CESEE: A time of moderate expectations Mario Holzner 2 A time of - PowerPoint PPT Presentation

Wiener Institut für The Vienna Institute for www.wiiw.ac.at Internationale International Economic Wirtschaftsvergleiche Studies 21 st Austria webinar, 12 March 2015 New wiiw forecast for Central, East and Southeast Europe, 2015-2017 CESEE: A time of moderate expectations Mario Holzner

2 A time of moderate expectations GDP growth rate since 1995 12 NMS-11 EU-15 Turkey Russia 10 8 6 4 2 0 -2 -4 -6 -8 -10 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017 Source: wiiw (March 2015), Eurostat. Forecasts by wiiw and European Commission (Winter Report,  February 2015).

3 Difference to EU-15 diminishing Differential in GDP growth vis-à-vis EU-15 since 1995, in pp 8 NMS-11 West Balkans - 6 CIS-4 6 4 2 0 -2 -4 -6 -8 -10 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017 Source: wiiw (March 2015), Eurostat. Forecasts by wiiw and European Commission (Winter Report,  February 2015).

4 The euro area seized by secular stagnation Euro area (12 original members) – per capita GDP growth rate GDP per capita 10-year average 8 6 4 2 0 -2 -4 -6 1960 1966 1972 1978 1984 1990 1996 2002 2008 2014  Source: Own calculations based on AMECO database.

5 Euro area investment and wage share tumbling GDP share of gross capital formation Adjusted GDP wage share 30 68 28 65 Euro area (12 original members) 26 62 24 59 22 56 Euro area (12 original members) 20 53 18 50 1960 1966 1972 1978 1984 1990 1996 2002 2008 2014 1960 1966 1972 1978 1984 1990 1996 2002 2008 2014  Source: Own calculations based on AMECO database.

6 Insufficiency of aggregate demand also in CESEE � Disinflation → Deflation � Unemployment high, or very high � Diminishing role of trade balance � Household consumption unimpressive � Investment recovering only slowly 

7 Apropos deflation: e.g. Poland CPI growth and contribution of components, 2013-2015, in percentage points 2.0 Energy Food Core inflation CPI, year-on-year growth in % 1.5 1.0 0.5 0.0 -0.5 -1.0 2013m01 2013m05 2013m09 2014m01 2014m05 2014m09 2015m01  Source: wiiw Monthly Database incorporating national and Eurostat statistics.

8 Growth: unimpressive GDP growth in 2014-2015, and contributions of individual demand components in pp Gross fixed capital formation Household final consumption Net exports GDP (growth in %) 8 6 4 2 0 -2 ‘14|‘15 -4 -6 -8 HR BG SI EE LV CZ HU LT RO SK PL 8 Gross fixed capital formation Household final consumption Net exports GDP (growth in %) 6 4 2 0 ‘14|‘15 -2 -4 -6 -8 UA RU BY RS BA AL KZ ME TR MK XK  Source: wiiw Annual Database incorporating national and Eurostat statistics. Forecasts by wiiw.

9 Private investment � Still depressed � Unconstrained by the availability of funds � Insensitive to interest rates � Highly profitable � Wage-led – not profit-led 

10 Private investment still depressed GDP share of private sector gross fixed capital formation, in % NMS-11 Germany 25 24 23 22 21 20 19 18 17 16 15 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014  Source: Own calculations based on AMECO database.

11 Corporate investment unconstrained by availability of funds E.g. Poland: Net lending (+) or net borrowing (-): corporations and households, % GDP Bubble Distress Normality 8 8 8 6 6 6 4 4 4 2 2 2 0 0 0 -2 -2 -2 -4 -4 -4 Corporations Households Corporations Households Corporations Households 2001 2001 2007 2007 2014 2014  Source: Own calculations based on AMECO database.

12 Corporate investment insensitive to interest rates Non-financial corporations, CESEE 2014 15 10 Growth rate of stock of loans Macedonia 5 Czech Republic 0 -5 -10 -15 -20 Slovenia -25 0 2 4 6 8 10 Real interest on new loans  Source: National bank statistics, wiiw own calculations.

13 Austrian banks’ exposure to CESEE substantial Source: BIS, RBI, own calculations using  USD/EUR exchange rate as of 30/09/2014.

14 Profits and risks unevenly distributed Private sector, CESEE 2014 30 Non-performing loans 25 HU 20 HR UA 15 RO 10 PL CZ SK 5 RU 0 -20 -15 -10 -5 0 5 10 15 20 25 Stock of bank loans to non-financial private sector growth  Source: National bank statistics, wiiw own calculations.

15 Profitability of the capital stock mostly increasing Net returns/net capital stock ratios for 2011-2014 (base period index 2000-2003), percentage change 152.4% 100% 80% 61.7% 60% 36.5% 40% 24.8% 22.0% 20% 10.1% 1.9% 3.6% 8.5% 0% -20% -26.2% -26.1% -22.7% -40% BG SI EE HR HU CZ LV LT SK PL RO DE  Source: AMECO.

16 Investment is wage-led (and not profit-led) GDP shares of employee Share of the corporate sector in private compensation, in % gross disposable income, in % NMS-11 Germany NMS-11 Germany 24 60 22 55 20 50 45 18 40 16 35 14 30 12 1994 1999 2004 2009 2014 1994 1999 2004 2009 2014  Source: Own calculations based on AMECO database.

17 EU-funded public investment partly counterbalances private investment GDP shares of public gross fixed capital formation, 2001-2014, in % 6 NMS-11 Germany 5 4 3 2 1 0 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014  Source: Own calculations.

18 Macroeconomic round-up � Nominal wages important … � … but exchange rate as well � Fiscal deficits and net lending abroad absorb excessive private savings in the NMS 

19 Exchange rate regimes do matter Percentage levels of overvaluation (positive) or undervaluation (negative) of NMS currencies vs. euro, 2004, 2009, 2014 40 Fixers Floaters 30 2009 20 10 2014 2004 0 -10 -20 -30 HR EE LV SI SK RO PL BG DE LT CZ HU Note: Over- or undervaluation in the price level in relation to the GDP per capita level.  Source: Own calculations.

20 Fiscal deficits and net lending abroad absorb excessive private savings in the NMS Net lending (+) or net borrowing (–), 2007, 2014, in % of GDP 2007 2014 General government Total economy General government Total economy Germany Germany Bulgaria Estonia Estonia Lithuania Poland Czech Republic Slovenia Latvia Latvia Romania Czech Republic Hungary Lithuania Slovakia Slovakia Bulgaria Croatia Poland Romania Croatia Hungary Slovenia -20 -15 -10 -5 0 5 10 -20 -15 -10 -5 0 5 10 Remark: Bulgaria: -26.3.  Source: wiiw Annual Database incorporating national and AMECO statistics, own calculations.

21 2015-2017: A time of moderate expectations � Weak wage growth, limited investment growth � NMS & candidates: No substantial growth speed-up � NMS growth differential vis-à-vis euro area diminishing from ~3% before crisis to ~1.5% � Current account deficit quite low (NMS) or quite high (candidates) � Inflation gradually returns to normalcy: energy prices stabilise, more borrowing (?) � Unemployment recedes (NMS) or stays high (candidates) � CIS hopefully recover in 2016 � EU economic paradigms need to be adjusted 

22 GDP growth, wiiw forecast for 2015-2017 2015 2016 2017 2015 2016 2017 Kosovo 3.6 2.9 3.8 Estonia 2.0 2.5 3.1 Poland 3.5 3.2 3.2 Albania 2.0 2.2 2.4 Macedonia 3.5 2.9 2.6 Kazakhstan 2.0 3.5 4.5 Turkey 3.3 3.5 3.5 Slovenia 1.7 1.8 2.0 Romania 2.5 3.0 3.0 Bosnia and Herzegovina 1.6 2.1 2.4 Slovakia 2.5 2.7 3.0 Bulgaria 1.5 1.9 2.3 Lithuania 2.4 2.9 3.2 Croatia 0.3 1.1 1.5 Czech Republic 2.3 2.4 2.4 Serbia -0.5 1.0 1.4 Hungary 2.3 2.0 2.0 Belarus -2.0 1.3 2.0 Montenegro 2.3 2.6 2.9 Russia -3.9 1.9 2.0 Latvia 2.1 2.8 2.8 Ukraine -5.0 0.0 1.8  Source: wiiw forecast, February 2015.

23 Country codes AL Albania ME Montenegro BA Bosnia and Herzegovina MK Macedonia BG Bulgaria PL Poland BY Belarus RO Romania CZ Czech Republic RS Serbia EE Estonia RU Russia HR Croatia SI Slovenia HU Hungary SK Slovakia KZ Kazakhstan TR Turkey LT Lithuania UA Ukraine LV Latvia XK Kosovo CESEE Central, East and Southeast Europe CIS Commonwealth of Independent States NMS New Member States SEE Southeast Europe 