Looking for Shelter from the Storm Richard Grieveson Mario Holzner - PowerPoint PPT Presentation

Wiener Institut für The Vienna Institute for wiiw.ac.at Internationale International Economic Wirtschaftsvergleiche Studies Webinar, May 6 th 2020 New wiiw forecast for Central, East and Southeast Europe, 2020-2021 Looking for Shelter from the Storm Richard Grieveson Mario Holzner

Overview 1. Global overview and assumptions 2. New wiiw forecasts for Eastern Europe 3. Tracking COVID-19 cases and deaths in Eastern Europe 4. Initial economic impact 5. Areas of resilience and vulnerability 6. How this crisis will change Eastern Europe in the medium and long term Ó 2

1. Global overview: Worst crisis since the 1930s Ó 3

Global overview: Worst crisis since the 1930s Real GDP growth, % 10 2009 2020 2021 8 6 4 2 0 -2 -4 -6 -8 -10 Austria Germany Italy US China Ó 4 Source: IMF April WEO.

2. New wiiw forecasts for CESEE Ó 5

New wiiw real GDP forecasts and revisions Forecast, % Revisions, pp 2019 2020 2021 2019 2020 2021 BG 3.4 -6.3 1.7 -0.1 -9.1 -0.6 CZ 2.6 -4.8 2.5 0.2 -7.0 0.1 EE 4.3 -7.0 4.0 0.4 -9.7 1.4 HR 2.9 -11.0 4.0 -0.1 -13.7 1.3 HU 4.9 -5.5 2.0 0.0 -8.8 -0.6 EU-CEE11 LT 3.9 -6.5 4.3 0.0 -9.3 1.7 LV 2.2 -8.0 4.5 0.0 -10.0 2.2 PL 4.1 -4.0 3.0 0.1 -7.6 -0.3 RO 4.1 -7.0 3.0 0.0 -10.2 0.2 SI 2.4 -9.5 4.0 -0.2 -12.1 1.3 SK 2.3 -9.0 4.6 0.0 -11.0 2.2 AL 2.2 -5.0 3.8 -0.4 -8.2 0.4 BA 2.6 -5.0 3.0 -0.1 -7.5 0.2 ME 3.6 -8.0 5.0 0.3 -10.8 2.1 WB6 MK 3.6 -5.0 4.0 0.2 -8.3 0.7 RS 4.2 -4.0 4.0 0.2 -7.7 0.5 XK 4.2 -4.4 4.0 0.1 -8.7 -0.2 Turkey TR 0.9 -6.0 5.5 0.4 -9.9 1.4 BY 1.2 -5.3 -0.7 0.0 -6.3 -2.0 KZ 4.5 -3.0 2.0 0.0 -6.7 -1.8 CIS4+UA MD 3.6 -3.0 3.0 -1.0 -7.0 -1.0 RU 1.3 -7.0 1.5 0.0 -9.1 -0.8 UA 3.2 -6.0 2.5 -0.1 -9.6 -1.7 Note: Current forecast and revisions relative to the wiiw Spring forecast 2020. Colour scale Ó 6 variation from the minimum (red) to the maximum (green). Source: wiiw forecast.

New forecasts: main messages • Most countries facing worst recessions since early 1990s . • Biggest 2020 declines : Croatia, Montenegro, Slovenia, Slovakia, Latvia – major dependence on trade/tourism is a liability this year. • Smallest 2020 declines : Poland, Serbia, Kosovo, Moldova, Kazakhstan – bigger fiscal resources, less trade dependence, agriculture. • Major declines for Russia and Turkey , but latter will bounce back much more quickly than former. Ó 7

3. Tracking cases and deaths in CESEE Ó 8

Death rate in Eastern Europe has been dramatically lower than Western Europe Deaths per 1m population 500 450 400 350 300 250 200 150 100 50 0 n y e K a a a c H a d a e s e a y a a a y a o a a a a i l c n i i i i r i v i i i n i c r i i u i n i a U l i i a r n n n a n b n t n r v s k b B g n a o e r t a a a i t a p s e o a g o r a a a t s a u e a I a m d l o e e g u u t b r v S v m n d u o l p n L r s l S r r l e k o R o r A u o h P l u F e C G e E o e A B U e l M l H c t B S t S R R i G n a L o M h M c h e t z r o C N Ó 9 Source: Worldometer. Updated end-April 2020.

Eastern European countries imposed major restrictions at a much lower level of confirmed cases Stringency index and number of confirmed cases, March 15 th 2020 100 Albania and Kosovo Spain 90 Poland 80 Bulgaria, Romania, Slovakia, Ukraine 70 Stringency index 60 50 France US 40 30 20 UK 10 0 0 1000 2000 3000 4000 5000 6000 Number of confirmed cases Ó 10 Source: Blavatnik School of Government, Oxford University.

4. Initial impact Ó 11

Manufacturing PMIs at or close to all-time lows across Europe in April Manufacturing purchasing managers’ indices (PMIs); 50 = no change 50 45 40 35 30 25 20 15 10 5 0 Euro area Czech Poland Turkey Kazakhstan Russia Republic March April Ó 12 Source: IHS Markit.

Lockdowns have had severe impact on normal economic life Google mobility data, change versus baseline (%), mid-April 0 -10 -20 -30 -40 -50 -60 -70 BY LV TR CZ HU EE LT SK PL MK MD HR SI BA BG KZ RO SE AT IT Ó 13 Source: google. Average of data for grocery/pharmacy, retail/recreation and workplace activity

5. Factors of resilience and vulnerability Ó 14

5.a. Trade and tourism dependence leaves some countries particularly exposed to initial fallout Exposure to external trade, tourism and travel services 30 Albania Croatia Most exposed Montenegro Travel and tourism, % of GDP 25 20 Estonia 15 Slovenia Turkey Least exposed Bosnia 10 Hungary Slovakia Romania Serbia Russia 5 Ukraine Kazakhstan Poland Moldova 0 0 20 40 60 80 100 120 140 160 180 200 External trade, % of GDP Ó 15 Sources: World Bank, national sources, wiiw.

5.b. Fiscal space to react and room to recover differs widely across the region Average credit rating; 1 (prime) to 7 (substantial risks) 7 6 5 4 3 2 1 0 c a d a n a a y s H a e n a n y a a a a y a a a a o i i i i n i i i r a i i i i e i u v r n e i i l l i i a n v n k n r a n s t n b n r a b B g r o a a t a k i d t a t o t a a e g s a s o r a a s p u a e l o r d e I g u e t v b r u u o v n h m d u l S p L n s l r S e l k w o o R h P u u k T l o A C e e e E o A B U l l a M S t B H c S S t R i R n L z a a o M h K M c h e z t r C o N Ó 16 Sources: Moody’s, Fitch, S&P. Average of available ratings.

5.c. Weak healthcare capacity required lockdowns at lower level of infections and could influence recovery Public healthcare spending per capita, PPP, Austria = 100 60 50 40 30 20 10 0 a a e n a a a s a H a y a a d y a a a a c v i u i e i i r i i i i n a i i i n i i n b i r v n n t n k n l n s a B b o t r a k a i a a s a o r s t a a o a e a g r a o u d e g l u r h b d l u m o n u t v v p l e l L r s k S o o R u h o k l e T P u C e U A B o E a l M B t l c H S i S R R z a L a M h K c h e t z r o C N Ó 17 Source: World Bank. Data for 2016.

5.d. Reliance on capital flows a major area of exposure for much of Western Balkans, Moldova and Ukraine Selected capital inflows, % of GDP, average of last five available years 35 30 25 20 15 10 5 0 -5 -10 a a a y d a n a s a a c e a H a o a a y a a o e u i i r i i i n i a i i i i i n i i v v r l i n s a n r n t n v k n b n b B g k a r o o a a t i s t a o a r e g o a s a a a r a u e l o e s d u g t u o v d r b v n u h m l r L p o l n s l e k S o R o u u h T P C k e l o e e E o B U A K l a l M H B t c S S R t i R n L z a a M o h K M c h e t z r o C N Personal remittances received Net FDI inflows Net hot money inflows Ó 18 Sources: World Bank, national sources, wiiw.

6. First thoughts on the medium and long-term implications Ó 19

The next decade in Eastern Europe 1. Consumer caution could outlast acute phase of crisis. 2. Interest rates and inflation lower for longer. 3. Higher (and maybe more progressive) taxes. 4. A bigger role for the state in economic life. 5. Opportunities from near-shoring, services out-sourcing and digitalisation. 6. After a pause, labour shortages and automation will return. 7. Ever greater gulf within Eastern Europe. 8. China’s economic role in the region will remain important. Ó 20

Conclusions • Worst year for global economy since 1930s. • Many CESEE countries face worst recession since early 1990s. • Short-term: those with major trade and tourism exposure will suffer most. • But advantages for those with better healthcare and bigger fiscal capacity. • Many will face difficulties with sharp reduction in capital flows, and are going to need outside help. • Longer-term: A lot of things are going to change. • Negative: Consumer caution, higher debt, non-EU falling further behind. • Positive: Near-shoring, outsourcing of services, digitalisation, further automation. Ó 21

Wiener Institut für The Vienna Institute for www.wiiw.ac.at Internationale International Economic Wirtschaftsvergleiche Studies Thank you for your attention! Follow us: www.wiiw.ac.at Ó 22

Country codes AL Albania KZ Kazakhstan RS Serbia BY Belarus LT Lithuania RU Russia BA Bosnia and Herzegovina LV Latvia SI Slovenia BG Bulgaria MD Moldova SK Slovakia CZ Czech Republic ME Montenegro TR Turkey EE Estonia MK North Macedonia UA Ukraine HR Croatia PL Poland XK Kosovo HU Hungary RO Romania CESEE23 Central, East and Southeast Europe CIS4+UA Commonwealth of Independent States-4 and Ukraine EA19 Euro area EU-CEE11 European Union – Central and Eastern Europe Ó WB6 Western Balkans 23

Wiener Institut für The Vienna Institute for www.wiiw.ac.at Internationale International Economic Wirtschaftsvergleiche Studies Extra slides Ó 24