WILL CHINA’S SLOWDOWN BRING ECA Economic Update …bruegel.org/wp-content/uploads/2016/04/Maurizio... · • The nature of the slowdown is important because its consequences on

ECA Economic Update April 2016

1

Report site: www.worldbank.org/en/region/eca/publication/europe-and-central-asia-economic-update-april-2016

WILL CHINA’S SLOWDOWN BRING HEADWINDS OR OPPORTUNITIES FOR EUROPE AND CENTRAL ASIA?

April 29, 2016 Bruegel , Brussels, Belgium

Maurizio Bussolo Chief Economist Office Europe and Central Asia Region

• Low growth is expected in Europe and Central Asia (ECA), as global headwinds remain strong.

• The headwinds are of structural, rather than cyclical nature. They are part of a new normal.

• This is also true for the slowdown in China, which has a pervasive impact on ECA. The impact creates challenges but also opportunities.

• Policies have to adjust to new circumstances.

2

Overview

Growth moderation and rebalancing in China Growth moderation and rebalancing in China

Growth prospects and policy challenges differ across the Europe and Central Asia region

3

Part I

4

Country Groups

Western Europe Southern Europe Central Europe Northern Europe Western BalkansAustria Greece Bulgaria Denmark Albania Belgium Italy Croatia Finland Bosnia and HerzegovinaFrance Portugal Czech Republic Sweden KosovoGermany Spain Hungary Estonia FYR MacedoniaIreland Cyprus Poland Latvia MontenegroLuxemburg Malta Romania Lithuania SerbiaThe Netherlands Slovak RepublicUnited Kingdom Slovenia

South Caucasus Central Asia Russia Turkey Other Eastern EuropeArmenia Kazakhstan BelarusAzerbaijan Kyrgyz Republic Moldova Georgia Tajikistan Ukraine

TurkmenistanUzbekistan

Europe and Central Asia

European Union and Western

Balkans

Eastern Europe and Central Asia

5

Subdued growth in new forecast

• Collapse in oil revenues amounts to large terms-of-trade losses and sharp depreciations.

• Reductions in remittances (deflated by import prices) imply large declines in household incomes.

• Diverging monetary policies and reversals of capital flows lead to changes in competitiveness.

6

Big shifts in relative prices are affecting consumption and exports

7

Consumption has sharply declined in Eastern Europe and Central Asia

Annual growth rates, 2015

-25.0

-20.0

-15.0

-10.0

-5.0

0.0

5.0

10.0

Ukraine Belarus RussianFederation

Azerbaijan Moldova Kazakhstan Armenia Georgia KyrgyzRepublic

Turkey Tajikistan Uzbekistan

GDP growth (%) Private consumption growth (%)

8

Euro Area export growth now outpaces global average

-6.0

-5.0

-4.0

-3.0

-2.0

-1.0

0.0

1.0

2.0

2003m12 2006m12 2009m12 2012m12 2015m12

Percentage points difference between growth export volume euro area and global export growth, 12m/12m

9

European export growth accelerates as U.S. and Chinese exports slow down

[CELLRANGE]

[CELLRANGE]

[CELLRANGE]

[CELLRANGE]

[CELLRANGE] [CELLRANGE]

[CELLRANGE]



[CELLRANGE]

[CELLRANGE]

-15

-10

-5

0

5

10

15

-6.0 -5.0 -4.0 -3.0 -2.0 -1.0 0.0 1.0 2.0 3.0 4.0

Chan

ge o

f rea

l effe

ctiv

e ex

chan

ge ra

te (%

)

Change of export volume growth (%)

• Unemployment in European Union is declining as the EU enters fourth year of recovery.

• Crisis in many countries in eastern part of region starts showing in rising unemployment.

• Digital technologies, sharing economy, migration, and globalization are fundamentally changing labor markets, and requires new social contract.

10

Labor markets affected by cyclical and structural factors

Growth moderation and rebalancing in China: headwinds or opportunities?

11

Part II

• Slowdown is result of slower expansion of production capacity

• Rebalancing entails

– Shift from investments to consumption

– Shift from low-skilled to high-skilled production

– Shift from inward FDI to outward FDI

12

Growth moderation and rebalancing in China

• The nature of the slowdown is important because its consequences on the rest of the world are quite different

• Cyclical slowdown (a reduction of domestic demand) implies an increase in trade surplus (i.e. a reduction of Chinese demand on global production);

• Structural slowdown (a reduction of production) implies a reduction of both imports and exports – Need of a structural (supply side) analytical approach

13

Chinese Growth moderation and demand for the rest of the world

14

Slowdown in China coincides with decelerating potential growth

5.0

7.0

9.0

11.0

13.0

15.0

1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

potential GDP growth actual GDP growth

Annual percentage change

15

China is catching up to the European Union

0

10

20

30

40

50

60

70

80

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

starting share cumulative volume effect cumulative price effect

China’s nominal GDP as percentage of EU’s nominal GDP

The evolution of ECA’s links with China: is the region exporting to China at its potential?

16

China and ECA trade links

17

China’s share of imports by ECA has expanded rapidly

Share of imports from China in total imports, percent

0

5

10

15

20

25

30

35

Central Asia Central Europe Eastern Europe Northern Europe Russia South Caucasus Southern Europe Turkey Western Balkans Western Europe

1996 2014

• Exports are not as big as gravity model predicts. There seem to be special factors impeding exports to China.

• Sharp real depreciations vis-à-vis China have made producers much more competitive.

18

But region can export even more to China

19

Eastern ECA may have greater potential than western ECA to increase exports to China

Exports to China by sector from ECA sub-regions, US$ million

0

500

1000

1500

2000

2500

CentralAsia

CentralEurope

EasternEurope

NorthernEurope

Russia SouthCaucasus

SouthernEurope

Turkey WesternBalkans

WesternEurope

Agriculture

Actual Predicted

0

5000

10000

15000

20000

25000

CentralAsia

CentralEurope

EasternEurope

NorthernEurope


SouthernEurope


WesternEurope

Low Skill Manufacturing

Actual Predicted

020000400006000080000

100000120000140000160000

CentralAsia

CentralEurope

EasternEurope

NorthernEurope


SouthernEurope


WesternEurope

High Skill Manufacturing

Actual Predicted

05000

100001500020000250003000035000

CentralAsia

CentralEurope

EasternEurope

NorthernEurope


SouthernEurope


WesternEurope

Natural Resources

Actual Predicted

20

ECA currencies depreciated sharply over past year

Percent change in real exchange rate with China, Jan-Feb 2015 to Jan-Feb 2016

-50

-45

-40

-35

-30

-25

-20

-15

-10

-5

0

Azer

baija

nBe

laru

sRu

ssia

n Fe

dera

tion

Kaza

khst

anU

krai

neGe

orgi

aM

oldo

vaKy

rgyz

Rep

ublic

Pola

ndTu

rkey

Swed

enCy

prus

Rom

ania

Gree

ceHu

ngar

ySp

ain

Bosn

ia a

nd H

erze

govi

naLi

thua

nia

Croa

tiaSl

oven

iaEs

toni

aSl

ovak

Rep

ublic

Mac

edon

ia, F

YRIre

land

Finl

and

Fran

ceBu

lgar

iaGe

rman

yIta

lyLa

tvia

Denm

ark

Luxe

mbo

urg

Port

ugal

Net

herla

nds

Aust

riaM

alta

Belg

ium

Czec

h Re

publ

icAl

bani

aU

nite

d Ki

ngdo

mAr

men

iaTa

jikist

an

21

Exchange rate depreciation could boost ECA’s exports to China

Percent change in volume of total exports as a result of real exchange rate depreciation in ECA

0

2

4

6

8

10

12

14

CentralAsia

CentralEurope

EasternEurope

NorthernEurope


SouthernEurope


WesternEurope

Agriculture

02468

101214161820

CentralAsia

CentralEurope

EasternEurope

NorthernEurope


SouthernEurope


WesternEurope


0

5

10

15

20

25

CentralAsia

CentralEurope

EasternEurope

NorthernEurope


SouthernEurope


WesternEurope


0

2

4

6

8

10

12

14

CentralAsia

CentralEurope

EasternEurope

NorthernEurope


SouthernEurope


WesternEurope

Natural Resources

22

Exchange rate depreciation has created opportunities to compete with imports

Percent change in potential imports as a result of real exchange rate depreciation in ECA

-9-8-7-6-5-4-3-2-101

CentralAsia

CentralEurope

EasternEurope

NorthernEurope


SouthernEurope


WesternEurope

Agriculture

-14

-12

-10

-8

-6

-4

-2

0

CentralAsia

CentralEurope

EasternEurope

NorthernEurope


SouthernEurope


WesternEurope


-16

-14

-12

-10

-8

-6

-4

-2

0

CentralAsia

CentralEurope

EasternEurope

NorthernEurope


SouthernEurope


WesternEurope


-4-3-2-101234567

CentralAsia

CentralEurope

EasternEurope

NorthernEurope


SouthernEurope


WesternEurope

Natural Resources

• The impact of a slowdown in China would hurt resource exporters in the East, while reducing competition for exporters in the West;

• A rebalancing (towards consumption, high skill production, and outward FDI) will benefit more the East;

• Factorial distribution of income will change favoring labor versus capital and low skill vs high skill.

23

China growth slowdown and rebalancing

24

China imports primary goods and exports manufactures

Net surplus as a percent of world trade, 2016 forecast

-50

-40

-30

-20

-10

0

10

20

Agriculture Livestock Oil and Gas Natural Resources Low-skilled manufactures High-skilled manufactures

Reduction in demand

Reduction in supply

25

China’s slowdown has a mixed impact on ECA’s exports

Percentage difference in export volumes in slowdown compared to business as usual scenario

-3.5

-3

-2.5

-2

-1.5

-1

-0.5

0

0.5

1

1.5

Russia Kazakhstan Azerbaijan Kyrgyz Republic Ukraine Poland Bulgaria Turkey and OtherECA

EU and EFTA

26

China’s slowdown improves wages, particularly of unskilled workers

Percent change in China slowdown versus business as usual scenarios

-0.1

0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0.8

0.9

Russia Kazakhstan Azerbaijan Kyrgyz Republic Ukraine Poland Bulgaria Turkey andOther ECA

EU and EFTA

wage/rental rate unskilled/skilled wages

• Investment at 42% of GDP is simulated to go down by 15 ppt; with corresponding rise in consumption;

• The share of skilled workers in China will almost double over the next 10 years, implying an increase of 100 million skilled workers;

• A rise of China’s FDI outflows equal to 5 percentage points of GDP over the next 10 years.

27

China rebalancing

28

Change in private consumption relative to business as usual scenario

Percent

1.8

3.3

5.7

3.0

1.4 1.6

-1.0

-1.2

-1.1

-4.7

-0.5

-0.9

-6

-4

-2

0

2

4

6

8

Russian Federation Kazakhstan Azerbaijan Kyrgyz Rep Ukraine EU and EFTA

Full Rebal Slow Down

29

China rebalancing reduces the skill premium globally

Percentage difference in skill premium between rebalancing and business as usual scenarios

-2.500 -2.000 -1.500 -1.000 -0.500 0.000

India

North Am excl Mex

Russian Federation

Kazakhstan

Azerbaijan

Kyrgyz Rep

Ukraine

Poland

Bulgaria

Turkey and other ECA

EU and EFTA

Major Opec

Rest of the world

• Expected slow GDP growth tells only part of the story. Big changes in relative prices have far-reaching consequences.

• Slowdown and rebalancing in China are key elements of structural changes in global environment.

• There are some silver linings in the outlook. Unemployment is declining in EU and export opportunities are improving.

• Policies challenges most complicated for Eastern Europe and Central Asia.

30

Conclusions

ECA Economic Update April 2016

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Maurizio Bussolo Chief Economist Office Europe and Central Asia Region

Thank you!

April 29, 2016 Brussels, Belgium

Documents

WILL CHINA’S SLOWDOWN BRING ECA Economic Update …bruegel.org/wp-content/uploads/2016/04/Maurizio... · • The nature of the slowdown is important because its consequences on