World Economic Outlook Central Europe and Baltic Countries Presentation by Susan Schadler and Christoph Rosenberg September 5
World growth returns to trend. (World real GDP growth, annual percent change) Projections 8 Trend, 197 4 6 4 197 75 8 85 9 95 5 1 Source: IMF staff estimates.
Headline Inflation remains contained (Annualized percent change of three-month moving average over previous three-month average) World Emerging markets Projections 8 6 4 Industrial countries M1 1M1 M1 3M1 4M1 5M1 6M1 Source: Haver Analytics.
... reflecting low core inflation, (Annualized percent change of 3-months moving average over previous 3-months moving average) 8 Emerging markets 6 World 4 Industrial countries 1 3 4 Jul. 5 Source: Haver Analytics.
... stable non-oil commodity prices, yet high oil prices. (Real commodity prices, 1995 = 1) Projections 5 Oil prices Non-oil commodity prices 4 3 1 197 75 8 85 9 95 5 1 Source: IMF staff estimates.
Financial market conditions remain benign. (World real long-term interest rate, percent) Projections 9 6 3-3 197 75 8 85 9 95 5 1-6 Source: IMF staff estimates.
Yield curves are flattening 1/ (Basis points) 5 United States 4 3 Euro area Japan 1 United Kingdom 1 3-1 4 Sep. 9, 5 Source: Bloomberg Financial Markets, LP. 1/ 1-year government bond less 3-month treasury bond yields.
Mature equity markets are resilient (March = 1; national currency) FTSE 1 Topix Wilshire 5 DJ Euro Stoxx 11 1 9 8 7 6 5 4 1 3 4 3 Sep. 9, 5 Source: Bloomberg Financial Markets, LP.
Nominal effective exchange rates have varied within stable ranges (February = 1) Japan Euro area 13 1 11 1 1 3 United Kingdom United States 4 5 9 8 7 Source: Bloomberg Financial Markets, LP.
Euro area: recovery continues to struggle (Real GDP; percent change from four quarters earlier) United States Projections 7 5 3 1 Japan Euro area -1 1996 98 4-3 6 Sources: Haver Analytics; and IMF staff estimates.
Euro area: investment contribution has recovered (Annual percent change) Domestic demand Total consumption Gross fixed capital formation Projections 8 6 4-1996 1997 1998 1999 1 3 4 5 6-4 Source: IMF staff estimates.
Euro area: Exports continue to lead, (In percent) GDP growth Domestic demand Export growth Projections 14 1 1 8 6 4 1996 1997 1998 1999 1 3 4 5 6 Source: IMF staff estimates.
Euro area: but net exports have been flat (In percent) Projections 4 GDP growth Contribution of domestic demand Contribution of net export 1996 1997 1998 1999 1 3 4 5 6 - Source: IMF staff estimates.
Euro area: headline, core inflation subdued (Annualized percent change of 3-month moving average over previous 3-month average) 3..5. Headline inflation Core inflation 1.5 1..5 1 3 4 5. Source: IMF staff estimates.
Euro area: Recent data have been positive, (Percent change of 3-month moving average) 1.5 6 1. 4.5. -.5 s - -1. -1.5 Export (right scale) Industrial production (left scale) -4-6 3 4 5 Source: European Commission.
employment is growing, (Employment in percent of working age population) 74.5 74. 73.5 3 4 73. Source: European Commission.
and long-term interest rates are falling. (Basis points) 6 United States United Kingdom 5 4 1 3 Euro area 4 Sep. 9, 5 3 Source: Bloomberg Financial Markets, LP.
But confidence indicators remain subdued Business confidence index Consumer confidence index 1 5-5 -1-15 - -5 1999M1 1999M7 M1 M7 1M1 1M7 M1 M7 3M1 3M7 4M1 4M7 5M1 5M7 Source: European Commission.
and differences in GDP growth across countries reflect local weaknesses (Cumulative difference in GDP growth from euro area average in 4 percent, 1999 4) 3 1-1 Spain Greece Luxembourg Ireland Italy Portugal Netherlands Austria Belgium France Finland Germany Sources: OECD, Economic Outlook; and IMF staff calculations.
EU8: Growth will continue to outpace the euro area Real GDP change( weighted average, in percent) 8 7 6 Euro area EU8 Emerging markets Projections 5 4 3 1 4 6 Source: National authorities; IMF; and WEO.
Baltics and Slovakia will continue to grow faster than central Europe (Real GDP growth, in percent) 9 8 7-4 5f 6f 6 5 4 3 1 LV EE LT SK HU SI CZ PL Source: National authorities; IMF; and WEO.
EU8: Euro area activity matters but effect varies Business cycle synchronization -4 (correlation coefficients between GDP growth in EU8 and EU1) 1. 1.8.6.4. -. -.4 -.6 -.8-1 HU SI CZ EE PL LV LT SK Sources: National authorities; IMF; and WEO.
And euro-area exports matter even more for EU8 exports Correlation coefficients between EU8 Exports and the Euro zone Exports 1-4 1.8.6.4. -. -.4 SI PL CZ HU EE LV LT SK Sources: National authorities; IMF; and WEO.
EU8 and Emerging Market Growth: Raising labor utilization key to growth in the region (Contribution to GDP growth, in percent) 8 Employment 6 TFP 4 - -4 9-94 95-99 - 4 9-94 95-99 - 4 9-94 95-99 - 4 9-94 95-99 Capital Overall GDP Growth CEE-5 Baltics East Asia Latin America OECD - 4 9-94 95-99 - 4 8 6 4 - -4
EU8:Large Current Account deficits come with high growth EU8: Higher Current Account Deficit Countries 1 1 8 Real GDP Growth ( in percent) Estonia Latvia Lithuania Hungary 14 1 1 8 Deficit (in percent of GDP) Estonia Latvia Lithuania Hungary 6 4 4 6 1 1 8 6 4 Poland Slovakia Czech Republic Slovenia 6 4 4 6 EU8: Lower Current Account Deficit Countries Real GDP Growth ( in percent) 14 1 1 8 6 4 Deficit (in percent of GDP) Poland Slovakia Czech Republic Slovenia 4 6 4 6 Source: National authorities; IMF; and WEO.
Fortunately, emerging market financing is plentiful (Billions of U.S. dollars) 1998 4 Jul. 5 45 4 35 3 5 15 1 5 Source: Capital Data.
And large deficits have sizable FDI backing (In percent of GDP) Higher deficit countries Estonia 1 Hungary 1 5 5 1 3 4 5 proj. 6 proj. 1 3 4 5 proj. 6 proj. Latvia 1 Lithuania 1 5 5 1 3 4 5 proj. 6 proj. 1 3 4 5 proj. 6 proj. Current account deficit FDI Source: IMF staff calculations.
while smaller deficits are almost fully FDI-financed (In percent of GDP) Lower deficit countries Czech Republic 1 Poland 1 5 5 1 3 4 5 proj. 6 proj. 1 3 4 5 proj. 6 proj. Slovak Republic 1 5 Slovenia 11 6 1 3 4 5 proj. 6 proj. 1 3 4 5 proj. 6 proj. 1-4 Current account deficit FDI Source: IMF staff calculations.
EU8: exchange rates have edged up (Nominal effective exchange rates, Jan. = 1) ERM countries IT countries Estonia Lithuania Latvia Slovenia 14 13 Czech Republic Poland Hungary Slovak Republic 14 13 1 1 11 11 1 1 9 9 3 4 5 8 3 4 5 8 Source: IMF staff calculations.
EU8: inflation subdued in most countries but oil prices a risk (Annul percent change) ERM countries Euro area Estonia Latvia Lithuania Slovenia 8 6 4 1 3 4 5 6- proj. 14 1 1 IT countries Euro area Hungary Slovak Rep. Czech Rep. Poland 1 3 4 5 6 proj. 14 1 1 8 6 4 Source: IMF staff calculations.
Major risks to the projections: Oil Oil price increases Unwinding global imbalances
EU8: Oil Price increases will hurt Inflation & Growth but not by much Oil price increase in local currency (5, per barrel) Net tax equivalent 1/ ( in percent of GDP) 6 5 4 3 1 Latvia Slovenia Estonia Lithuania Hungary Slovaki a Cze ch Re public Poland Dollar Price Source: IMF staff calculations using UN Comtrade data. 1/ Notional increase in local currency equivalent of oil payments (net of re-exports) in 5 on 4 volumes. 1.5 1.5 Latvia Slovenia Estonia Lithuania HungarySlovakia Cze ch Republic Poland
Growing global imbalances are a risk (In percent of world GDP) Saving Investment Current account (right scale) 4 Industrial Countries 1. 7 Emerging Market and Oil- Producing Economies 1..5 6.5. 5. 18 -.5 4 -.5 16-1. 3-1. 14 197 8 9-1.5 4 197 8 9 4-1.5 Sources: OECD Analytic Database; World Bank, World Development Indicators; IMF staff estimates.
World saving and investment at historic lows (Percent of GDP) 8 Investment 6 4 Saving 197 75 8 85 9 95 4 Sources: OECD Analytical Database; World Bank, World Development Indicators; IMF staff estimates.
Low savers generally are low investors Saving Investment Current account (right scale) (Percent of each sub-region s GDP) 4 United States 8 Other Industrial 6 1 18 16 - -4 4 18-1 - 14-6 16-3 1 197 8 9 4-8 14 197 8 9 4-4 3 8 Euro Area 1 6 4 Emerging Markets Outside East Asia 1 6-1 4-1 - - 18-3 -3 16-4 -5 18 197 8 9 4-4 14-6 197 8 9 4 Sources: OECD Analytical Database; World Bank, World Development Indicators; and IMF staff calculations.
High savers are not all high investors 36 East Asia Saving Investment Current account (right scale) (Percent of each sub-region s GDP) 9 55 China 6 3 6 5 4 8 3 45 4 4-3 35 - -6 3-4 16 197 8 9 4-9 5 197 8 9 4-6 45 Japan 6 3 Oil Producers 9 4 35 3 4 8 4 6 3-3 5 16-6 - 197 8 9 4 197 8 9 4 1-9 Sources: OECD Analytical Database; World Bank, World Development Indicators; and IMF staff calculations.
Euro Area and Japan: Effects of benign,disruptive adjustments Output Growth (percent) 4 Current Account Balance (percent of GDP in percentage points) 3 1 1995 5 1 15 Real Effective Exchange Rate (percent change, + = depreciation, 199 = 1) 11 Baseline Disruptive adjustment 1995 5 1 15 Inflation (percent) 1-1.5 1. 1.5 9 1. 8 1995 5 1 15 Source: IMF staff estimates. 1995 5 1 15.5
U. S.: Effects of benign,disruptive adjustment Output Growth (percent) 5 4 3 1 Current Account Balance (percent of GDP in percentage points) Baseline Disruptive adjustment -1 - -3-4 -5 1995 5 1 15 Real Effective Exchange Rate (percent change, + = depreciation, 199 = 1) 11-6 1995 5 1 15 Inflation (percent) 4 1 3 9 8 7 1995 5 1 15 Source: IMF staff estimates. 1995 5 1 15 1
Positioning EU8 to reduce vulnerabilities to global risks Special Issues Understanding fast credit growth Keeping Keeping debt at prudent levels
Banks lending to the private sector is growing fast in some countries. Average growth of credit to the private sector (in percentage points of GDP) 1 1 8 6 4 - -4 EU8: 1-4 Non-core EMU: 1995-98* Scandinavia: Asia: 1984-89 1993-97 *Greece 1997- **Czech Republic -4 Latvia Estonia Lithuania Hungary Slovenia Poland Czech Slovakia Ireland Portugal Greece Spain Finland Sweden Thailand Indonesia Korea Source: IFS, national authorities, IMF staff calculations
Indebtedness corresponds to income levels. Private credit to GDP Source: IFS, Eurostat Private credit to GDP and income per capita, EU countries, 4 % 15% 1% 5% % PT GR EE LV HU SI PL SK CZ LT ES IT DE FR FI NL DK AT BE IE 8, 13, 18, 3, 8, 33, GDP per capita (purchasing power parities)
Private sector debt has still some way to grow. Bank credit to the private sector: Actual and estimated equilibrium levels (percent of GDP) 1 1 8 6 4 EU8 countries (Q,5) Actual Estimated Non-core EMU (Q4,1998) *Greece (Q1.1999) CZ HU PL SK EE LV LT SI IE GR* PT ES Source: National authorities, calculations based on Schadler et al. (5)
Households increasingly borrow in foreign currency. EU8: Credit denominated in foreign currency 1-4 (calculated at constant exchange rates) 9 Foreign currency loans in percent of total credit to the private sector 8 Foreign currency loans in percent of total credit to households 8 7 6 5 4 3 1 4 7 6 5 4 3 1 4 1 1 EE LT LV HU SI PL SK CZ EE LV LT PL HU SI SK CZ Source: National authorities, IMF staff estimates
Banks that lend in foreign currency rely increasingly on foreign funding. EU8. Foreign currency credits and deposit 5 15 1 5-5 -1 Change of foreign currency credits and deposits* during 1-4 (in percentage points of GDP) foreign currency-denominated credits foreign currency-denominated deposits EE LV LT SI HU SK PL CZ 15 1 5-5 -1-15 - -5-3 Net foreign assets of the banking sector (in percent of GDP) 1 4 CZ PL HU LT SK SI LV EE Source: National authorities, IMF staff estimates *Residents only, except for CZ and EE.
Credit growth raises concern about overheating in some countries. EU8: Current account balance 1-4 and asset prices 3-4 EU8: Current account balance 1-4 (annual average, in percent of GDP) - -4-6 -8-1 -1 8 6 4 LV LT EE HU SI PL SK CZ EU8: Real estate* and stock market prices 3-4 (average annual change in percent) real estate stock market LV LT HU EE SI PL SK CZ Source: Eurostat, European Council of Real Estate Professions - Annual Report 4, National authorities, IMF staff estimates * Percentage change in average sales prices for houses and apartments in 3-4; EE and SK not available
Debt ratios are high in some countries in Central Europe. EU8: Debt to GDP ratio, and 4 (ESA 95, percent) Source: Eurostat 7 6 5 4 3 1 Hungary* Poland* Slovakia 4 Czech Republic** Max prudent public debt level Slovenia Lithuania *Funded pension schemes with government guarantees included in the general government. **Including state guarantee provided to IPB bank, recording of this guarantee is a subject to ongoing discussions between Eurostat and the authorities. Latvia Estonia
Few countries have used the benign global environment to undertake fiscal adjustments. EU8: Structural Fiscal Balances (in percent of GDP) 1 4 1-1 - -3-4 Max prudent fiscal deficit -5-6 -7 EE SI LV CZ LT SK PL HU Source: IMF staff estimates
Primary spending in Central Europe is high, suggesting that fiscal adjustments should start at expenditure side. EU8: Primary expenditure, -4 average 6 Primary expenditure (percent of GDP) 55 5 45 4 35 SK CZSI PL gr HU mt pt LV EE LT cy es se dk fr fi at debe nl uk no 3 Source: Eurostat 8 13 18 3 8 33 GDP per capita (purchasing power parities) it ie
The Baltics and Slovakia have reduced spending. EU8. Change in general government revenue and primary expenditure -4 (in percentage points of GDP) 6 4 - -4-6 -8-1 -1 revenue primary expenditure SK LT LV EE SI CZ PL* HU* *Hungary and Poland data for 3 Source: Eurostat
Flat taxes are popular in the region. Flat tax rates, implemented and under discussion PIT rates CIT Year PIT rate before the reform rate Estonia 1994 4 1/ 16,4,33 4 / Lithuania 1994 33 Rates 18-33 15 Latvia 1995 5 Five rates 15-35 15 Slovakia 4 19 Five rates 1-38 3/ 19 Russia 1 13 1-3 37 Ukraine 4 13 1-4 5 Georgia 5 1 1- Romania 5 16 18-4 16 Poland 8 4/ 18 19,3,4 18 Slovenia 7 5/ Five rates 17-5 5 Czech Rep. after 6 6/ 15 Four rates 15-3 15 1/ The rate was introduced at 6 percent, with a phased reduction to percent by 7. / Estonia subsequently reduced the CIT on retained profits to zero, with dividends taxed at the PIT 3/ On average production earnings, the average PIT rate was about percent. 4/ Proposed by the outgoing government. 5/ Proposed by Council of advisors to the government. 6/ Proposed by opposition party ODS
Thank You September 5
18. Strong Productivity Growth Offset by Weak Labor Utilization 1971 95 1995 4 45 36 7 18 9-9 -18 Per capita GDP Productivity Hours worked per person Employment ratio -7 Sources: OECD, Economic Outlook; Eurostat; and IMF staff calculations.
17. EU15 Per Capita GDP Stuck at about 7 Percent of US (ratio of per capita GDP in PPP dollars in Europe to that in the United States) 8 75 7 65 1965 7 75 8 85 9 95 6 Source: IMF staff estimates.
19. Employment Rates Still Far from Lisbon Targets Percent 4 8 7 6 5 4 3 1 Denmark Netherlands Sweden United Kingdom Austria Portugal Finland Ireland Germany France Luxembourg Spain Belgium Greece Italy Source: OECD, Economic Outlook; Eurostat; and IMF staff calculations.