (May 2017=100) 104 CZK/EUR 102 PLN/EUR 100 98 HUF/EUR RON/EUR 96 94 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
THE FUTURE OF CONVERGENCE 38
Convergence has resumed (except in CIS) 70 60 50 Real GDP per capita (Percent of Germany) CE-5 Baltics 40 30 SEE EU CIS 20 SEE non-eu 10 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 39
But CESEE is still much poorer than Western Europe 40
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 50 45 40 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 35 30 ALB MKD MNE BIH TUR GRC ITA 25 20 0 100 200 300 400 500 600 700 Capital per worker in 2014 (Thousands of PPP dollars) 41
Growth is slower than pre-crisis 10 GDP growth (Percent, 3 year moving average) 8 6 4 2 0-2 -4 Baltics SEE EU CE-5 SEE non-eu CIS -6 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 42
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* 15 2002 2004 2006 2008 2010 2012 2014 2016 2018 *Excl. MKD 43
Technological progress and efficiency advance much more slowly 7 TFP Growth (Percent, 5-year moving average) 6 5 4 3 2 CIS Baltics SEE EU 1 0 CE-5-1 -2 SEE non-eu 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 44
Further exacerbated by the decline of the working age population 0.5 Working Age Population Growth (Population ages 15-64 years, 5 year moving average) 0.0 SEE non-eu -0.5-1.0 SEE EU CE-5 CIS -1.5 Baltics -2.0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 45
Fall in TFP is a global problem 1.5 TFP growth (Percent, 5 year moving average) 1.0 0.5 USA 0.0-0.5 EU15-1.0 2000 2002 2004 2006 2008 2010 2012 2014 2016 46
Why has global TFP growth slowed? 47
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
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
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
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
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 2014 4.0 EU countries non-eu countries 3.5 3.0 2.5 2.0 Note: 2007 for Czech Republic. 52
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
CONCLUSION 54
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
Thank you