1. No category

Wiener Institut für
Internationale
Wirtschaftsvergleiche
The Vienna Institute for
International Economic
Studies
www.wiiw.ac.at
21st Austria webinar, 12 March 2015
New wiiw forecast for
Central, East and Southeast Europe, 2015-2017
CESEE: A time of moderate expectations
Mario Holzner
2
A time of moderate expectations
GDP growth rate since 1995
12
NMS-11
EU-15
Turkey
Russia
10
8
6
4
2
0
-2
-4
-6
-8
-10
1995
1997
1999
2001
2003
2005
2007
2009
2011
2013
2015
Source: wiiw (March 2015), Eurostat. Forecasts by wiiw and European Commission (Winter Report,
February 2015).
2017

3
Difference to EU-15 diminishing
Differential in GDP growth vis-à-vis EU-15 since 1995, in pp
8
NMS-11
West Balkans - 6
CIS-4
6
4
2
0
-2
-4
-6
-8
-10
1995
1997
1999
2001
2003
2005
2007
2009
2011
2013
2015
Source: wiiw (March 2015), Eurostat. Forecasts by wiiw and European Commission (Winter Report,
February 2015).
2017

4
The euro area seized by secular stagnation
Euro area (12 original members) – per capita GDP growth rate
GDP per capita
8
10-year average
6
4
2
0
-2
-4
-6
1960
1966
1972
1978
1984
Source: Own calculations based on AMECO database.
1990
1996
2002
2008
2014

5
Euro area investment and wage share tumbling
GDP share of gross capital formation
30
28
Adjusted GDP wage share
68
Euro area (12 original members)
65
26
62
24
59
22
56
20
53
18
1960 1966 1972 1978 1984 1990 1996 2002 2008 2014
50
1960 1966 1972 1978 1984 1990 1996 2002 2008 2014
Source: Own calculations based on AMECO database.
Euro area (12 original members)

6
Insufficiency of aggregate demand also in CESEE
Disinflation → Deflation
Unemployment high, or very high
Diminishing role of trade balance
Household consumption unimpressive
Investment recovering only slowly

7
Apropos deflation: e.g. Poland
CPI growth and contribution of components, 2013-2015, in percentage points
2.0
Energy
Food
Core inflation
CPI, year-on-year growth in %
1.5
1.0
0.5
0.0
-0.5
-1.0
2013m01
2013m05
2013m09
2014m01
2014m05
Source: wiiw Monthly Database incorporating national and Eurostat statistics.
2014m09
2015m01

8
Growth: unimpressive
GDP growth in 2014-2015, and contributions of individual demand components in pp
Gross fixed capital formation
8
6
4
2
0
-2
-4
-6
-8
Household final consumption
Net exports
GDP (growth in %)
‘14|‘15
HR
8
6
4
2
0
-2
-4
-6
-8
BG
SI
EE
Gross fixed capital formation
LV
CZ
HU
Household final consumption
LT
RO
Net exports
SK
PL
GDP (growth in %)
‘14|‘15
UA
RU
BY
RS
BA
AL
KZ
ME
TR
Source: wiiw Annual Database incorporating national and Eurostat statistics. Forecasts by wiiw.
MK
XK

9
Private investment
Still depressed
Unconstrained by the availability of funds
Insensitive to interest rates
Highly profitable
Wage-led – not profit-led

10
Private investment still depressed
GDP share of private sector gross fixed capital formation, in %
25
NMS-11
Germany
24
23
22
21
20
19
18
17
16
15
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Source: Own calculations based on AMECO database.

11
Corporate investment unconstrained by availability of funds
E.g. Poland:
Net lending (+) or net borrowing (-): corporations and households, % GDP
Bubble
Normality
Distress
8
8
8
6
6
6
4
4
4
2
2
2
0
0
0
-2
-2
-2
-4
-4
Corporations
2001
Households
2001
-4
Corporations
2007
Source: Own calculations based on AMECO database.
Households
2007
Corporations
2014
Households
2014

12
Corporate investment insensitive to interest rates
Non-financial corporations, CESEE 2014
Growth rate of stock of loans
15
10
Macedonia
5
Czech Republic
0
-5
-10
-15
-20
Slovenia
-25
0
2
4
6
Real interest on new loans
Source: National bank statistics, wiiw own calculations.
8
10

13
Austrian banks’
exposure to
CESEE substantial
Source: BIS, RBI, own calculations using
USD/EUR exchange rate as of 30/09/2014.

14
Profits and risks unevenly distributed
Private sector, CESEE 2014
Non-performing loans
30
25
HU
20
HR
RO
UA
15
10
5
-20
-15
CZ
PL
SK
0
-10
-5
0
5
10
15
20
Stock of bank loans to non-financial private sector growth
Source: National bank statistics, wiiw own calculations.
RU
25

15
Profitability of the capital stock mostly increasing
Net returns/net capital stock ratios for 2011-2014
(base period index 2000-2003), percentage change
152.4%
100%
80%
61.7%
60%
36.5%
40%
22.0%24.8%
20%
1.9% 3.6%
10.1%
8.5%
0%
-20%
-40%
-26.2% -26.1%
BG
Source: AMECO.
SI
-22.7%
EE
HR
HU
CZ
LV
LT
SK
PL
RO
DE

16
Investment is wage-led (and not profit-led)
GDP shares of employee
compensation, in %
NMS-11
60
Share of the corporate sector in private
gross disposable income, in %
Germany
55
22
50
20
45
18
40
16
35
14
30
12
1994
1999
2004
2009
NMS-11
24
2014
Source: Own calculations based on AMECO database.
1994
1999
Germany
2004
2009

2014
17
EU-funded public investment partly counterbalances
private investment
GDP shares of public gross fixed capital formation, 2001-2014, in %
6
NMS-11
Germany
5
4
3
2
1
0
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Source: Own calculations.

18
Macroeconomic round-up
Nominal wages important …
… but exchange rate as well
Fiscal deficits and net lending abroad absorb
excessive private savings in the NMS

19
Exchange rate regimes do matter
Percentage levels of overvaluation (positive) or
undervaluation (negative) of NMS currencies vs. euro, 2004, 2009, 2014
40
Fixers
Floaters
30
2009
20
10
2014
2004
0
-10
-20
-30
HR
EE
LV
SI
SK
RO
PL
BG
DE
Note: Over- or undervaluation in the price level in relation to the GDP per capita level.
Source: Own calculations.
LT
CZ
HU

20
Fiscal deficits and net lending abroad absorb excessive
private savings in the NMS
Net lending (+) or net borrowing (–), 2007, 2014, in % of GDP
2007
2014
General government
Total economy
General government
Germany
Germany
Bulgaria
Estonia
Estonia
Lithuania
Poland
Czech Republic
Slovenia
Latvia
Latvia
Romania
Czech Republic
Hungary
Lithuania
Slovakia
Slovakia
Bulgaria
Croatia
Poland
Romania
Croatia
Hungary
Slovenia
-20
-15
-10
-5
0
5
10
-20
-15
Total economy
-10
Remark: Bulgaria: -26.3.
Source: wiiw Annual Database incorporating national and AMECO statistics, own calculations.
-5
0

5
10
21
2015-2017: A time of moderate expectations
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

22
GDP growth, wiiw forecast for 2015-2017
2015
2016 2017
2015
2016
2017
Kosovo
3.6
2.9
3.8
Estonia
2.0
2.5
3.1
Poland
3.5
3.2
3.2
Albania
2.0
2.2
2.4
Macedonia
3.5
2.9
2.6
Kazakhstan
2.0
3.5
4.5
Turkey
3.3
3.5
3.5
Slovenia
1.7
1.8
2.0
Romania
2.5
3.0
3.0
Bosnia and Herzegovina
1.6
2.1
2.4
Slovakia
2.5
2.7
3.0
Bulgaria
1.5
1.9
2.3
Lithuania
2.4
2.9
3.2
Croatia
0.3
1.1
1.5
Czech Republic
2.3
2.4
2.4
Serbia
-0.5
1.0
1.4
Hungary
2.3
2.0
2.0
Belarus
-2.0
1.3
2.0
Montenegro
2.3
2.6
2.9
Russia
-3.9
1.9
2.0
Latvia
2.1
2.8
2.8
Ukraine
-5.0
0.0
1.8
Source: wiiw forecast, February 2015.

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
