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

2. Main Points
Growth has returned. Growth rates will average about 4 percent in 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

3. DEVELOPMENTS
THE REGION RECOVERS
9/21/2018

4. 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

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

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

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

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

9. 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 Q which is q/q), saar
9/21/2018

10. 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

11. Capital inflows up in ECA, because of both official transfers and private portfolio flows
Capital Flows (% GDP), (medians)
Europe & Central Asia
Latin America & East Asia
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12. FDI Inflows in FYR Macedonia
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13. 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

14. 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

15. Non-performing loans are up, and higher than other emerging economies
Bank Non-Performing Loans (% Total Loans)
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16. Unemployment has stayed high in CEE, and continues to rise in CIS
Unemployment Rate (%)
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17. A full array of measures has been used to address rising unemployment
Discretionary Labor Market Measures
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18. ECA countries use a variety of assistance programs even in good times
Social Assistance Programs (% GDP)
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19. Higher social benefits generally mean higher fiscal deficits
Relationship Between Increased Social Benefits and Fiscal Deficits (2008- to 2009)
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20. Fiscal Balance (% GDP), 2008-2010
In 2010, the median ECA country ran fiscal deficits of about 5 percent of GDP
Fiscal Balance (% GDP), 20

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

22. 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.

23. The nature and durability of GROWTH
ANALYSIS
The nature and durability of GROWTH
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24. 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
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25. 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
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26. Recessions reduce employment, depressions destroy it
Relationship between GDP Growth (2009) and Change in Employment Growth (2008 to 2009)
9/21/2018

27. 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

28. 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
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29. 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
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30. 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

31. 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

32. 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
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33. 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
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34. 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

35. The Big unknown: growth in WESTern EUROPE
PROSPECTS
The Big unknown: growth in WESTern EUROPE
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36. By 2008, ECA was the most export-dependent emerging region
Merchandise Exports & Imports (% GDP, PPP),
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37. Half of Southeastern Europe’s exports go to the EU
Exports as a share of total exports to the world (%), 2008 37

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

39. Euro-zone growth went from highest in 2007 to lowest in 2010
Real GDP Growth (%),
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40. 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
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41. Both public and private debt are high in western Europe
Source: Bruegel & WIIW (forthcoming) Whither Growth in Central and Eastern Europe?
9/21/2018

42. 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 (%) and 1970 Per Capita GDP
All Countries: R-sq = 0.019
EU-27 Countries: R-sq= 42

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

44. 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