Economic Update Growth Returns, with Questions Europe and Central Asia Region The World Bank Indermit Gill Chief Economist Skopje, March 17, 2011

Main Points Growth has returned. Growth rates will average about 4 percent in 2010. But Central and Eastern Europe (CEE) will grow at 3 percent, Turkey by more than 4 percent, and the former Soviet Union (FSU) will grow at almost 4.5 percent. Jobs have not returned as quickly. Unemployment rates are stubbornly high in CEE and Turkey, and are still rising in the FSU. Prospects more coupled with the west. The durability of the recovery depends on Western Europe, because emerging European economies may now be even more integrated with EU-15 than before the crisis. 2

DEVELOPMENTS THE REGION RECOVERS 9/21/2018

Growing again, but gingerly and (mostly) joblessly GDP growth was positive in 2010 The region grew by about 4 percent Kyrgyz Rep., Romania, Croatia and Latvia exceptions Recovery led by exports, and fuelled by capital inflows Prices of manufactured goods, oil, metals and food up Large official flows, and better terms for private flows But industrial production and employment have lagged Turkey one of the exceptions 4

ECA’s growth in 2010 improved, but weakest among emerging economies Real GDP Growth (%), 2008-2012 5

Most economies in the region contracted in in 2009 GDP Growth (%), preliminary estimates for 2009 6

Most countries in the region grew in 2010 GDP Growth (%), ECA Region estimates for 2010 7

All countries in the region forecast to grow in 2011 GDP Growth (%), ECA Region estimates for 2011 8

Goods Exports, Volume (% ch y/y, except Q1 2010 which is q/q), saar The recovery in merchandise exports has been as strong as in other regions Goods Exports, Volume (% ch y/y, except Q1 2010 which is q/q), saar 9/21/2018

Oil, Metals, and Food Prices ( Index, 2000=100) Metal prices close to pre-crisis peak, oil and food prices back to 2007 prices Oil, Metals, and Food Prices ( Index, 2000=100) 9/21/2018

Capital inflows up in ECA, because of both official transfers and private portfolio flows Capital Flows (% GDP), 2007-2010 (medians) Europe & Central Asia Latin America & East Asia 9/21/2018

FDI Inflows in FYR Macedonia 9/21/2018

Borrowing costs are down, but still twice the levels before the crisis Sovereign Bond Interest Rate Spreads, BP over UST (3 mma) 9/21/2018

Industrial Production (Index, 2006=100) Industrial production has increased, but not back to pre-crisis levels in much of ECA Industrial Production (Index, 2006=100) 9/21/2018

Non-performing loans are up, and higher than other emerging economies Bank Non-Performing Loans (% Total Loans) 9/21/2018

Unemployment has stayed high in CEE, and continues to rise in CIS Unemployment Rate (%) 9/21/2018

A full array of measures has been used to address rising unemployment Discretionary Labor Market Measures 9/21/2018

ECA countries use a variety of assistance programs even in good times Social Assistance Programs (% GDP) 9/21/2018

Higher social benefits generally mean higher fiscal deficits Relationship Between Increased Social Benefits and Fiscal Deficits (2008- to 2009) 9/21/2018

Fiscal Balance (% GDP), 2008-2010 In 2010, the median ECA country ran fiscal deficits of about 5 percent of GDP Fiscal Balance (% GDP), 2008-2010 20

In 2011, the median ECA country will run a smaller fiscal deficit Projected Fiscal Balance (% GDP), 2011 21

Only a quarter of people in ECA feel their lives are getting better People reporting their lives are getting better (%) 9/21/2018 Source: ILO (2010) World of Work.

The nature and durability of GROWTH ANALYSIS The nature and durability of GROWTH 9/21/2018

Business cycle combining rapid contraction with slow expansion Concerns: Construction and consumption at home, and growth in Western Europe Business cycle combining rapid contraction with slow expansion Excess industrial capacity in Emerging Europe Construction and Financial Services slowest to recover Rapid growth in much of region before the crisis Region integrated with Western Europe to an unprecedented degree Integration increased before the crisis, and outside of Central Asia, increased even more during the crisis 9/21/2018

USA: Recessions and recoveries have changed since the 1980s Recovery of the US from recent economic recessions (Indexed from levels when recession ended) Personal Consumption (Real Spending on Services) Unemployment Rate Source: Floyd Norris, “Recessions and Recoveries Are Not All the Same,” New York Times, 24 Sept 2010 9/21/2018

Recessions reduce employment, depressions destroy it Relationship between GDP Growth (2009) and Change in Employment Growth (2008 to 2009) 9/21/2018

Nature: Contrasting experiences in Poland, Russia and Turkey during the crisis Together, these economies are about 75 percent of ECA’s GDP of $3.5 trillion. Manufacturing, Construction, and Financial Services employment and output were most volatile during crisis. Services overall have served as an anchor for non-farm employment during the recession. Differences in run-up to crisis show up afterwards in trajectory of non-farm employment during recovery. 9/21/2018

Poland: Employment in construction and industry has been falling during recovery Unemployment rate has risen despite recovery since April 2009 Employment in construction rose rapidly before crisis, and has fallen during recovery Employment in industry has not risen despite sharp recovery in exports 9/21/2018

Russia: Employment in construction and industry has not risen during recovery Unemployment rate has not fallen despite recovery since February 2009 Employment in Construction fell since early 2008, and has not risen during recovery Employment in Industry fell a bit despite sharp recovery in Exports 9/21/2018

Turkey: Employment is recovering both in construction and industry Unemployment rate rose since December 2008, but has come down since mid-2009 Employment in Construction was steady before, fell moderately during crisis, and rose sharply during recovery Employment in Industry has risen with industrial production and Exports 9/21/2018

Poland: Steady increase in services employment and output through the crisis FIRE is the only component of services to decline since April 2009 Employment in services rose before crisis, and has risen during recovery Employment in trade rose throughout the period 9/21/2018

Russia: Employment and output in services rose before crisis, and flat since Finance, Insurance and Real Estate (FIRE) has fallen since February 2009 Value added in services has stabilized Trade has recovered somewhat more 9/21/2018

Turkey: Services keep employment growing through the crisis FIRE employment increasing before and after December 2008 Employment in Services overall provided a steadying influence during crisis Trade has made a quick recovery after the crisis 9/21/2018

Durability: Recovery after a decade of integration, with Western Europe sluggish Industrial production in EU new member states, EU candidate countries, and Eastern Partnership economies is more correlated with EU-15 now than in 2000 Industrial production in Eastern Partnership countries and Central Asia is more correlated with Russia now than in 2000 Industrial production in Russia and in the EU-15 are more correlated now than in 2000 9/21/2018

The Big unknown: growth in WESTern EUROPE PROSPECTS The Big unknown: growth in WESTern EUROPE 9/21/2018

By 2008, ECA was the most export-dependent emerging region Merchandise Exports & Imports (% GDP, PPP), 1998-2008 9/21/2018

Half of Southeastern Europe’s exports go to the EU Exports as a share of total exports to the world (%), 2008 37

Balkan growth prospects depend increasingly on Western Europe Business Cycle Synchronization (12-month moving correlation of industrial production with EU15) 38

Euro-zone growth went from highest in 2007 to lowest in 2010 Real GDP Growth (%), 2008-2012 9/21/2018

During the crisis, public finances held up better in ECA than in the EU-15 Growth in Western Europe dimmed by debt… …and weakening fiscal positions. ECA EU-15 9/21/2018

Both public and private debt are high in western Europe Source: Bruegel & WIIW (forthcoming) Whither Growth in Central and Eastern Europe? 9/21/2018

Real GDP Growth (%) 1970-2007 and 1970 Per Capita GDP But the convergence benefits from being in the EU are enormous: incomes Real GDP Growth (%) 1970-2007 and 1970 Per Capita GDP All Countries: R-sq = 0.019 EU-27 Countries: R-sq= - 0.599 42

Consumption Growth (%) 1970-2007 and 1970 Per Capita Consumption But the convergence benefits from being in the EU are enormous: consumption Consumption Growth (%) 1970-2007 and 1970 Per Capita Consumption All Countries: R-sq = 0.019 EU-27 Countries: R-sq= - 0.599 43

Summary A multi-speed recovery. Regional forecast for 2011 of 4 percent growth masks big differences—from 1.5 percent growth for Romania, to 4 percent for FYR Macedonia, to 6 percent for Kosovo. A jobless recovery. With current trends and policies, the employment losses may take much longer to recover than output losses. A tentative recovery. In Central, Eastern and Southern Europe, it is now impossible to assess economic prospects without looking at growth in Western Europe. 44