Regional Economic Outlook and

Regional Economic Issues

Bas B. Bakker

Senior Regional Resident Representative

for Central and Eastern and Southeastern Europe

IMF Macroeconomic Policy Seminar

Vienna, February 26, 2018

In the last decade, world has experienced

a lot of shocks

2008/09 global economic and financial crisis

2010/12 Euro area crisis

2014/15 oil price collapse and recession in

large EMCs

2

Until a year ago growth continued to

disappoint

3

3.0

3.5

4.0

4.5

2011 2012 2013 2014 2015 2016 2017 2018

WEO Apr 2014

WEO Apr 2015

WEO Apr 2016

WEO Apr 2017

Global Real GDP growth according to various WEO vintages

(Percent)

The good news is that more recently we

have been upgrading growth forecast

4

3.0

3.5

4.0

4.5

2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

WEO Update Jan-2018

WEO Apr-17

WEO Oct-17

Global Real GDP growth according to various WEO vintages

(Percent)

-4

-2

0

2

4

6

8

10

12

14

2000 2002 2004 2006 2008 2010 2012 2014 2016 2018

This year, advanced economies are growing around

2 ¼ percent, China and India, 7, other EMCs, 3 ½

5

Real GDP Growth

(Percent)

China and India

EMs

excl. China and India

Advanced Economies

USA will grow by 2.7 percent, euro area by 2.2,

and Japan by 1.2

6

-6

-4

-2

0

2

4

6

2000 2002 2004 2006 2008 2010 2012 2014 2016 2018

Real GDP Growth

(Percent)

USA

Euro Area

Japan

5

6

7

8

9

1980 1983 1986 1989 1992 1995 1998 2001 2004 2007 2010 2013 2016 2019

Unemployment rate in advanced

countries is near pre-crisis low

7

Unemployment Rate in Advanced Economies

(Percent)

But wage growth remains subdued

8

0

1

2

3

4

5

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Euro Area

USA

Nominal Wage Growth

(Percent y/y, 2-quarter moving average)

With recovering oil prices, inflation in advanced

countries has picked up, but remains below target

9

-2

-1

0

1

2

3

4

2000 2002 2004 2006 2008 2010 2012 2014 2016 2018

Japan

USA

Euro Area

Inflation

(Percent)

450

500

550

600

650

700

1980 1986 1992 1998 2004 2010 2016

0

500

1000

1500

2000

2500

3000

1980 1986 1992 1998 2004 2010 2016

But stock markets are surging, net worth

in the US is above pre-crisis peak

10

Households Net Worth

(Percent of Disposable Income)

Standard & Poor's 500

Stock Price Index

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

2014 2015 2016 2017 2018 2019 2020

Fed has started to tighten, ECB rates are expected to

remain low for longer

11

US and EA Policy Rates and its’ Forecasts

(Percent)

ECB Survey of Professional Forecasters

Macroeconomic Advisers’ Forecast

Fed

ECB

-10

-8

-6

-4

-2

0

2

4

6

8

10

2000 2002 2004 2006 2008 2010 2012 2014 2016 2018

In CESEE, CIS recovering and non-CIS

growing strongly

12

Real GDP growth

(Percent)

CIS

Other CESEE

GDP per capita is well above pre-crisis

level (except Ukraine)

13

NON-CIS CESEE

14

-1

0

1

2

3

4

5

6

7

2011 2012 2013 2014 2015 2016 2017

0

5

10

15

20

25

2011 2012 2013 2014 2015 2016 2017

Growth is rapid, and unemployment is falling sharply

15

Real GDP growth

(Percent)

Unemployment Rate

(Percent)

SEE EUBaltics

CE-5

SEE non-EUSEE EU

Baltics

CE-5

SEE non-EU

-15

-10

-5

0

5

10

15

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Growth in the region is not as high as in

the pre-crisis years

16

Max

Min

Real GDP growth in CESEE excl. CIS

(Percent)

Average

2007 level

2002

2003

2004

2005

2006

2007

2012

2013

2014

2015

2016

2017

-3

-2

-1

0

1

2

0 2 4 6 8

SEE

2002

20032004

2005

2006

2007

20122013

2014

2015

20162017

-1

0

1

2

3

0 1 2 3 4 5 6 7

CE-5

But employment growth in many countries is as high

as during pre-crisis peaks.

17

GDP growth vs. employment growth

(Percent, 2 year average)

2 y

ear

avera

ge e

mp

loym

en

t g

row

th

2 year average GDP growth

Post-crisis

Pre-crisis

Post-crisis

Pre-crisis

-3

-2

-1

0

1

2

SEE CE-5

0

1

2

3

4

5

6

SEE CE-5

Even if we exclude peak pre-crisis years:

current growth is lower but employment growth

higher than pre-crisis

18

GDP and Employment Growth in 2002-04 and 2015-17

(Average, percent)

GDP Growth Employment Growth

2002-0

4

2015-1

7

2002-0

4

2015-17

Inflation, which was very low in 2015-16 has

picked up recently

-2

0

2

4

6

8

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

CPI Inflation

(Percent)

CESEE excl. CIS

Euro Area

Energy and food prices played key role in pick-

up of inflation

20

-50

-40

-30

-20

-10

0

10

20

30

40

2013 2014 2015 2016 2017

Oil Price

Food and

Beverage Price

Index

Oil and Food Prices

(Percent, Y/Y, 6 months moving average)

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

21

-3

-2

-1

0

1

2

3

2005 2007 2009 2011 2013 2015 2017

Employment growth

Working Age Population

Growth and UN projection

What will this imply for labor markets?

22

Employment and Working Age Population Growth in CESEE

(Excl. TUR and CIS, percent)

In the EU NMS wage growth has accelerated, while it

has remained more modest in the Western Balkans

23

-2

0

2

4

6

8

10

12

14

16

18

MNE BIH MKD SRB POL HRV LVA SVN CZE SVK LTU EST BGR HUN ROU

2017Q3

2015Q4

Nominal Wage Growth

(Percent, Y/Y)

In Western Balkans unemployment rates are

still very high and employment rates low

24

-4

-2

0

2

4

6

8

10

12

14

2007 2010 2013 2016

HRV

SVNBGR

ROU

-4

-2

0

2

4

6

8

10

12

14

2007 2010 2013 2016

LTUEST

CZE

HUN

Unemployment is coming down rapidly and is

now below pre-crisis levels in many countries

25

Cumulative Changes in Unemployment Rate

(2008Q1=0, seasonally adjusted)

LVA

SVK

POL

-4

-2

0

2

4

6

8

10

12

14

2008 2010 2012 2014 2016

SRB

ALB*

MKD

BIHMNE

2017Q3:

-12.2

*For ALB 2012Q1=0

In both regions, 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

26

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.

27

0

10

20

30

40

50

60

70

80

90

EST UVK BGR CZE LVA LTU ROU MKD BIH SVK POL SRB ALB MNE HUN SVN HRV

2017

2007

General Government Debt

(Percent of GDP)

-5

-4

-3

-2

-1

0

1

2

3

ROU POL HUN SVK HRV EST LVA SVN BGR SRB BIH CZE LTU

Unfortunately, many countries with too high

structural deficits are reverting to pro-cyclical

loosening

28

General Government Structural Balance

(Percent of GDP)

2018

2016

CIS

29

-16

-14

-12

-10

-8

-6

-4

-2

0

Ukraine Belarus Russia

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

30

Change in GDP

(percent)

Between

2013-15

Between

2013-16

Exchange rate flexibility was unavoidable

given the limited buffers…

31

20

30

40

50

60

70

80

90

100

110

120

20 30 40 50 60 70 80 90 100 110

RUS

UKRBLR

2013

2014 2014

2014

2015

2015

2015

2016

2016

2016

Foreign reserves and XR depreciation

(6-month moving averages)

USD exchange rate (index, H1’2013=100)

Fo

reig

n r

ese

rves

(USD

in

dex,

H1’2

013=

100)

Depreciation

Reserv

es d

raw

dow

n

-5

0

5

10

15

20

25

30

2004 2006 2008 2010 2012 2014 2016

…but increased inflation and reduced real

wages

32

CPI Inflation in European CIS

(Percent, weighted average)

max

min

0

250

500

750

1000

Q1'2010 Q1'2012 Q1'2014 Q1'2016

RUS

UKR

BLR

Average monthly wages

(USD)

-20

-15

-10

-5

0

5

10

15

20

2005 2007 2009 2011 2013 2015 2017

Ukraine and Russia are now recovering (helped

by rising oil prices)

33

-100

-75

-50

-25

0

25

50

75

100

-20

-15

-10

-5

0

5

10

15

20

2005 2008 2011 2014 2017

RUS

Oil prices

(right axis)

Real GDP growth in Russia, other CIS countries and changes in oil prices

(Percent, y/y)

UKR

RUS

BLR

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

34

-6

-4

-2

0

2

4

6

8

10

12

14

16

2011 2012 2013 2014 2015 2016 2017

But is now also recovering

35

Real GDP Growth in Moldova

(Percent, y/y)

Near-term prospects show solid growth

36

0

1

2

3

4

BLR RUS UKR MDA

Real GDP Growth Projections

(Percent)

2017

2019

2018

But growth is low in comparison to pre-

crisis period

37

-6

-4

-2

0

2

4

6

8

10

12

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Real GDP Growth

(Percent, 3-year moving average)

UKR

RUS

BLR

MDA

THE FUTURE OF CONVERGENCE

38

Convergence has resumed (except in

CIS)

39

10

20

30

40

50

60

70

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Real GDP per capita

(Percent of Germany)

CE-5

Baltics

SEE EU

CIS

SEE non-EU

But CESEE is still much poorer than

Western Europe

40

ALB

AUT

BEL

BGR

BIH

CZE

DEU DNK

ESP

EST

FINFRA

GBR

GRC

HRV

HUN IRL

ITA

LTULVA

MDA

MKD MNE

NLD

POL

PRT

ROU

RUS

SRBSVK SVN

SWE

TUR

UKR

20

25

30

35

40

45

50

0 100 200 300 400 500 600 700

Em

plo

ym

en

t to

po

pu

lati

on

rati

o in

2016

(Perc

en

t)

Capital per worker in 2014

(Thousands of PPP dollars)

As fewer people work and there is less capital

per worker

4141

Capital per Worker vs. Employment to Population Ratio

-6

-4

-2

0

2

4

6

8

10

2002 2004 2006 2008 2010 2012 2014 2016

Growth is slower than pre-crisis…

42

GDP growth

(Percent, 3 year moving average)

SEE non-EU

Baltics SEE EUCE-5

CIS

As investment rates are lower (except CIS)

43

15

20

25

30

35

2002 2004 2006 2008 2010 2012 2014 2016

Baltics

SEE non-EU*

CIS

SEE EU

CE-5

*Excl. MKD

Investment Rate

(Percent of GDP, 3 year moving average)

-2

-1

0

1

2

3

4

5

6

7

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Technological progress and efficiency

advance much more slowly

44

TFP Growth

(Percent, 5-year moving average)

SEE non-EU

Baltics

CE-5

SEE EUCIS

-2.0

-1.5

-1.0

-0.5

0.0

0.5

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Further exacerbated by the decline of the

working age population

45

Working Age Population Growth

(Population ages 15-64 years, 5 year moving average)

Baltics

SEE EU

CE-5

SEE non-EU

CIS

-1.0

-0.5

0.0

0.5

1.0

1.5

2000 2002 2004 2006 2008 2010 2012 2014 2016

Fall in TFP is a global problem

46

EU15

USA

TFP growth

(Percent, 5 year moving average)

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

49

Address several problems

Limited access to financial

services (e.g. for SMEs)

Infrastructural gaps

Inefficient legal systems and

other government services

Improve institutions, especially judiciary

50

Judicial Independence, 2015

Source: World Economic Forum. Note: Worldwide distribution excluding LICs

Above 75 percentile Between 25 and 75 percentile Below 25 percentile

Impartial Courts, 2015

Other institutional indicators also show a

room to catch up to Western Europe

51

World Governance Indicators, 2016

(Ranges from -2.5 (weak) to 2.5 (strong) governance performance)

2.0

2.5

3.0

3.5

4.0

BLR

UV

K

BIH

SR

B

MD

A

UK

R

RU

S

MN

E

ALB

MK

D

SV

N

RO

U

BG

R

HR

V

CZ

E

HU

N

LV

A

LTU

SV

K

PO

L

EST

EU accession process should lead to improved

institutions / completion of transition

52

Average of Six EBRD Transition Indicators in 2014

EU countries

non-EU countries

Note: 2007 for Czech Republic.

Institutional reforms provide large

efficiency gains

53

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

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