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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

EU10 Regular Economic Report April 2011- Presentation  

EU10 Regular Economic Report April 2011- Presentation

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