Wiener Institut für

Internationale

Wirtschaftsvergleiche

The Vienna Institute for

International Economic

Studies

www.wiiw.ac.at

Mario Holzner

New wiiw forecast for

Central, East and Southeast Europe, 2015-2017

CESEE: A time of moderate expectations

21st Austria webinar, 12 March 2015

2

Source: wiiw (March 2015), Eurostat. Forecasts by wiiw and European Commission (Winter Report,

February 2015).

GDP growth rate since 1995

A time of moderate expectations

-10

-8

-6

-4

-2

0

2

4

6

8

10

12

1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017

NMS-11 EU-15 Turkey Russia

3

Source: wiiw (March 2015), Eurostat. Forecasts by wiiw and European Commission (Winter Report,

February 2015).

Differential in GDP growth vis-à-vis EU-15 since 1995, in pp

Difference to EU-15 diminishing

-10

-8

-6

-4

-2

0

2

4

6

8

1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017

NMS-11 West Balkans - 6 CIS-4

4

Source: Own calculations based on AMECO database.

Euro area (12 original members) – per capita GDP growth rate

The euro area seized by secular stagnation

-6

-4

-2

0

2

4

6

8

1960 1966 1972 1978 1984 1990 1996 2002 2008 2014

GDP per capita 10-year average

5

Source: Own calculations based on AMECO database.

GDP share of gross capital formation

Euro area investment and wage share tumbling

18

20

22

24

26

28

30

1960 1966 1972 1978 1984 1990 1996 2002 2008 2014

50

53

56

59

62

65

68

1960 1966 1972 1978 1984 1990 1996 2002 2008 2014

Adjusted GDP wage share

Euro area (12 original members)

Euro area (12 original members)

6

� Disinflation → Deflation

� Unemployment high, or very high

� Diminishing role of trade balance

� Household consumption unimpressive

� Investment recovering only slowly

Insufficiency of aggregate demand also in CESEE

7

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

2013m01 2013m05 2013m09 2014m01 2014m05 2014m09 2015m01

Energy Food Core inflation CPI, year-on-year growth in %

Source: wiiw Monthly Database incorporating national and Eurostat statistics.

Apropos deflation: e.g. Poland

CPI growth and contribution of components, 2013-2015, in percentage points

8

Source: wiiw Annual Database incorporating national and Eurostat statistics. Forecasts by wiiw.

Growth: unimpressive GDP growth in 2014-2015, and contributions of individual demand components in pp

-8

-6

-4

-2

0

2

4

6

8

HR BG SI EE LV CZ HU LT RO SK PL

Gross fixed capital formation Household final consumption Net exports GDP (growth in %)

‘14|‘15

-8

-6

-4

-2

0

2

4

6

8

UA RU BY RS BA AL KZ ME TR MK XK

Gross fixed capital formation Household final consumption Net exports GDP (growth in %)

‘14|‘15

9

� Still depressed

� Unconstrained by the availability of funds

� Insensitive to interest rates

� Highly profitable

� Wage-led – not profit-led

Private investment

10

Source: Own calculations based on AMECO database.

GDP share of private sector gross fixed capital formation, in %

Private investment still depressed

15

16

17

18

19

20

21

22

23

24

25

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

NMS-11 Germany

11

Source: Own calculations based on AMECO database.

E.g. Poland:

Net lending (+) or net borrowing (-): corporations and households, % GDP

Corporate investment unconstrained by availability of funds

-4

-2

0

2

4

6

8

Corporations2001

Households2001

Normality

-4

-2

0

2

4

6

8

Corporations2007

Households2007

Bubble

-4

-2

0

2

4

6

8

Corporations2014

Households2014

Distress

12

Source: National bank statistics, wiiw own calculations.

Non-financial corporations, CESEE 2014

Corporate investment insensitive to interest rates

Slovenia

Macedonia

Czech Republic

-25

-20

-15

-10

-5

0

5

10

15

0 2 4 6 8 10

Gro

wth

rate

of sto

ck o

f lo

an

s

Real interest on new loans

13

Source: BIS, RBI, own calculations using

USD/EUR exchange rate as of 30/09/2014.

Austrian banks’

exposure to

CESEE substantial

14

Source: National bank statistics, wiiw own calculations.

Private sector, CESEE 2014

Profits and risks unevenly distributed

HR

CZ

HU

PL

RO

SK

RU

UA

0

5

10

15

20

25

30

-20 -15 -10 -5 0 5 10 15 20 25

No

n-p

erf

orm

ing

loans

Stock of bank loans to non-financial private sector growth

15

Source: AMECO.

Net returns/net capital stock ratios for 2011-2014

(base period index 2000-2003), percentage change

Profitability of the capital stock mostly increasing

-26.2% -26.1%-22.7%

1.9% 3.6%8.5%

22.0%24.8%

36.5%

61.7%

10.1%

-40%

-20%

0%

20%

40%

60%

80%

100%

BG SI EE HR HU CZ LV LT SK PL RO DE

152.4%

16

30

35

40

45

50

55

60

1994 1999 2004 2009 2014

NMS-11 Germany

12

14

16

18

20

22

24

1994 1999 2004 2009 2014

NMS-11 Germany

Source: Own calculations based on AMECO database.

GDP shares of employee

compensation, in %

Investment is wage-led (and not profit-led)

Share of the corporate sector in private

gross disposable income, in %

17

0

1

2

3

4

5

6

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

NMS-11 Germany

Source: Own calculations.

GDP shares of public gross fixed capital formation, 2001-2014, in %

EU-funded public investment partly counterbalances

private investment

18

� Nominal wages important …

� … but exchange rate as well

� Fiscal deficits and net lending abroad absorb

excessive private savings in the NMS

Macroeconomic round-up

19

2004

2009

2014

-30

-20

-10

0

10

20

30

40

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.

Percentage levels of overvaluation (positive) or

undervaluation (negative) of NMS currencies vs. euro, 2004, 2009, 2014

Exchange rate regimes do matter

Fixers Floaters

20

Remark: Bulgaria: -26.3.

Source: wiiw Annual Database incorporating national and AMECO statistics, own calculations.

Net lending (+) or net borrowing (–), 2007, 2014, in % of GDP

Fiscal deficits and net lending abroad absorb excessive

private savings in the NMS

-20 -15 -10 -5 0 5 10

Hungary

Romania

Croatia

Slovakia

Lithuania

Czech Republic

Latvia

Slovenia

Poland

Estonia

Bulgaria

Germany

2007General government Total economy

-20 -15 -10 -5 0 5 10

Slovenia

Croatia

Poland

Bulgaria

Slovakia

Hungary

Romania

Latvia

Czech Republic

Lithuania

Estonia

Germany

2014General government Total economy

21

� 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

2015-2017: A time of moderate expectations

22

Source: wiiw forecast, February 2015.

GDP growth, wiiw forecast for 2015-2017

2015 2016 2017

Kosovo 3.6 2.9 3.8

Poland 3.5 3.2 3.2

Macedonia 3.5 2.9 2.6

Turkey 3.3 3.5 3.5

Romania 2.5 3.0 3.0

Slovakia 2.5 2.7 3.0

Lithuania 2.4 2.9 3.2

Czech Republic 2.3 2.4 2.4

Hungary 2.3 2.0 2.0

Montenegro 2.3 2.6 2.9

Latvia 2.1 2.8 2.8

2015 2016 2017

Estonia 2.0 2.5 3.1

Albania 2.0 2.2 2.4

Kazakhstan 2.0 3.5 4.5

Slovenia 1.7 1.8 2.0

Bosnia and Herzegovina 1.6 2.1 2.4

Bulgaria 1.5 1.9 2.3

Croatia 0.3 1.1 1.5

Serbia -0.5 1.0 1.4

Belarus -2.0 1.3 2.0

Russia -3.9 1.9 2.0

Ukraine -5.0 0.0 1.8

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