How to Get Back on the Fast Track?

Transcription

1 REGIONAL ECONOMIC ISSUES REPORT ON CENTRAL, EASTERN AND SOUTHEASTERN EUROPE How to Get Back on the Fast Track? MAY, 216 EUROPEAN DEPARTMENT

2 Map of Central, Eastern, and South-Eastern Europe Baltics CEE SEE EU SEE non-eu CIS excl. Russia Russia Turkey BLR BIH SRB UVK MNE ALB MKD

3 REGIONAL ECONOMIC ISSUES REPORT ON CENTRAL, EASTERN AND SOUTHEASTERN EUROPE OUTLOOK AND RISKS MEDIUM-TERM GROWTH CHALLENGES ICY PRIORITIES

4 REGIONAL ECONOMIC ISSUES REPORT ON CENTRAL, EASTERN AND SOUTHEASTERN EUROPE OUTLOOK AND RISKS

5 Solid growth in most CESEE countries CESEE (excl. CIS and Turkey): Real GDP Growth and Decomposition (y-o-y percent change) Net exports Consumption Investment Real GDP growth Baltics -2-2 CEE SEE EU -4-4 SEE non-eu Baltics CEE SEE-EU SEE non-eu :Q1 214:Q3 21:Q1 21:Q H1'1 H2'1 H1'1 H2'1 H1'1 H2'1 H1'1 H2'1-6 OUTLOOK AND RISKS

6 incl. Turkey, but CIS still in recession CIS and Turkey: Real GDP Growth and Decomposition (y-o-y percent change) Net exports Consumption 1 CIS excl. 1 1 Investment Real GDP growth Turkey Belarus Russia Ukraine :Q1 214:Q3 21:Q1 21:Q H1'1 H2'1 H1'1 H2'1 H1'1 H2'1 H1'1 H2'1-2 OUTLOOK AND RISKS

7 Cyclical recovery near completion? CESEE: Estimated Output Gaps Largely closed gap Small gap Large gap Note: Large gap (wider than -3%) BLR BIH SRB MNE ALB MKD small gap (between -3% and -1.%) largely closed gap (narrower than -1.%) OUTLOOK AND RISKS

8 Low inflation outside CIS and Turkey CESEE (excl. CIS and Turkey): Inflation (y-o-y percent change) CIS and Turkey: Headline Inflation (y-o-y percent change) 4 4 Headline inflation CIS excl. 3 Core inflation Dec-12 Jun-13 Dec-13 Jun-14 Dec-14 Jun-1 Dec-1 Dec-12 Jun-13 Dec-13 Jun-14 Dec-14 Jun-1 Dec-1 OUTLOOK AND RISKS

9 Volatile capital flows Cumulative Flows to Exchange-Traded and Mutual Funds Investing in Emerging Market Bonds (May 213 = 1) 12 Russia Turkey Other emerging markets CESEE (excl. Russia and Turkey) May-13 Nov-13 Apr-14 Oct-14 Apr-1 Sep-1 Mar-16 2 OUTLOOK AND RISKS

10 but asset price declines smaller than in other EMs Equity Markets (Dec. 1, 21 to Feb. 16, 216, percent change) Global EM Index -1.9 EM Asia -8. EM Europe -6 EM Latam EM Latam 1 EM Global 66 EM Europe 1/ Simple average of pair-wise correlations of daily changes in CDS spreads using a rolling 3-day window. OUTLOOK AND RISKS EMBIG Spreads (Dec. 1, 21 to Feb. 16, 216, basis point change) 4 EM Asia CDS Spreads (Pair-wise correlations of CESEE spreads) 1/ With major EMs CESEE only Feb-1 Mar-1 Apr-1 May-1 Jun-1 Jul-1 Aug-1 Sep-1 Oct-1 Nov-1 Dec-1 Jan-16 Feb-16

11 And exposures to external financial risks are lower CESEE: External Financing Needs and Pre-and Post-Crisis Loan-to-Deposit Ratios Average CDS spreads, 21 - present (basis points) MKD SRB ALB CDS Spreads (2824.4) (percent) External financing needs, 216 (% of GDP) ALB MKD SRB BIH BLR OUTLOOK AND RISKS

12 216 forecasts broadly unchanged, except CIS 216 Growth Forecast (percent) 6 Baltics CEE SEE-EU SEE non-eu Other CIS October 21 WEO ALB BIH KOS MKD MNE SRB BLR OUTLOOK AND RISKS

13 216 forecasts broadly unchanged, except CIS 216 Growth Forecast (percent) 6 Baltics CEE SEE-EU SEE non-eu Other CIS April 216 WEO ALB BIH KOS MKD MNE SRB BLR OUTLOOK AND RISKS

14 Overall, better growth outlook for 216 CESEE: GDP Growth Forecasts (y-o-y percent change) Baltics CEE SEE EU SEE non-eu :Q4 214:Q2 214:Q4 21:Q CIS excl :Q4 214:Q2 214:Q4 21:Q OUTLOOK AND RISKS

15 But downside risks have increased CESEE: Desk Assessment of Risks to Outlook (percent of total responses) Downside Risks Tighter/more volatile global financial conditions Significant slowdown in China/major EMs Euro area stagnation Likelihood High / Medium Low / Medium High / Medium Impact High Medium/High Medium Low/Medium Low Refugee crisis High Political instability/populism Medium OUTLOOK AND RISKS

16 REGIONAL ECONOMIC ISSUES REPORT ON CENTRAL, EASTERN AND SOUTHEASTERN EUROPE MEDIUM-TERM GROWTH CHALLENGES

17 Post-crisis growth slowdown Real GDP Growth (y-o-y percent change) Advanced Economies Latin American EMs CESEE (excl. CIS and ) MEDIUM-TERM GROWTH CHALLENGES

18 Fast pace of convergence before crisis CESEE and Korea: GDP per Capita (percent of per capita GDP of the U.S. at PPP) 7 KOR ALB BIH BLR SRB MKD MNE Note: Data for CESEE countries are for 2-21 and are shifted back in time to comparable level of development of Korea. MEDIUM-TERM GROWTH CHALLENGES

19 leveled off since CESEE and Korea: GDP per Capita (percent of per capita GDP of the U.S. at PPP) KOR ALB BIH BLR SRB MKD MNE Note: Data for CESEE countries are for 2-21 and are shifted back in time to comparable level of development of Korea. MEDIUM-TERM GROWTH CHALLENGES

20 Lower potential growth due to productivity and investment slowdown Difference Between Average Potential Growth Before and After Crisis: Factor Contributions (percentage points) 4 2 Capital Labor TFP Potential growth Baltics CEE SEE-EU SEE non-eu CIS SRB MKD Note: TFP is the difference between potential growth and the contributions of capital and labor. MEDIUM-TERM GROWTH CHALLENGES

21 LABOR Decline in working age population Working Age Population Growth, (y-o-y percent change, average) Working Age Population Growth, 21-3 (y-o-y percent change, average) 2 Working-age population growth Contribution of migration EU-1 median Baltics CEE SEE-EU SEE non-eu CIS Baltics CEE SEE-EU SEE non-eu CIS ALB MNE MKD BIH SRB BLR MNE MKD ALB SRB BIH BLR MEDIUM-TERM GROWTH CHALLENGES

22 LABOR Room to increase labor supply Full-Time-Equivalent Participation Rate (percent, 214) Average Unemployment Rate (percent, 2-1) 7 6 Baltics CEE SEE-EU SEE non-eu CIS EU-1 median 3 3 Baltics CEE SEE-EU SEE non-eu CIS ALB SRB MKD MNE BIH BLR BIH MNE SRB ALB MKD BLR MEDIUM-TERM GROWTH CHALLENGES

23 LABOR Room to increase labor quality and allocation Labor Force with Above Primary Education (percent of total, 214) Labor force with above primary education MKD MNE BIH ALB SRB EU-1 median Baltics CEE SEE-EU SEE non-eu CIS BLR Mismatch in field of work Skill Mismatch and Active Labor Market Policies CYP NOR FRA DNK SWE LUX DEU AUT NLD BEL FIN GRC ITA ESP IRL Spending on active labor market policies (percent of GDP) MEDIUM-TERM GROWTH CHALLENGES

24 CAPITAL Capital gaps relative to advanced Europe Capital Stock, Per Capita, 214 (percent of EU-1 average) 12 Other EU countries CESEE 12 1 EU-1 average LUX CHE USA BEL IRL AUT NLD SWE BEL DNK DEU GBR ISL FIN FRA ESP ITA MLT CYP GRC PRT MNE SRB BIH ALB MEDIUM-TERM GROWTH CHALLENGES

25 CAPITAL But investment rates too low for fast catch-up Investment Rates in CESEE (percent of GDP) average for EU average for EU1 Baltics CEE SEE-EU SEE non-eu CIS ALB BIH SRB MNE MKD BLR MEDIUM-TERM GROWTH CHALLENGES

26 CAPITAL Investment constrained by crisis legacies and low savings Non-Performing Loans (percent of total loans, 21Q3 or latest) Gross Domestic Saving Rate, 214 (percent of GDP) BIH MKD RKS BLR BLR LTV MKD ALB SRB MNE BIH MEDIUM-TERM GROWTH CHALLENGES

27 CAPITAL Household savings are below advanced Europe 3 2 Economy-Wide Saving Rates: Composition (average , percent of GDP) Households and non-profits serving households Non-financial corporations Government and financial institutions Total economy savings Baltics CEE SEE-EU EA EA MEDIUM-TERM GROWTH CHALLENGES

28 CAPITAL Corporate savings could be higher Corporate Sector Gross Operating Income (average , percent of GDP) Saving rate Distributed profits, nationally Distributed FDI profits Reinvested FDI profits Interest payments Baltics CEE SEE-EU EA EA MEDIUM-TERM GROWTH CHALLENGES

29 TFP Productivity gaps relative to advanced Europe Relative Total Factor Productivity Level (22-14 average) 14 Advaced Europe CESEE EU-1 average LUX IRL AUT SWE GBR BEL FRA NLD DEU NOR ITA DNK CYP FIN ESP ISL MLT CYP PRT SRB MEDIUM-TERM GROWTH CHALLENGES

30 TFP Technical efficiency Potential Efficiency Gains From Structural Reforms (percent) Easing business regulation Lowering restrictions on FDI 4 Strengthening property rights Upgrading legal system Baltics CEE SEE-EU SEE non-eu CIS Total SRB ALB MEDIUM-TERM GROWTH CHALLENGES

31 TFP Allocative efficiency Potential Productivity Gains from Improved Allocative Efficiency (relative labor productivity, Sweden = 1) Potential gains from making financial services more affordable Potential gains from more efficient government Labor productivity, Baltics CEE SEE-EU SEE non- EU CIS SRB MEDIUM-TERM GROWTH CHALLENGES

32 TFP Post-crisis decline in TFP global phenomenon Difference Between Average TFP Growth before and after Crisis (percentage points) 1 Baltics CEE SEE-EU SEE non-eu CIS Advanced Europe US SRB MKD FIN GBR SWE GRE AUT LUX NDL CYP BEL DEU FRA DEN ITA PRT ESP IRL MLT USA MEDIUM-TERM GROWTH CHALLENGES

33 TFP Importance of common factors CESEE (excl. CIS and Turkey): Common and Country-Specific Components of the TFP Growth (deviations from the mean, percentage points).6 Country-specific Trading partner TFP growth Other common MEDIUM-TERM GROWTH CHALLENGES

34 REGIONAL ECONOMIC ISSUES REPORT ON CENTRAL, EASTERN AND SOUTHEASTERN EUROPE ICY PRIORITIES

35 Structural reform priorities Potential Gains to Long-Term Growth from Policy Actions Large Medium Small Data are not available Institutions Property rights Legal system Government efficiency Regulation Business regulations Restrictions on FDI Financial Sector Finance affordability Infrastructure Labor Female labor force participation Senior labor force participation Workforce with tertiary education Life expectancy Share of service sector employment Baltics CEE SEE-EU CIS Turkey Note: The thresholds are based on 2th (2.4 percentage points) and 7th (8.9 percentage points) percentiles of the distribution of growth impact of all policy measures across all CESEE countries. The growth impact of policy measures is calculated assuming that CESEE countries will improve their structural characteristics to the average level of EU-1. ICY PRIORITIES

36 TFP Need faster TFP growth to speed up convergence TFP Growth Same as Euro Area (percent of euro area income per capita) BIH ALB SRB MKD MNE BLR LTV ICY PRIORITIES

37 TFP Need faster TFP growth to speed up convergence Constant Positive TFP Growth Differential relative to Euro Area (percent of euro area income per capita) BIH ALB SRB MKD MNE BLR LTV ICY PRIORITIES

38 Key Takeaways Recovery amid headwinds Stalled convergence Reforms needed CESEE non-cis: cyclical recovery near complete Unfavorable demographics Rebuilding fiscal buffers CIS: gradual emergence from recession Weak productivity growth Productivity enhancing structural reforms but more downside risks Weak investment growth Labor market policies