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IMF Regional Economic Outlook Spring 2018

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May 2018

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IMF Regional Economic Outlook Spring 2018

  1. 1. Emerging Europe Advanced Europe Regional Economic Outlook Spring 2018 E U R
  2. 2. Key Messages ✓ Strong economic growth but lead indicators point to a peak ✓ Much lower wage growth in most of advanced Europe than in new EU member states because of slack, a flatter Phillips curve, and entrenched low inflation expectations ✓ Monetary policy normalization to proceed more slowly in most of advanced Europe: implications for capital flows to new EU member states and exchange rates ✓ Fiscal adjustment insufficiently ambitious, given the strength of the cycle. Some countries have even relaxed ✓ Policymakers need to seize the good times to advance further with fiscal consolidation and structural reforms 2
  3. 3. Developments and Outlook
  4. 4. 4 Europe continues to enjoy strong growth Sources: IMF, World Economic Outlook; and IMF staff calculations. 1/ The upper and lower bounds of the shaded areas depict the minimum - maximum growth range. Advanced Europe: Real GDP Growth (Year-over-year percent change) Emerging Europe: Real GDP Growth (Year-over-year percent change) -15 -10 -5 0 5 10 15 2000 2006 2012 Advanced Europe Euro area 2017 Min-max range 1/ -15 -10 -5 0 5 10 15 2000 2006 2012 Emerging Europe Russia 2017 Min-max range 1/
  5. 5. 5 Growth is driven by domestic demand Sources: IMF, World Economic Outlook; and IMF staff calculations. Advanced Europe: Contributions to Growth (Percentage points) Emerging Europe: Contributions to Growth (Percentage points) -3 -2 -1 0 1 2 3 4 5 2015 2016 2017 Consumption Investment Net exports Real GDP growth -3 -2 -1 0 1 2 3 4 5 2015 2016 2017 Consumption Investment Net exports Real GDP growth
  6. 6. 6 Upward growth revisions reflect largely stronger domestic demand Sources: IMF, World Economic Outlook; and IMF staff calculations. Advanced Europe: Growth Projections and Revisions Relative to April 2017 WEO (Growth in percent, revisions/contributions in percentage points) Emerging Europe: Growth Projections and Revisions Relative April 2017 WEO (Growth in percent, revisions/contributions in percentage points) -1.5 -1.0 -0.5 0.0 0.5 1.0 1.5 2.0 2.5 3.0 2017 2018 2019 Consumption Investment Net exports Real GDP growth revisions GDP growth -1.5 -0.5 0.5 1.5 2.5 3.5 2017 2018 2019 Consumption Investment Net exports Real GDP growth GDP growth revisions
  7. 7. -40 -20 0 20 40 60 Euro area United Kingdom Switzerland Czech Republic, Hungary, Poland, Turkey, and South Africa March-18 2017 7 High-frequency data suggest that momentum is peaking Manufacturing PMIs (Three-month moving average; deviations from 50) Sources: European Commission; Haver Analytics; IMF World Economic Outlook; and IMF staff calculations. 1/ Measures macroeconomic data surprises relative to market expectations. A positive/negative reading means that the data releases have been stronger/worse than expected. Citigroup Economic Surprise Index 1/ (Period average; in percent) More-positive surprises -6 -4 -2 0 2 4 6 8 10 Jan-10 Jan-12 Jan-14 Jan-16 Jan-18 Advanced Europe Emerging Europe Mar-18
  8. 8. Risks
  9. 9. 9 Near-term risks balanced. Medium-term risks to the downside Medium-term downside risks have become more acute: • Inward looking policies and rising protectionism • Protracted policy and economic uncertainty • Richly valued asset prices could correct abruptly Near-term risks balanced: • Robust confidence and still strong conjunctural indicators • But greater trade tensions and market volatility
  10. 10. 10 Large drops of stock prices have derailed recoveries Changes in Main Indicators after a Large Stock Price Decline 1/ (Quarter-over-quarter percent change) Sources: Haver Analytics; Thomson Reuters; IMF International Finance Statistics; and IMF staff calculations. 1/ Large stock price declines are defined as price drops within the fifth percentile of the distribution of quarterly changes. The sample covers G7 countries, Spain, and Sweden over the period 1980 to 2017. Real GDP Growth Inflation -2.5 -2.0 -1.5 -1.0 -0.5 0.0 0.5 1.0 1.5 0 1 2 3 One quarter ahead Eight quarters ahead -6 -5 -4 -3 -2 -1 0 1 2 0 1 2 3 One quarter ahead Eight quarters ahead Max Mean Min
  11. 11. Cyclical Position and Inflation
  12. 12. 12 Output gaps appear largely closed Output Gap, 2018 (Percent of potential GDP) Sources: IMF World Economic Outlook; and IMF staff estimates.
  13. 13. 13 Inflation pressures are diverging across economies Core Inflation (Year-over-year percent change; period average) Sources: Haver Analytics; and IMF staff calculations. Note: Other advanced economies include: Czech Republic, Israel, San Marino, Switzerland, and the United Kingdom. -0.5 0.0 0.5 1.0 1.5 2.0 2.5 2014Q1 15Q1 16Q1 17Q1 18Q1 Euro area Nordics Other advanced economies -0.5 0.0 0.5 1.0 1.5 2.0 2.5 2014Q1 15Q1 16Q1 17Q1 18Q1 Central Europe SEE EU SEE non-EU 0 5 10 15 20 25 30 35 2014Q1 15Q1 16Q1 17Q1 18Q1 CIS excl. Russia Turkey Russia
  14. 14. Labor Markets and Wages
  15. 15. 15 Labor market slack has declined, but remains high in EU-15, unlike in NMS Sources: Eurostat; and IMF staff calculations. 1/ Additional slack includes persons marginally attached to the labor force and underemployed part-time workers. 2/ EU-15: Austria, Belgium, Denmark, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, Netherlands, Portugal, Spain, Sweden, and the United Kingdom 3/ New member states: Bulgaria, Croatia, Czech Republic, Estonia, Hungary, Latvia, Lithuania, Poland, Romania, Slovakia, and Slovenia. EU: Unemployment and Additional Labor Market Slack 1/ (Percent) 8 10 12 14 16 18 20 22 2008Q1 2010Q3 2013Q1 2015Q3 2017Q New member states 3/ EU-15 2/
  16. 16. 16 Wage growth is sluggish in EU-15 and strong in NMS Source: Eurostat. 0 2 4 6 8 10 12 14 16 2001Q4 2005Q4 2009Q4 2013Q4 2017Q4 New member states EU-15 Nominal Wage Growth (Percent change y/y in four-quarter averages)
  17. 17. 17 The wage Phillips curve is alive and well: flat in selected EU-15 and steep in NMS Sources: IMF staff calculations. 1/ Based on a panel regression that uses a broad measure of slack (non-employment gap). Selected EU-15 comprise Austria, Belgium, France, Germany, Netherlands, and Spain. Wage Phillips Curve: New Member States 1/Wage Phillips Curve: Selected EU-15 1/ Wagegrowth Unemployment gap Slope = -0.4 Wagegrowth Unemployment gap Slope = -0.9
  18. 18. External Current Accounts
  19. 19. 19 NMS current accounts are in a much better position than pre-crisis Current Account Balance, 2017 (Percent of GDP) Sources: IMF, World Economic Outlook; and IMF staff calculations. 1/ The current account norm estimate for Hungary and Slovenia is for 2016. -4 -2 0 2 4 6 8 SVN BGR HRV HUN EST CZE LTU POL SVK LVA ROU Actual current account balance Current account norm 1/ New Member States: Export Market Shares, 2017 versus 2007-08 Average (Percent change) 0 10 20 30 40 50 60 ROU LTU POL BGR SVK EST CZE HUN LVA SVN HRV
  20. 20. 20 But competitiveness is gradually eroding Sources: European Commission; Eurostat; Haver Analytics; and IMF staff calculations. 1/ Corporate profit share is a four quarter average of seasonally unadjusted data. New Member States: Corporate Profitability and Wage Growth 1/ (Year-over-year percent change) 1 3 5 7 9 11 48 49 50 51 52 53 2010Q1 2011Q2 2012Q3 2013Q4 2015Q1 2016Q2 2017Q3 Corporate profit share Wage growth (right side) Selected Regions: Real Effective Exchange Rates (2000Q1=100; based on manufacturing unit labor cost) 80 100 120 140 160 180 2000Q1 2003Q3 2007Q1 2010Q3 2014Q1 2017Q4 Central Europe Southeastern European EU member states Baltics Euro area
  21. 21. 21 Overall, euro area current account still broadly in equilibrium; deficits shrinking, surpluses flat Sources: IMF, World Economic Outlook (WEO); and IMF staff calculations. Euro Area: Current Account Balance (Percent of GDP) -25 -20 -15 -10 -5 0 5 10 15 2001 2003 2005 2007 2009 2011 2013 2015 2017 Max Euro area Min
  22. 22. Policies
  23. 23. 23 In most of advanced Europe, maintain accommodative monetary policy Sources: Bloomberg Finance L.P.; Haver Analytics; and IMF staff calculations. 1/ Derived from government securities adjusted for the difference between the RPI inflation and CPI inflation, which has been, on average, 1 percentage point in recent years. 2/ Real policy rate is the difference between nominal policy rate and one-year ahead IMF’s WEO inflation forecast. Market expectation of interest rate is calculated as a difference between one-year-ahead interest rate swap rate and three-month interbank rate. Positive values indicate expectation of monetary tightening. Ten-year Breakeven Inflation (Percent; based on generic nominal government bonds and inflation-linked bonds) Real Policy Rates and Market Expectations 2/ (Percent) -2.5 -2.0 -1.5 -1.0 -0.5 0.0 0.5 GBR CZE EA SWE Real Policy rate Direction of market expectations 1/ 1.0 1.2 1.4 1.6 1.8 2.0 2.2 2.4 2014 2015 2016 2017 2018 Inflation target United Kingdom 1/ Sweden Euro area
  24. 24. Monetary Policy Challenges in NMS NMS are more advanced in the cycle ✓ Output gaps appear largely closed, wage growth is strong Thus, they have to tighten sooner, but mind spillovers ✓ Policy rates low for longer in advanced Europe ✓ Pressure for capital inflows and exchange rate appreciation 24
  25. 25. 25 A picture of procyclical fiscal policies Sources: IMF World Economic Outlook; and IMF staff calculations. 1/ The fiscal stance is considered to have tightened if the ratio of the structural primary balance to potential GDP improves by at least 0.25 percent per year, to have loosened if that ratio deteriorates by at least 0.25 percent per year, and to have remained neutral otherwise. General government non-oil primary structural balance is used for Russia, and structural non-oil balance in percent of mainland trend GDP is used for Norway. No data for ALB, BLR, UVK, MKD, MDA, MNE, and SMR. Fiscal Stance, 2013-18 1/ (Number of European countries) 0 10 20 30 40 2013 2014 2015 2016 2017 2018 Loosened Remained neutral Tightened Forecast
  26. 26. Fiscal Policy Priorities Advanced Europe: ✓ Use the good times to rebuild fiscal buffers in high public debt countries ✓ Countries with fiscal space should use it to lift potential growth ✓ Improve policy-mix to make it more growth-friendly, including preserving public investment Emerging Europe: ✓ Rebuild fiscal room to deal with future shocks and reduce pressure on monetary policy ✓ Fiscal policy procyclical in several economies in Central and Eastern Europe 26
  27. 27. 27 Financial Policy Priorities ✓ Address the remaining balance sheet weaknesses ✓ Prepare macroprudential frameworks Europe: Non-performing Loans versus Private Sector Credit Growth -8 -4 0 4 8 12 0 3 6 9 12 15 18 Privatesectorcreditgrowth (year-over-yearpercentchange) Nonperforming loans (percent of total loans) Emerging Europe Advanced Europe Sources: Eurostat; ECB; Haver Analytics; IMF Financial Soundness Indicators; IMF International Finance Statistics; and IMF staff calculations.
  28. 28. Structural Policy Priorities Advanced Europe: ✓ Seize the moment to push forward with labor and product market reforms Emerging Europe: ✓ Strengthen institutions ✓ Improve public sector efficiency ✓ Improve the business environment ✓ Boost labor force participation Europe: Potential GDP Growth 1/ (Percent) 28 Sources: IMF World Economic Outlook; and IMF staff calculations. 1/ Pre-crisis refers to 1998-2004 for advanced Europe and 2001-04 for emerging Europe; post-crisis refers to 2023 for both. 1 2 3 4 5 6 0.5 0.9 1.3 1.7 2.1 2.5 Pre-crisis Post-crisis Pre-crisis Post-crisis Advanced Europe Emerging Europe (right scale)
  29. 29. 29 Strengthen the EU Architecture Complete the Banking Union Fiscal Institutional Reforms Advance the Capital Market Union
  30. 30. Thank You

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