World Bank EU10 Regular Economic Report
Recovery and Beyond Bucharest, 19 April 2011
MESSAGES • With the recovery strengthening, output has reached precrisis levels in early 2011 and growth is set to get close to its potential in 2012 • Yet, weak demand and high unemployment could undermine the recovery • Sustained growth and job creation require stable financial markets, sustainable fiscal balances and structural reforms
Recovery Strengthening
Growth is improving ‌ Year-on-year GDP growth in EU10, EU15, Poland and Romania 10 8 6
4 2
2008
0
2009
-2
2010
-4 -6 -8
EU15
EU10
PL
RO
Source: Eurostat, Central Statistical Offices, World Bank staff calculations
… with rising momentum … Quarter-on-quarter GDP growth in EU10, EU15, Poland and Romania 1Q 10
2Q 10
3Q 10
4Q 10
1.5 1 0.5 0 -0.5 -1
EU15
EU10
PL
Source: Eurostat, Central Statistical Offices, World Bank staff calculations
RO
… also year-over-year … Year-on-year GDP growth in EU10, EU15, Poland and Romania 1Q 10
2Q 10
3Q 10
4Q 10
6 5 4 3
2 1 0
-1 -2 -3
EU15
EU10
PL
Source: Eurostat, Central Statistical Offices, World Bank staff calculations
RO
… aided by restocking … Contribution to GDP growth in the EU10, percent, year-on-year, not seasonally adjusted Final consumption 8
GFCF
Changes in inventories
Net exports
Other
GDP
6
4 2 0 -2 -4 -6
-8
Source: Eurostat, World Bank staff calculations
4Q 10
3Q 10
2Q 10
1Q 10
4Q 09
3Q 09
2Q 09
1Q 09
4Q 08
3Q 08
2Q 08
1Q 08
4Q 07
-10
‌ lifting growth close to its potential ‌ Projected 2010 and 2012 GDP growth rates, percent
Source: World Bank
… across the region … Forecasted GDP growth rates, percent 2010
2011
2012
5 4
3 2 1 0 -1 -2 EU15 Source: World Bank
EU10
PL
RO
… and catch-up to pre-crisis levels … Level output in 2010, 2011 and 2012 as percent of the pre-crisis peak output 120
Output 2010
110
100
114
2011
2012
108
106 100
98
102 91
90 84 97
99
80
81
87
97
97
93
95
92
99
100
103
100 96
103
97
106
90
84
86
EE
LT
110
92
93
94
RO
SI
HU
95
BG
98
99
CZ
SK
78 70 EU15 EU10
LV
Source: World Bank staff calculations
PL
‌ as growth advantage over EU10 has returned EU10 and EU15 projected growth, percent, year-over-year EU15
EU10
PL
RO
10 8 6
4 2 0 -2 -4 -6 -8 2005
2006
2007
Source: Eurostat, World Bank
2008
2009
2010
2011
2012
Weak Demand
Exports have rebounded ‌ Recovery in exports from pre-crisis peak to 2010, index, peak = 100, seasonally adjusted 120
Exports
100 95
100
80
87
94
96
98
98
LV
SK
EE
CZ
101
102
102
102
LT
HU
BG
PL
107
60 40 20 0
EU15 EU10
SI
Source: Eurostat, World Bank staff calculations
RO
‌ but consumption remains weak in some countries ‌ Recovery in final consumption from pre-crisis peak to 2010, index, peak = 100, seasonally adjusted 120
Consumption
100
100
98
80
82
82
EE
LT
86
91
91
HU
BG
101
101
102
SI
SK
CZ
105
73
60 40 20 0
EU15 EU10
LV
RO
Source: Eurostat, World Bank staff calculations
PL
… and investment weak across the region … Recovery in gross fixed investment from pre-crisis peak to 2010, index, peak = 100, seasonally adjusted 120
Investment
100 97
80
86
84
81
60
65 51
40
69
87
89
HU
CZ
73
57
44
20 0
EU15 EU10
LV
EE
LT
RO
Source: Eurostat, World Bank staff calculations
BG
SI
SK
PL
‌ as credit growth to enterprises remains weak Contribution to real credit growth from Oct 2008 to January 2011 Credit to HHS
Credit to enterprises
Credit growth
15 10 5 0 -5
-10 -15 -20 EU15 EU10
SK
CZ
PL
SI
Source: ECB, World Bank staff calculations
BG
EE
LV
HU
LT
RO
High Unemployment
Recovery is still jobless ‌ Unemployment rates in EU10 and EU15, pre-crisis, crisis peak and latest, percent 11
10
9 EU15 8
EU10
7
6
Pre-crisis
Crisis peak
Current
Source: Eurostat, World Bank staff calculation Notes: Pre-crisis refers to lowest unemployment rate in period 2007-2008, crisis peak refers to highest unemployment rate in period January 2008 to current, current is February 2011.
‌ as unemployment declined only in few countries ‌ Unemployment rates in EU10 and EU15, pre-crisis, crisis peak and latest, percent Pre-crisis
Crisis peak
Current
20
15
10
5
0
EU15 EU10
CZ
RO
SI
PL
BG
HU
SK
EE
LV
LT
Source: Eurostat, World Bank staff calculation Notes: Pre-crisis refers to lowest unemployment rate in period 2007-2008, crisis peak refers to highest unemployment rate in period January 2008 to current, current is February 2011.
‌ and remains high for the young & low-skilled and often of long duration ‌ Unemployment rates in EU10 countries in 4Q 2010, percent total
young
low-skilled
long-term
45 40 35
30 25 20 15 10 5 0
EU15 EU10
CZ
RO
SI
Source: Eurostat, World Bank staff calculation Notes: LTU refers to 3Q 2010.
PL
HU
BG
SK
EE
LV
LT
‌ even though labor costs are declining in most countries ‌ Real unit labor cost in selected EU10 countries in 4Q 2010, total economy, annual rate of change, not seasonally adjusted, percent 6 4 2 0 -2 -4 -6 -8 -10
EU15 EU10
LT
RO
BG
EE
Source: Eurostat, World Bank staff calculations. Notes: Data for Poland refer to 3Q 2010.
HU
LV
SK
SI
CZ
PL
‌ as higher demand leads to increases in productivity per worker Real labor productivity per person employed in EU10 and EU15, quarter-toquarter, seasonally adjusted EU15
EU10
2 1 0
-1 -2
Source: Eurostat, World Bank staff calculations.
4Q 10
3Q 10
2Q 10
1Q 10
4Q 09
3Q 09
2Q 09
1Q 09
4Q 08
3Q 08
2Q 08
1Q 08
-3
Policies: Stable Financial Markets
Risk appetite has returned ‌ Asset class performance, percent change Current
2008 Peak
Mar 2009
CDS banks
Interbank rates spreads
Oct 2010
600 500 400 300 200 100 0 5Y CDS
Source: Bloomberg, Reuters, World Bank staff calculations
Stocks*
… and capital flows continued … Gross capital inflows to EU10 markets, USD billions Public bond flows
Private bond flows
Equity flows
Bank related flows
Source: DECPG, World Bank staff calculations
1Q 11
4Q 10
3Q 10
2Q 10
1Q 10
4Q 09
3Q 09
2Q 09
1Q 09
4Q 08
3Q 08
2Q 08
1Q 08
4Q 07
3Q 07
2Q 07
1Q 07
20 18 16 14 12 10 8 6 4 2 0
‌ at moderate rate ‌ 2009
2010
Sub-Saharan Africa
2008
South Asia
Gross capital flows EU10 versus other external markets
Source: GEM database, World Bank staff calculations
EU10
Europe and Central Asia*
Middle East and North Africa
Latin America and Carribean
East Asia and Pacific
180 160 140 120 100 80 60 40 20 0
‌ leaving exchange rates competitive ‌ US Dollar exchange rates EU10 versus other external markets, index, 2008=100 2009
2010
2011
pre-crisis=100
120 110 100
90 80 70
Source: GEM database, World Bank staff calculations
South Africa
Singapore
Brazil
Malaysia
Thailand
Indonesia
Taiwan
India
Czech Rep
Mexico
Hungary
Russia
Poland
Turkey
Romania
Ukraine
60
‌ and stock markets below or close to pre-crisis peaks ‌ Stock markets in EU10 versus other emerging markets, index, 2008=100 2009
2010
2011
pre-crisis =100
Source: GEM database, World Bank staff calculations
Turkey
Indonesia
Thailand
Mexico
Malaysia
India
South Africa
Singapore
China
Poland
Brazil
Hungary
Ukraine
Russia
Czech Rep
Romania
180 160 140 120 100 80 60 40 20 0
… but spillovers from sovereign debt issues in parts of the euro area are a concern … EU10 government bonds’ yields correlations with Greek, Irish and Portuguese yields 0.60
0.40 0.20 0.00 -0.20 -0.40
-0.60 -0.80 -1.00
"Greece I" Nov 2009
"Greece II" Apr 2010
"Ireland" Nov 2010
"Portugal" Feb 2011
Source: Reuters, Bloomberg, World Bank staff calculations Notes: 3-month correlations
‌ as are funding pressures of banks Non-performing loans of banks in EU10 countries, percent of loan portfolio 20 18
16
CZ
14
EE
12
LV
10
BG
8
PL
6
4Q 10
3Q 10
2Q 10
1Q 10
4Q 09
3Q 09
2Q 09
HU
1Q 09
0 4Q 08
SK 3Q 08
2
2Q 08
RO
1Q 08
4
Source: Central Banks, World Bank staff calculations. Notes: Definition of non-performing loans may differ from one country to the next.
Policies: Sustainable Fiscal Balances
Most countries started fiscal consolidation last year ‌ General government fiscal deficit in 2009 and 2010, percent of GDP 2009 EU10
EE
BG
HU
2 0 -2 -4 -6 -8 -10 -12 Source: World Bank staff calculations
CZ
2010 SI
RO
LT
PL
SK
LV
… helping to improve market risk perception … Reduction in CDS spreads vs. reduction in general government fiscal deficit in 2009/10
Reduction in fiscal deficit 2010/09
2.5 LT EE
2.0
LV
1.5 1.0
CZ
0.5
HU
SI SK
0.0
BG RO
-0.5
PL
-1.0 0
200
400
600
800
1000
Reduction in CDS spreads Mar 2009 to Mar 2011 Source: Bloomberg, Eurostat, World Bank staff calculations
‌ and to moderate increases in government bond yields ‌ EU10 government bond yields
SK
CZ
PL
RO
HU
14 12 10
8 6 4 2 0
2008 Peak
Mar 2009
Oct 2010
Current
Source: Bloomberg, Eurostat, World Bank staff calculations
… and envision continued adjustments in the next years … General government fiscal deficit in 2010 to 2012, percent of GDP 2010 EU10
HU
SK
LT
6
4 2 0
-2 -4
-6 -8 -10 Source: World Bank staff calculations
2011 SI
CZ
2012 PL
RO
LV
BG
EE
… mostly on the expenditure side … Decomposition of general government fiscal deficit reduction from 2010 to 2012, percent of GDP Expenditure reduction
Revenue increase
Reduction in deficit
7 6
5 4 3 2 1
0 -1
-2 -3 -4 EU10
LV
PL
RO
Source: World Bank staff calculations
SK
LT
BG
SI
CZ
HU
EE
‌ also to limit further increases in public debt General government public debt in 2010 to 2012, percent of GDP 2010
2011
2012
80 70 60 50
40 30 20
10 0 EU10
EE
BG
RO
Source: World Bank staff calculations
LT
CZ
LV
SK
SI
PL
HU
Policies: Structural Reforms
Growth helps to bolster financial markets ‌ CDS spreads vs. GDP growth in 2010
GDP growth in 2010
5
4
SK
3
EE CZ
PL
2 LT
SI
1
HU
BG LV
0 -1
RO
-2 0
100
200
300
400
CDS spreads in March 2011 Source: Bloomberg, Eurostat, World Bank staff calculations
‌ but will require productivity improvements Real labor productivity per hour worked in 4Q 2010, Euro per hour worked
Source: Eurostat, World Bank staff calculations
THANK YOU
For more information visit: www.worldbank.org/eca/eu10rer krichter@worldbank.org
Inflation pressures HICP overall and core inflation in EU10 countries and EU15, year-over-year latest
Jan-08
Jan-10
latest
Oct-10
16
16
12
12
8
8
4
4
0
0
-4
-4
EU15 EU10
CZ
SI
LT
PL
SK
LV
HU
BG
EE
RO
EU15 EU10
SI
CZ
Jan-08
Jan-10
Oct-10
LT
SK
PL
LV
HU
Source: Eurostat, World Bank staff calculations Notes: Core inflation is overall index excluding energy and unprocessed food
BG
EE
RO
Actual output getting close to potential output in some countries Gap between actual and potential output in 2010
Source: EC Ameco database
Monetary policy has started to tighten in some countries Key monetary policy interest rates 12
CZ
HU
PL
RO
EURO
10 8
6 4 2
Source: Central Banks
Mar-11
Jan-11
Nov-10
Sep-10
Jul-10
May-10
Mar-10
Jan-10
Nov-09
Sep-09
Jul-09
May-09
Mar-09
Jan-09
0