Economic Update Growth Returns, with Questions Europe and Central Asia Region The World Bank Annual Meetings Washington DC, October 8, 2010

Most economies in the region contracted in in 2009 GDP Growth (%), 2009

Most countries in the region are expected to grow in 2010 GDP Growth (%), ECA Region forecasts for 2010

Economic Update Growth Returns, with Questions Europe and Central Asia Region The World Bank Office of the Chief Economist Annual Meetings Washington DC, October 8, 2010

Main Points Growth has returned. Growth rates will average about 4 percent in 2010. But Central and Eastern Europe (CEE) will grow less than 2 percent, the former Soviet Union (FSU) will grow at more than 4 percent, and Turkey may grow at 7 percent Jobs have not returned as quickly. Unemployment rates are stubbornly high in CEE and Turkey and are still rising in the FSU Prospects remain coupled with the west. The durability of the recovery depends on Western Europe, because ECA’s economies may be even more integrated with EU-15 than before the crisis 9/21/2018

A MULTI-SPEED RECOVERY DEVELOPMENTS A MULTI-SPEED RECOVERY 9/21/2018

Growing again, but gingerly and (mostly) joblessly GDP growth will be positive in 2010 The region will grow 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 may be one of the exceptions 9/21/2018

ECA’s prospects for 2010 improved, but weakest among emerging economies Real GDP Growth (%), 2007-2011 9/21/2018

Most economies in the region contracted in in 2009 GDP Growth (%), 2009

Most countries in the region are expected to grow in 2010 GDP Growth (%), ECA Region forecasts for 2010

The recovery in merchandise exports has been as strong as in other regions Goods Exports, Volume (% change 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

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

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

Active labor policies have been ratcheted up in Central Europe Budgets for ALMPs (% GDP), selected countries 9/21/2018

Fiscal Balance (% GDP), 2008-2010 In 2010, the median ECA country will run fiscal deficits of about 5 percent of GDP Fiscal Balance (% GDP), 2008-2010 9/21/2018

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.

ANALYSIS A JOBLESS RECOVERY? 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

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

PROSPECTS A TENTATIVE RECOVERY 9/21/2018

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

Exports as a share of total exports to the world (%), 2008 75 percent of Central European exports go to Western and Central Europe Exports as a share of total exports to the world (%), 2008 9/21/2018

CEE growth prospects depend increasingly on Western Europe Business Cycle Synchronization (12-month moving correlation of industrial production with EU15) 9/21/2018

Russia’s business cycle has been converging to the EU15’s Business Cycle Synchronization between EU15 and Russia (12-month moving correlation of industrial production) 9/21/2018

Euro-zone growth has gone from highest in 2007 to lowest in 2010 Real GDP Growth (%), 2007-2011 9/21/2018

Some currencies are almost back to their values at the end of 2008 Nominal Exchange Rates, Euro per Local Currency (Jan 2007=100) 9/21/2018

Both public and private debt are high in western Europe Gross Private and Public Debt (% GDP), 2008 9/21/2018 Source: Bruegel & WIIW (forthcoming) Whither Growth in Central and Eastern Europe?

Summary A multi-speed recovery. Regional forecast for 2010 of 4 percent growth masks big differences—from contractions for Kyrgyz Republic and Croatia to strong growth for Turkey and Turkmenistan A jobless recovery. With current trends and policies, the employment losses may take much longer to recover than output losses A tentative recovery. It is now impossible to assess economic prospects in Central, Eastern and Southern Europe without looking at growth in Western Europe