ECA Economic Update April 216 WILL CHINA S SLOWDOWN BRING HEADWINDS OR OPPORTUNITIES FOR EUROPE AND CENTRAL ASIA? Maurizio Bussolo Chief Economist Office and Asia Region April 29, 216 Bruegel, Brussels, Belgium Report site: www.worldbank.org/en/region/eca/publication/europe-andcentral-asia-economic-update-april-216 1
Overview Low growth is expected in and Asia (ECA), as global headwinds remain strong. The headwinds are of structural, rather than cyclical nature. They are part of a new normal. Growth moderation and rebalancing in China This is also true for the slowdown in China, which has a pervasive impact on ECA. The impact creates challenges but also opportunities. Policies have to adjust to new circumstances. 2
Part I Growth prospects and policy challenges differ across the and Asia region 3
Country Groups and Asia an Union and Balkans Southern Northern Balkans Austria Greece Bulgaria Denmark Albania Belgium Italy Croatia Finland Bosnia and Herzegovina France Portugal Czech Republic Sweden Kosovo Germany Spain Hungary Estonia FYR Macedonia Ireland Cyprus Poland Latvia Montenegro Luxemburg Malta Romania Lithuania Serbia The Netherlands United Kingdom Slovak Republic Slovenia Eastern and Asia South Caucasus Asia Russia Turkey Other Eastern Armenia Kazakhstan Belarus Azerbaijan Kyrgyz Republic Moldova Georgia Tajikistan Ukraine Turkmenistan Uzbekistan 4
Subdued growth in new forecast 5
Big shifts in relative prices are affecting consumption and exports Collapse in oil revenues amounts to large terms-of-trade losses and sharp depreciations. Reductions in remittances (deflated by import prices) imply large declines in household incomes. Diverging monetary policies and reversals of capital flows lead to changes in competitiveness. 6
Consumption has sharply declined in Eastern and Asia Annual growth rates, 215 1. 5.. -5. Ukraine Belarus Russian Federation Azerbaijan Moldova Kazakhstan Armenia Georgia Kyrgyz Republic Turkey Tajikistan Uzbekistan -1. -15. -2. -25. GDP growth (%) Private consumption growth (%) 7
Euro Area export growth now outpaces global average Percentage points difference between growth export volume euro area and global export growth, 12m/12m 2. 1.. -1. 23m12 26m12 29m12 212m12 215m12-2. -3. -4. -5. -6. 8
an export growth accelerates as U.S. and Chinese exports slow down 15 Change of real effective exchange rate (%) [CELLRANGE] [CELLRANGE] 1 5-6. -5. -4. -3. -2. -1.. 1. 2. 3. 4. [CELLRANGE] [CELLRANGE] [CELLRANGE] [CELLRANGE] [CELLRANGE] [CELLRANGE] [CELLRANGE] -5 [CELLRANGE] [CELLRANGE] [CELLRANGE] [CELLRANGE] -1-15 Change of export volume growth (%) 9
Labor markets affected by cyclical and structural factors Unemployment in an Union is declining as the EU enters fourth year of recovery. Crisis in many countries in eastern part of region starts showing in rising unemployment. Digital technologies, sharing economy, migration, and globalization are fundamentally changing labor markets, and requires new social contract. 1
Part II Growth moderation and rebalancing in China: headwinds or opportunities? 11
Growth moderation and rebalancing in China Slowdown is result of slower expansion of production capacity Rebalancing entails Shift from investments to consumption Shift from low-skilled to high-skilled production Shift from inward FDI to outward FDI 12
Chinese Growth moderation and demand for the rest of the world The nature of the slowdown is important because its consequences on the rest of the world are quite different Cyclical slowdown (a reduction of domestic demand) implies an increase in trade surplus (i.e. a reduction of Chinese demand on global production); Structural slowdown (a reduction of production) implies a reduction of both imports and exports Need of a structural (supply side) analytical approach 13
Slowdown in China coincides with decelerating potential growth Annual percentage change 15. 13. 11. 9. 7. 5. 1993 1994 1995 1996 1997 1998 1999 2 21 22 23 24 25 26 27 28 29 21 211 212 213 214 215 potential GDP growth actual GDP growth 14
China is catching up to the an Union China s nominal GDP as percentage of EU s nominal GDP 8 7 6 5 4 3 2 1 199 1991 1992 1993 1994 1995 1996 1997 1998 1999 2 21 22 23 24 25 26 27 28 29 21 211 212 213 214 215 starting share cumulative volume effect cumulative price effect 15
China and ECA trade links The evolution of ECA s links with China: is the region exporting to China at its potential? 16
China s share of imports by ECA has expanded rapidly Share of imports from China in total imports, percent 35 1996 214 3 25 2 15 1 5 Asia Eastern Northern Russia South Caucasus Southern Turkey Balkans 17
But region can export even more to China Exports are not as big as gravity model predicts. There seem to be special factors impeding exports to China. Sharp real depreciations vis-à-vis China have made producers much more competitive. 18
Eastern ECA may have greater potential than western ECA to increase exports to China Exports to China by sector from ECA sub-regions, US$ million 25 2 15 1 5 Asia Eastern Northern Agriculture Russia South Southern Caucasus Turkey Balkans 35 3 25 2 15 1 5 Asia Eastern Northern Natural Resources Russia South Southern Caucasus Turkey Balkans Actual Predicted Actual Predicted Low Skill Manufacturing High Skill Manufacturing 25 2 15 1 5 Asia Eastern Northern Russia South Southern Caucasus Turkey Balkans 16 14 12 1 8 6 4 2 Asia Eastern Northern Russia South Southern Caucasus Turkey Balkans Actual Predicted Actual Predicted 19
ECA currencies depreciated sharply over past year Percent change in real exchange rate with China, Jan-Feb 215 to Jan-Feb 216 Azerbaijan Belarus Russian Federation Kazakhstan Ukraine Georgia Moldova Kyrgyz Republic Poland Turkey Sweden Cyprus Romania Greece Hungary Spain Bosnia and Herzegovina Lithuania Croatia Slovenia Estonia Slovak Republic Macedonia, FYR Ireland Finland France Bulgaria Germany Italy Latvia Denmark Luxembourg Portugal Netherlands Austria Malta Belgium Czech Republic Albania United Kingdom Armenia Tajikistan -5-1 -15-2 -25-3 -35-4 -45-5 2
Exchange rate depreciation could boost ECA s exports to China Percent change in volume of total exports as a result of real exchange rate depreciation in ECA Agriculture Natural Resources 14 14 12 12 1 1 8 8 6 6 4 4 2 2 Asia Eastern Northern Russia South Southern Caucasus Turkey Balkans Asia Eastern Northern Russia South Southern Caucasus Turkey Balkans Low Skill Manufacturing High Skill Manufacturing 25 2 18 2 16 14 15 12 1 1 8 6 5 4 2 Asia Eastern Northern Russia South Southern Caucasus Turkey Balkans Asia Eastern Northern Russia South Southern Caucasus Turkey Balkans 21
Exchange rate depreciation has created opportunities to compete with imports Percent change in potential imports as a result of real exchange rate depreciation in ECA Agriculture Natural Resources 1-1 -2-3 -4-5 -6-7 -8-9 Asia Eastern Northern Russia South Southern Caucasus Turkey Balkans 7 6 5 4 3 2 1-1 -2-3 -4 Asia Eastern Northern Russia South Southern Caucasus Turkey Balkans High Skill Manufacturing Low Skill Manufacturing -2-2 -4-6 -8-1 -12-4 -6-8 -1-12 -14-14 Asia Eastern Northern Russia South Southern Caucasus Turkey Balkans -16 Asia Eastern Northern Russia South Southern Caucasus Turkey Balkans 22
China growth slowdown and rebalancing The impact of a slowdown in China would hurt resource exporters in the East, while reducing competition for exporters in the West; A rebalancing (towards consumption, high skill production, and outward FDI) will benefit more the East; Factorial distribution of income will change favoring labor versus capital and low skill vs high skill. 23
China imports primary goods and exports manufactures 2 Net surplus as a percent of world trade, 216 forecast Reduction in supply 1 Agriculture Livestock Oil and Gas Natural Resources Low-skilled manufactures High-skilled manufactures -1-2 -3-4 -5 Reduction in demand 24
China s slowdown has a mixed impact on ECA s exports Percentage difference in export volumes in slowdown compared to business as usual scenario 1.5 1.5 -.5-1 Russia Kazakhstan Azerbaijan Kyrgyz Republic Ukraine Poland Bulgaria Turkey and Other ECA EU and EFTA -1.5-2 -2.5-3 -3.5 25
China s slowdown improves wages, particularly of unskilled workers Percent change in China slowdown versus business as usual scenarios wage/rental rate unskilled/skilled wages.9.8.7.6.5.4.3.2.1 -.1 Russia Kazakhstan Azerbaijan Kyrgyz Republic Ukraine Poland Bulgaria Turkey and Other ECA EU and EFTA 26
China rebalancing Investment at 42% of GDP is simulated to go down by 15 ppt; with corresponding rise in consumption; The share of skilled workers in China will almost double over the next 1 years, implying an increase of 1 million skilled workers; A rise of China s FDI outflows equal to 5 percentage points of GDP over the next 1 years. 27
Change in private consumption relative to business as usual scenario Percent 8 Full Rebal Slow Down 6 5.7 4 3.3 3. 2 1.8 1.4 1.6-2 -1. -1.2-1.1 -.5 -.9-4 -6 Russian Federation Kazakhstan Azerbaijan Kyrgyz Rep Ukraine EU and EFTA -4.7 28
China rebalancing reduces the skill premium globally Percentage difference in skill premium between rebalancing and business as usual scenarios Rest of the world Major Opec EU and EFTA Turkey and other ECA Bulgaria Poland Ukraine Kyrgyz Rep Azerbaijan Kazakhstan Russian Federation North Am excl Mex India -2.5-2. -1.5-1. -.5. 29
Conclusions Expected slow GDP growth tells only part of the story. Big changes in relative prices have far-reaching consequences. Slowdown and rebalancing in China are key elements of structural changes in global environment. There are some silver linings in the outlook. Unemployment is declining in EU and export opportunities are improving. Policies challenges most complicated for Eastern and Asia. 3
ECA Economic Update April 216 Thank you! Maurizio Bussolo Chief Economist Office and Asia Region April 29, 216 Brussels, Belgium 31