Mario Holzner Olga Pindyuk Overview 1. Changes to the wiiw Forecast - PowerPoint PPT Presentation

Wiener Institut für The Vienna Institute for wiiw.ac.at Internationale International Economic Wirtschaftsvergleiche Studies Press conference, 7 November 2018 New wiiw forecast for Central, East and Southeast Europe, 2018-2020 Robust growth in the face of increased negative risks Richard Grieveson Mario Holzner Olga Pindyuk

Overview 1. Changes to the wiiw Forecast Report 2. Global and eurozone overview 3. New forecasts for CESEE 2018-20 4. Main drivers of growth 5. Risks to the outlook 6. Conclusions  2

1. Global and eurozone backdrop: multiple headwinds weighing on growth  3

Global growth still reasonably robust – IMF forecasts around 3.7% this year and next (same as 2017) Real GDP growth, % per year, major economies 8 2017 2018 2019 7 6 5 4 3 2 1 0 Japan Eurozone US World China  4 Source: IMF World Economic Outlook, October 2018.

But significant headwinds for CESEE: trade tensions, eurozone + China slowdown, higher US rates Eurozone real GDP, seasonally adjusted, % change quarter on quarter 1.2 Eurozone Germany* France Italy 1 0.8 0.6 0.4 0.2 0 -0.2 -0.4 2016Q1 2016Q2 2016Q3 2016Q4 2017Q1 2017Q2 2017Q3 2017Q4 2018Q1 2018Q2 2018Q3 * Q3 data for Germany not yet available.  5 Source: Eurostat.

2. New forecasts for CESEE in 2018-20  6

Growth still healthy in most of the region Quarterly real GDP growth, change in % against preceding year EU-CEE-11 WB-6 Turkey CIS + Ukraine 14 12 10 8 6 4 2 0 -2 -4 -6 1Q 11 3Q 11 1Q 12 3Q 12 1Q 13 3Q 13 1Q 14 3Q 14 1Q 15 3Q 15 1Q 16 3Q 16 1Q 17 3Q 17 1Q 18 2Q 18  7 Source: wiiw Monthly Database incorporating national and Eurostat statistics, own calculation.

Most of the region at/past the peak wiiw real GDP growth forecasts Forecast, % Revisions, pp 2018 2019 2020 2018 2019 2020 BG 3.3 3.2 3.0 -0.2 -0.2 -0.1 CZ 3.3 3.2 3.1 -0.4 -0.1 -0.1 EE 3.5 3.1 2.7 0.0 0.0 -0.3 HR 2.5 2.6 2.7 0.0 -0.1 -0.1 HU 4.3 3.0 2.3 0.3 0.2 -0.1 EU-CEE LT 3.5 3.0 2.6 0.2 0.0 0.0 LV 4.1 3.3 3.0 0.2 -0.3 -0.1 PL 5.0 3.5 3.3 1.2 0.0 0.0 RO 3.8 3.6 3.7 -0.4 0.1 -0.1 SI 4.5 3.6 3.5 -0.3 -0.1 -0.1 SK 3.8 4.1 3.3 0.0 -0.1 0.0 AL 4.1 4.0 4.0 0.3 -0.1 0.0 BA 3.0 3.4 3.4 -0.3 0.1 0.1 ME 4.2 3.1 3.1 1.0 -0.1 0.1 Western Balkan MK 2.9 2.8 3.1 -0.6 -0.3 -0.2 RS 4.3 3.4 2.8 0.7 0.4 0.0 XK 4.2 4.0 4.2 0.3 0.2 0.4 Turkey TR 2.5 1.0 4.0 -2.0 -3.1 0.0 BY 3.7 3.0 2.8 -0.3 -0.7 -0.6 KZ 4.0 3.1 3.0 0.0 0.1 0.0 CIS+UA RU 1.7 1.6 1.8 0.2 0.0 0.1 UA 3.3 2.7 2.0 0.0 -0.4 0.0 Note: Current forecast and revisions relative to the wiiw Summer Forecast 2018. Colour scale variation from the minimum (red) to the maximum (green).  8 Source: wiiw Autumn 2018 Forecast Report.

What is wrong with Russia and Turkey? Annual real GDP growth, % change against preceding year Current account balance, % of GDP 15 TR GDP RU GDP TR current account RU current account 10 5 0 -5 -10 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020  9 Source: wiiw Annual Database incorporating national and Eurostat statistics, own calculation.

3. Main drivers of growth  10

Strong wage growth supporting private consumption Job vacancy rate, % Average monthly gross wages, real change in % against preceding year 6 8 CZ HU PL SI SK DE 6 5 4 4 2 0 3 -2 2 -4 -6 PL RS 1 -8 TR RU -10 0 2013 2014 2015 2016 2017 2018 2015 2016 2017 2018 Note: Data for 2018 are an average of first two quarters. Source: wiiw Annual Database incorporating national Source: Eurostat. and Eurostat statistics.  11

Capacity constraints spurring investment Real GFCF Capacity utilisation, % change in % against preceding year seasonally adjusted DE other EU-CEE* other EU-CEE Visegrád WB CIS + UA Visegrád WB 10 90 8 6 85 4 2 80 0 75 -2 -4 70 -6 -8 65 -10 -12 60 2015 2016 2017 2018 1Q 13 1Q 14 1Q 15 1Q 16 1Q 17 1Q 18 * EU-CEE excl. Visegrád. Source: wiiw Annual Database incorporating national Note: Simple averages for country aggregates. and Eurostat statistics.  Source: Eurostat statistics. 12

Export growth slowing down amid weakening external environment Exports of goods (customs statistics) growth, %, 4-quarter moving average Visegrad Other EU-CEE WB 20 18 16 14 12 10 8 6 4 2 0 1Q 13 1Q 14 1Q 15 1Q 16 1Q 17 1Q 18 Note: Simple averages for country aggregates. WB excluding XK, CIS excluding BY.  13 Source: wiiw Monthly Database incorporating national and Eurostat statistics.

Visegrád countries and Baltics are most exposed to global demand decline Exports of goods and services, % of GDP 90 2000 2008 2017 80 70 60 50 40 30 20 10 0 TR WB CIS+UA HR, SI, BG, RO Baltics Visegrad Note: Simple averages for country aggregates.  14 Source: wiiw Annual Database incorporating national and Eurostat statistics.

Credit cycle is firming, in particular for households Credit growth, % year on year Non-financial corporations Households EU-CEE WB CIS + UA EU-CEE WB CIS + UA 25 25 20 20 15 15 10 10 5 5 0 0 -5 -5 -10 -10 -15 -15 Jan-10 Jan-12 Jan-14 Jan-16 Jan-18 Jan-10 Jan-12 Jan-14 Jan-16 Jan-18 Note: Simple averages for country aggregates. WB excluding XK, CIS excluding BY.  15 Source: wiiw Monthly Database incorporating national statistics.

CESEE overheating risks subside wiiw business cycle index 2.0 4Q 2007 2Q 2018 1.5 1.0 0.5 0.0 -0.5 -1.0 RU RS UA KZ BG BA PL AL HR TR LV SI MK EE LT SK RO HU ME CZ Note: Number of standard deviations from historical mean, average of 11 indicators.  16 Sources: wiiw Monthly Database incorporating national statistics and Eurostat; BIS.

Main potential sources of risk are tight labour markets, low/negative real interest rates, and high property prices Number of countries in CESEE showing overheating or underheating by indicator, Q2 2018 Overheating Underheating 18 16 14 12 10 8 6 4 2 0 Notes: CPI: consumer price index, CA: current account, RER: real exchange rate (EUR) CPI deflated, RIR: real interest rate CPI deflated.  17 Source: wiiw business cycle index, incorporating wiiw Monthly Database, national statistics, Eurostat, BIS.

Concerns about overheating are soothed by relative lack of inflation Core inflation, % change year on year EU-CEE WB CIS + UA TR 7 14 6 12 5 10 4 8 3 6 2 4 1 2 0 0 1Q 12 3Q 12 1Q 13 3Q 13 1Q 14 3Q 14 1Q 15 3Q 15 1Q 16 3Q 16 1Q 17 3Q 17 1Q 18 3Q 18 1Q 12 3Q 12 1Q 13 3Q 13 1Q 14 3Q 14 1Q 15 3Q 15 1Q 16 3Q 16 1Q 17 3Q 17 1Q 18 3Q 18 Note: Core inflation (HICP/COICOP), overall index excluding energy. Simple averages for country aggregates. WB excluding XK, CIS excluding BY. Source: Eurostat and national statistics.  18

Why is inflation not higher? (1) Increasing savings rates reduce wage pass-through Gross household savings rate, % 20 2007 2012 2016 15 10 5 0 -5 -10 -15 -20 -25 AT BG CZ EE LV LT HU PL SI SK  19 Source: Eurostat.

Why is inflation not higher? (2) Growing remittance outflows Migrant remittance outflows, % of GDP 0.9 2013 2014 2015 2016 0.8 0.7 0.6 0.5 0.4 0.3 0.2 0.1 0.0 CZ PL HU SI SK  20 Source: World Bank Migration and Remittances Data, wiiw Annual Database.

Recent pace of convergence has been strong for most, but will slow from here Percentage-point change in real per capita GDP (PPP) level versus Austria between 2012 and 2017 10 8 6 4 2 0 -2 -4 -6 -8 RU BY UA AL RS XK HR SK MK KZ BA HU SI PL BG EE CZ ME TR LV RO LT  21 Source: wiiw Annual Database incorporating national statistics and Eurostat.

4. Risks to the outlook: Watch out for trade war, eurozone crisis and next EU budget  22

wiiw CESEE risk matrix October 2018 Impact on CESEE countries High Medium Low Global trade war Smaller EU budget (only EU-CEE High Rule of law and institutions countries) deteriorate further No eurozone reform Likelihood Medium Labour shortages stimulate higher investment EM crisis affects more countries in CESEE Low Formalised core/periphery in EU Improvement in EU-Russia Faster-than-expected ECB (only EU-CEE countries) relations tightening Hard/no deal Brexit  23 Source: wiiw.

A. Eurozone does not reform and new crisis breaks out German opinion poll, Oct 2017, % 10-year bond yields, % 4.0 50 For Against Germany Italy Spread 45 3.5 40 3.0 35 2.5 30 2.0 25 20 1.5 15 1.0 10 0.5 5 0.0 0 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Common eurozone budget Eurozone finance minister  24 Sources: YouGov, Der Spiegel, investing.com, wiiw.

B. Wider trade war (1): It has already started Share of imports to US subject to Exports of goods and services, ‚ harmful ‘ trade restrictions, % of GDP by exporter, % 70 50 World China EU Turkey EU China Russia 45 60 40 50 35 30 40 25 30 20 15 20 10 10 5 0 0 2009 2010 2011 2012 2013 2014 2015 2016 2017 1980 1984 1988 1992 1996 2000 2004 2008 2012 2016  25 Sources: Global Trade Alert, World Bank.