CLOUDY OUTLOOK FOR GROWTH IN EMERGING EUROPE AND CENTRAL ASIA Presentation by Laura Tuck, Vice President, ECA Hans Timmer, Chief Economist, ECA October 8, 2014 Annual Meetings
Three key trends for Emerging Europe and Central Asia Recovery in new EU member states remains tepid, but some signs of improvement. Deep crisis in Ukraine due to the tensions, however, with the exception of a few industries, has not materialized into stiff headwinds for ECA as a whole. Russia and some neighboring countries are slowing as past drivers of strong growth have largely run their course. In Russia, geopolitical tensions and an uncertain policy environment are casting the longest shadow on Russia s medium-term prospects. 1
Economic Growth in ECA remains weak among developing regions in 2014 and 2015 9.0 8.0 7.0 6.0 5.0 4.0 3.0 2.0 1.0 GDP Growth (%), weighted average by region 8.3 7.4 7.2 7.2 6.9 6.9 6.0 5.2 5.4 4.9 4.6 4.7 4.6 4.8 4.1 4.2 4.2 3.5 3.0 3.0 2.4 2.4 2.2 2.6 2.0 2.1 1.8 1.5 1.2 2011 2012 2013 2014e 2015p 0.0-1.0-0.7-2.0 Latin America & Caribbean Europe & Central Asia Middle East & N. Africa East Asia & Pacific Sub-Saharan Africa South Asia 2
Croatia Slovenia Estonia Bulgaria Czech Republic Slovak Republic Latvia Romania Lithuania Poland Hungary Bosnia and Herzegovina Serbia Albania Montenegro Kosovo FYR Macedonia Ukraine Russia Belarus Moldova Kyrgyz Republic Armenia Kazakhstan Azerbaijan Georgia Tajikistan Uzbekistan Turkmenistan Turkey ECA growth prospects have been adjusted down since the Spring, particularly for Ukraine 16 2014 Real GDP Growth Projections 11 6 1-4 -9 EU 11 Western Balkans CIS, Georgia, Turkey, Ukraine 2014 (April 2014 Projection) 2014 (September 2014 Projection) 3
Drilling-down into the three trends for Emerging Europe and Central Asia Recovery in new EU member states remains tepid, but some signs of improvement. Deep crisis in Ukraine due to the tensions, however, with the exception of a few industries, has not materialized into stiff headwinds for ECA as a whole. Russia and some neighboring countries are slowing as past drivers of strong growth have largely run their course. In Russia, geopolitical tensions and an uncertain policy environment are casting the longest shadow on Russia s medium-term prospects. 4
Tepid growth in the new EU Member States, Crisis in Ukraine, and Stagnation in Russia Industrial Production Index (January 2013=100) 110 105 100 95 90 85 EU11 Russia Ukraine 80 75 70 Note: The industrial sector includes manufacturing, mining, and utilities. Underlying data is in constant US$, seasonally adjusted.
6 Recovery in new EU member states remains tepid, but some signs of improvement
The external environment is weak, and expectations have deteriorated (Consensus Real GDP Forecast, Percent, April vs. September 2014) 8 7 6 April Forecast September Forecast 5 4 3 2 1 0 China Brazil USA Euro Zone 7 Source: Consensus Forecasts
Unwinding of fiscal imbalances has been slow, but progress has been made in Central and Eastern Europe 3.0 2.0 1.0 (Percent Share of GDP) CIS(less Russia&Ukraine) Ukraine Russia Turkey Western Balkans EU11 0.0 2010 2011 2012 2013 2014e -1.0-2.0 New EU members -3.0-4.0-5.0-6.0-7.0 Source: National authorities, IMF, DEC GEP and ECSPE country teams' estimates/projections.
Labor had become more expensive across all European countries before the 2008 crisis 100 200 300 400 Area of rising labor costs to productivity relative to Germany ROM LAT EST CZE SVK HUN LTU BLG IRL NOR ESP CYP DNK ITALUX PORMLT BEL FRA NLD FIN AUT DEU SWE GBR GRCPOL SVN 100 120 140 160 180 200 Hourly Real Labour Productivity Growth, 2000-2008; 2000=100.0 9
80 100 120 140 160 Post-2008 crisis labor costs have adjusted downward BLG NOR SWE GRC LUX AUT FIN DEU BEL FRA DNK SVN ITA MLT NLD POR GBR CZECYP HUN ROM IRL SVK ESP EST LAT POL LTU Area of falling labor costs to productivity relative to Germany 90 100 110 120 Hourly Real Labour Productivity Growth, 2008-2013; 2008=100.0 10
HUN ROU CZE POL EST SVK LVA SVN BGR LTU HRV TUR MKD ALB MNE BIH SRB GEO KAZ RUS AZE MDA ARM UKR MLT ITA PRT CYP ESP GRC DEU NOR AUT BEL GBR LUX SWE FIN ISL FRA DNK NLD IRL 25 Consequently, unemployment is declining across most of new EU member countries 20 15 10 5 0-5 -10-15 Since 2010, many new EU member countries have seen declines in unemployment EU11 TurkeyWestern Balkans CIS Southern Europe Northern Europe Unemployment (Change 2010-2014) Unemployment (Change 2008-2010) 11
Declining unemployment rates in new EU member countries may bring income growth back in the bottom 40 percent... Unemployment Rate, Annual Change Income Growth Bottom 40 4 20% 3 Unemployment rate 15% 2 1 Income growth of the bottom 40 percent 10% 5% 0 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 0% -1-5% -2-10% Unemployment Rate (pct points, change; left axis) Income Growth of the Bottom 40 (right axis) 12 Note: Shared prosperity figures from 2011 onwards are forecasted using an OLS regression of income growth of the bottom 40 on changes in unemployment, controlling for GDP growth and country level trends.
13 Deep crisis in Ukraine due to the tensions, but with the exception of a few industries has not materialized into stiff headwinds for ECA as a whole
Crisis takes toll on Ukraine s economy Ukraine FDI Inflows, Cross border CAPEX investments in $ millions 9,000 8,000 7,000 6,000 5,000 4,000 3,000 2,000 1,000 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014e* 14 Source: JP Morgan Note: Annualized, based on data through August 2014. World Bank staff estimates
Nominal devaluations in the CIS have reflected high uncertainty Serbia Albania Kosovo Montenegro Bosnia and Herzegovina Macedonia, FYR Czech Republic Hungary Croatia Bulgaria Lithuania Estonia Latvia Slovak Republic Slovenia Romania Poland Ukraine Kazakhstan Belarus Moldova Turkey Russian Federation Uzbekistan Kyrgyz Republic Georgia Tajikistan Armenia Turkmenistan Azerbaijan 65 Exchange Rate (US$-LCU Sep 2014/ Sep 2013) 55 45 35 25 15 5-5 Western Balkans EU11 CIS + Turkey 15 Source: JP Morgan
2012M01 2012M02 2012M03 2012M04 2012M05 2012M06 2012M07 2012M08 2012M09 2012M10 2012M11 2012M12 2013M01 2013M02 2013M03 2013M04 2013M05 2013M06 2013M07 2013M08 2013M09 2013M10 2013M11 2013M12 2014M01 2014M02 2014M03 2014M04 2014M05 2014M06 2014M07 2014M08 Russia s relative food price inflation was accelerating before it imposed sanctions on European food imports. The impact on Europe has also been modest. 4 3 Difference between Food and headline CPI Inflation, Percent, y-o-y Russia s relative food inflation began before recent sanctions and tensions 2 1 0-1 -2-3 -4-5 Europe s relative food price deflation also started before sanctions and the recent tensions Western Europe EU11 Ukraine Russia -6 16 Source: Eurostat, Bloomberg
Increased financial uncertainty in Ukraine and Russia, but Russia is still close to EMBI Global spreads 16-Sep-13 16-Oct-13 16-Nov-13 16-Dec-13 16-Jan-14 16-Feb-14 16-Mar-14 16-Apr-14 16-May-14 16-Jun-14 16-Jul-14 16-Aug-14 16-Sep-14 650 550 Country EMBI spread relative to EMBI Global Strip Spread (bps) Unrest in Crimea region Downing of Malaysian Airlines flight 900 800 450 700 350 600 250 500 150 400 50 300-50 200-150 100-250 Russia Ukraine (right axis) 0 17 Source: JP Morgan
18 Russia and some neighboring countries are slowing as past drivers of strong growth have largely run their course. In Russia, geopolitical tensions and an uncertain policy environment are casting the longest shadow on Russia s medium-term prospects.
Russia s investment and GDP growth were declining before the recent turmoil 25 20 15 10 5 0 2007 2008 2009 2010 2011 2012 2013 2014e -5-10 -15-20 Gross fixed capital formation (annual % growth) GDP growth (annual %) 19
1/1/2009 3/1/2009 5/1/2009 7/1/2009 9/1/2009 11/1/2009 1/1/2010 3/1/2010 5/1/2010 7/1/2010 9/1/2010 11/1/2010 1/1/2011 3/1/2011 5/1/2011 7/1/2011 9/1/2011 11/1/2011 1/1/2012 3/1/2012 5/1/2012 7/1/2012 9/1/2012 11/1/2012 1/1/2013 3/1/2013 5/1/2013 7/1/2013 9/1/2013 11/1/2013 1/1/2014 3/1/2014 5/1/2014 7/1/2014 9/1/2014 While stable to recently declining oil prices have not been a big boost to the Russian economy or CIS energy exporters over the last year US$/ barrel 130 120 110 100 90 80 70 Source: Bloomberg 20 Note: Russian domestic crude oil Volgo-Uraltic average price, benchmarked to east Siberian export price, US dollars/barrel.
BLR ARM UZB MDA GEO KGZ KAZ LTU SER TUR LVA POL EST SVN SVK TJK ROM HUN BGR AZE TKM Russia s stagnation and Ukraine s crisis matters for neighboring countries, less so for the rest of ECA 70 % of total exports, 2013 60 50 40 30 20 10 0 Exports to Ukraine Exports to Russia 21 Source: UN Comtrade
Bottom-Line ECA forecast remains tepid as drivers of growth drivers have slowed. The Ukraine tensions have developed into a deep crisis for Ukraine but spill-overs to other countries have been limited so far. Growth in Russia and some neighboring countries is limited by structural impediments. In Russia, geopolitical tensions and an uncertain policy environment are casting the longest shadow on Russia s medium-term prospects. 22
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