Eu10slides

Bucharest, Warsaw, ZagrebBucharest, Warsaw, Zagreb

May 21, 2009May 21, 2009

EU10 Regular Economic ReportMay 2009

What we have seenWhat we have seen– Trade and financial shocks have led to a severe slump and job Trade and financial shocks have led to a severe slump and job

losses …losses …– … … although there are tentative signs of financial market although there are tentative signs of financial market

stabilizationstabilization

What we can expectWhat we can expect– Recession in 2009 and stagnation in 2010Recession in 2009 and stagnation in 2010– Impact of the crisis differs greatly depending on degree of Impact of the crisis differs greatly depending on degree of

market integration and magnitude of macro imbalancesmarket integration and magnitude of macro imbalances

What should be doneWhat should be done– Policy responses differ across countriesPolicy responses differ across countries– Fiscal policy options limited, financial policy measures Fiscal policy options limited, financial policy measures

necessary, and social and structural policy actions prioritynecessary, and social and structural policy actions priority

OverviewOverview

What we have seenWhat we have seen


Economy -Economy - sharp slowdownsharp slowdown

-20

-15

-10

-5

0

5

10

BG CZ EE LV LT HU PL RO SI SK

Q3 2008 Q4 2008 Q1 2009

Real GDP growth in EU10 in 3Q 2008 to 1Q 2009, (% change, yoy, sa)

Source: Eurostat, World Bank Staff calculations. Q1 2009 data is preliminary.


Trade – collapse in exportsTrade – collapse in exportsEU and HIC Imports and EU10 and LMIC Exports (3mma, %change, yoy, sa)

-40

-30

-20

-10

0

10

20

30

40Ja

n-01

Jul-0

1

Jan-

02

Jul-0

2

Jan-

03

Jul-0

3

Jan-

04

Jul-0

4

Jan-

05

Jul-0

5

Jan-

06

Jul-0

6

Jan-

07

Jul-0

7

Jan-

08

Jul-0

8

Jan-

09

EU-10 Exports

Euro Area Imports

Developing Countries' Exports

High Income Countries' Imports

EU10 pre-crisis exports

EU10 post-crisis exports

Source: Datastream Thomson and World Bank.


Trade – collapse in industrial productionTrade – collapse in industrial productionVolume Index of Industrial Production (% change, yoy, wda)

-40

-30

-20

-10

0

10

20

30

Jan-

07

Mar

-07

May

-07

Jul-0

7

Sep

-07

Nov

-07

Jan-

08

Mar

-08

May

-08

Jul-0

8

Sep

-08

Nov

-08

Jan-

09

Mar

-09

CZ HU PL SK

-40

-30

-20

-10

0

10

20

30

Jan-

07

Mar

-07

May

-07

Jul-0

7

Sep

-07

Nov

-07

Jan-

08

Mar

-08

May

-08

Jul-0

8

Sep

-08

Nov

-08

Jan-

09

Mar

-09

EE LV LT SI

-40

-30

-20

-10

0

10

20

30

Jan-

07

Mar

-07

May

-07

Jul-0

7

Sep

-07

Nov

-07

Jan-

08

Mar

-08

May

-08

Jul-0

8

Sep

-08

Nov

-08

Jan-

09

Mar

-09

BG RO

Source: Eurostat, Staff calculations


Trade - collapse in investmentTrade - collapse in investmentContribution to GDP Growth 1Q-4Q 2008 (percentage points)

-20

-15

-10

-5

0

5

10

15

20

1Q 0

82Q

08

3Q 0

84Q

08

1Q 0

82Q

08

3Q 0

84Q

08

1Q 0

82Q

08

3Q 0

84Q

08

1Q 0

82Q

08

3Q 0

84Q

08

1Q 0

82Q

08

3Q 0

84Q

08

1Q 0

82Q

08

3Q 0

84Q

08

1Q 0

82Q

08

3Q 0

84Q

08

1Q 0

82Q

08

3Q 0

84Q

08

1Q 0

82Q

08

3Q 0

84Q

08

1Q 0

82Q

08

3Q 0

84Q

08

1Q 0

82Q

08

3Q 0

84Q

08

CZ EE HU LV LT PL SK SI BG RO EU10

Net exportsGross capital formationFinal consumption expenditureStat. discrepancy

Source: Eurostat, Statistical Offices, World Bank Staff calculations


Finance – slowdown in gross capital flowsFinance – slowdown in gross capital flows

Gross capital flows to emerging markets and emerging EU10 countries, USD, bln per quarter

Gross capital flows to emerging markets and

emerging EU-10 countriesbillion US dollars per quarter

020406080

10012014016018020020

07-Q

1

2007

-Q2

2007

-Q3

2007

-Q4

2008

-Q1

2008

-Q2

2008

-Q3

2008

-Q4

2009

-Q1

012345678

Banks (left axis) Bonds (left axis)

Equities (left axis) EU-10 total (right axis)

Source: World Bank Global Prospect Group, World Bank Staff calculations.


Finance – slowdown in credit growthFinance – slowdown in credit growthCredit to private sector, yoy, percent

0

10

20

30

40

50

60

70

Jan-

07

Mar

-07

May

-07

Jul-0

7

Sep

-07

Nov

-07

Jan-

08

Mar

-08

May

-08

Jul-0

8

Sep

-08

Nov

-08

Jan-

09

CZ HU PL

0

10

20

30

40

50

60

70

Jan-

07

Mar

-07

May

-07

Jul-0

7

Sep

-07

Nov

-07

Jan-

08

Mar

-08

May

-08

Jul-0

8

Sep

-08

Nov

-08

Jan-

09

EE LV LT

0

10

20

30

40

50

60

70

Jan-

07

Mar

-07

May

-07

Jul-0

7

Sep

-07

Nov

-07

Jan-

08

Mar

-08

May

-08

Jul-0

8

Sep

-08

Nov

-08

Jan-

09

BG RO

Source: European Central Bank, World Bank Staff calculations


Finance – stabilizing stock markets Finance – stabilizing stock markets Stock Market Indices (January 2008=100)

0

20

40

60

80

100

120

Jan-

08

Feb

-08

Mar

-08

Apr

-08

May

-08

Jun-

08

Jul-0

8

Aug

-08

Sep

-08

Oct

-08

Nov

-08

Dec

-08

Jan-

09

Feb

-09

Mar

-09

Apr

-09

RO BET Index PL WIG Index

HU BUX Index BG SOFIX Index

CZ PX Index SK SKSM Index

RO

SKCZ

HUPL

BG

0

20

40

60

80

100

120

Jan-

08

Feb

-08

Mar

-08

Apr

-08

May

-08

Jun-

08

Jul-0

8

Aug

-08

Sep

-08

Oct

-08

Nov

-08

Dec

-08

Jan-

09

Feb

-09

Mar

-09

Apr

-09

EE TALSE Index LV RIGSE Index

LT VILSE Index

EE

CZ

LT

LV

Source: Reuters, World Bank Staff Calculations


Finance – easing of interbank ratesFinance – easing of interbank ratesInterbank rates for selected EU10 countries (%)

1

3

5

7

9

11

13Ju

n-08

Jul-0

8

Aug

-08

Sep

-08

Oct

-08

Nov

-08

Dec

-08

Jan-

09

Feb

-09

Mar

-09

Apr

-09

May

-09

Hungary

Croatia

Latvia

Lithuania

Euro Libor (3-month)



Finance – easing of spreadsFinance – easing of spreadsEmerging Market Bond Index Global

spreads (basis points)

0

100

200

300

400

500

600

700

800

900

Jan-

08

Mar

-08

May

-08

Jul-0

8

Sep

-08

Nov

-08

Jan-

09

Mar

-09

May

-09

EMBIG composite

Poland

Bulgaria

Hungary

0

2

4

6

8

10

12

14

Jan-

08

Feb

-08

Mar

-08

Apr

-08

May

-08

Jun-

08

Jul-0

8

Aug

-08

Sep

-08

Oct

-08

Nov

-08

Dec

-08

Jan-

09

Feb

-09

Mar

-09

Apr

-09

BG CZ

HU LT

PL RO

SK EE

LV

5-Year Credit Default Swaps (%)

Source: JP Morgan. World Bank Global Prospect Group, World Bank Staff calculations.



Finance – easing of CDS of parent banksFinance – easing of CDS of parent banksEuropean Banks’ 5-year CDS (bps)

0

100

200

300

400

500

600

Jan-

08

Feb

-08

Mar

-08

Apr

-08

May

-08

Jun-

08

Jul-0

8

Aug

-08

Sep

-08

Oct

-08

Nov

-08

Dec

-08

Jan-

09

Feb

-09

Mar

-09

Apr

-09

May

-09

RZB

Societe Generale

Unicredit

Intesa

ERSTE

SEB Bank

Source: Bloomberg, Datastream, World Bank Staff calculations.


Labor – slowdown in employment growthLabor – slowdown in employment growthEmployment growth rate, yoy

-8

-6

-4

-2

0

2

4

6

8

1Q 0

7

2Q 0

7

3Q 0

7

4Q 0

7

1Q 0

8

2Q 0

8

3Q 0

8

4Q 0

8

CZ HU PL SK BG

-6

-4

-2

0

2

4

6

8

1Q 0

7

2Q 0

7

3Q 0

7

4Q 0

7

1Q 0

8

2Q 0

8

3Q 0

8

4Q 0

8

EE LV LT SI

Source: Eurostat, Statistical Offices, World Bank Staff calculations


Labor – increase in job lossesLabor – increase in job lossesNet job creation as percentage of the labor force

-0.6

-0.5

-0.4

-0.3

-0.2

-0.1

0.0

0.1

0.2

0.3

SI HU EE CZ SK LT PL RO LV BG

Oct 2007 - Mar 2008

Oct 2008 - Mar 2009

Source: European Restructuring Monitor


Labor – slowdown in wage growthLabor – slowdown in wage growthReal wage growth (% change, yoy)

-5

0

5

10

15

20

25

1Q 0

7

2Q 0

7

3Q 0

7

4Q 0

7

1Q 0

8

2Q 0

8

3Q 0

8

4Q 0

8

CZ HU PL SK

-5

0

5

10

15

20

25

1Q 0

7

2Q 0

7

3Q 0

7

4Q 0

7

1Q 0

8

2Q 0

8

3Q 0

8

4Q 0

8

EE LV LT SI

-5

0

5

10

15

20

25

1Q 0

7

2Q 0

7

3Q 0

7

4Q 0

7

1Q 0

8

2Q 0

8

3Q 0

8

4Q 0

8

BG RO

Source: Statistical Offices, World Bank Staff calculations

What we can expectWhat we can expect


Economy – recession, stagnationEconomy – recession, stagnationGDP growth in EU10, (% change, yoy)

-4

-3

-2

-1

0

1

2

3

4

5

6

7

2007 2008 2009 2010

IMF EC

Source: IMF, World Economic Outlook, EC Spring Forecast May 2009, World Bank Staff calculations.


Economy – Q1 2009 versus 2009 forecastEconomy – Q1 2009 versus 2009 forecastQ1 2009 actual versus IMF 2009 forecast, (% change, yoy)

-20

-18

-16

-14

-12

-10

-8

-6

-4

-2

0

PL BG SK SI HU CZ RO LT EE LV

1Q 09 2009 F

Source: IMF, World Economic Outlook, Central Statistical Offices, World Bank Staff calculations.


Economy – Sentiment IndicatorEconomy – Sentiment IndicatorEconomic Sentiment Indicator (long-term mean = 100)

Source: European Commission

30405060708090

100110120130

Jan-

07

Mar

-07

May

-07

Jul-0

7

Sep

-07

Nov

-07

Jan-

08

Mar

-08

May

-08

Jul-0

8

Sep

-08

Nov

-08

Jan-

09

Mar

-09

CZ HUPL SK

30405060708090

100110120130

Jan-

07

Mar

-07

May

-07

Jul-0

7

Sep

-07

Nov

-07

Jan-

08

Mar

-08

May

-08

Jul-0

8

Sep

-08

Nov

-08

Jan-

09

Mar

-09

EE LVLT SI

30405060708090

100110120130

Jan-

07

Mar

-07

May

-07

Jul-0

7

Sep

-07

Nov

-07

Jan-

08

Mar

-08

May

-08

Jul-0

8

Sep

-08

Nov

-08

Jan-

09

Mar

-09

BG RO


Economy – downturn varies in sizeEconomy – downturn varies in sizeIMF’s forecast of real GDP growth in EU10 in 2009 and 2010, (% change, yoy)

-15

-10

-5

0

5

10

LV EE LT RO CZ HU SI SK BG PL

2008 2009 2010

Source: IMF, World Economic Outlook, April 2009


Economy – downturn depends on export marketsEconomy – downturn depends on export markets

Trade weighted growth of exports markets

2009 2010Bulgaria -3,686 0,039Estonia -4,974 -0,264

Czech Republic -4,014 -0,109Hungary -4,216 -0,161Latvia -6,056 -0,550

Lithuania -5,656 -0,176Poland -4,494 -0,208

Romania -4,074 -0,157Slovak Republic -3,929 -0,177

Slovenia -4,022 -0,139Source: WIIW calculations; IMF for GDP of trading partners.

What we can expectWhat we can expectEconomy – expected downturn increases with macro imbalancesEconomy – expected downturn increases with macro imbalances

Cumulative output drop in 2009-10 vs. current account balance in 2008

RO HU CZ

PL

LVLT

EE

BG

SKSI

-16

-14

-12

-10

-8

-6

-4

-2

0

2

-25 -20 -15 -10 -5 0

Current Account Balance in 2008 as % of GDP

Cum

ulat

ive

outp

ut d

rop

(200

8-20

10)

Flexible exchange rate regime

Fixed exchange rate regime

Source: IMF, World Bank Staff calculations


Cumulative output drop in 2009-10 vs. inflation rate in 2008

ROHU

CZ

PL

LVLT

EE

BG

SK SI

-14

-12

-10

-8

-6

-4

-2

0

2

2 4 6 8 10 12 14 16

Inflation rate in 2008

Cum

ulat

ive

outp

ut d

rop

(200

8-20

10)



Source: IMF, World Bank Staff calculations


Cum. output drop in 2009-10 vs. bank-related capital inflows in 2Q 07-1Q 08

PL

CZ

HURO

SKBG

EELT

LV

-18

-16

-14

-12

-10

-8

-6

-4

-2

0

2

2 6 10 14 18 22 26 30

Bank-related capital inf low 2007 Q2 - 2008 Q1in % of GDP (2008)

Cum

ulat

ive

outp

ut d

rop

(200

8-20

10)

Flexible exchange rate regimeFixed exchange rate regime

Source: IMF, World Bank, DEC PG, World Bank Staff calculations


Trade – decline in current account deficits Trade – decline in current account deficits Forecasts of current account balance (percent of GDP)

-30

-25

-20

-15

-10

-5

0

5

CZ PL SI SK HU EE LT RO LV BG

2008 2009 2010

Source: EC Spring Forecasts, May 2009, World Bank Staff calculations


Finance – capital flows don’t recover fullyFinance – capital flows don’t recover fully

Total capital inflows during past capital account crises (% of GDP)

-6

-4

-2

0

2

4

6

t-2 t-1 t t+1 t+2 t+3 t+4 t+5

Source: World Bank Staff


Finance – markets differentiate across countryFinance – markets differentiate across country

Country-Specific Components in New EU Member States

-400

-200

0

200

400

600

Feb.1, 2008 Jul.1, 2008 Dec.1, 2008 Apr.9, 2009

Bulgaria Czech Republic EstoniaHungary Latvia LithuaniaPoland Romania Slovak Republic

-400

-200

0

200

400

600

Feb.1, 2008 Jul.1, 2008 Dec.1, 2008 Apr.9, 2009

Bulgaria Czech Republic EstoniaHungary Latvia LithuaniaPoland Romania Slovak Republic

Source: World Bank Staff


Labor – increase in unemploymentLabor – increase in unemploymentEU 10 Unemployment rates (% of the Labor Force)

0

2

4

6

8

10

12

2007 2008 2009f 2010f



Labor – unemployment increase varies in sizeLabor – unemployment increase varies in size

Forecasts of unemployment rates in EU10 countries, (percent of labor force)

0

2

4

6

8

10

12

14

16

18

CZ SI BG RO HU PL EE SK LT LV

2008 2009f 2010f



Labor – rise in unemployment linked to drop in outputLabor – rise in unemployment linked to drop in output

Cum. output drop in 2009-10 vs. change in unemployment rate in 2009-10

RO

HU

CZPL

LV LT

EE

BGSK SI

-18

-16

-14

-12

-10

-8

-6

-4

-2

0

0 2 4 6 8 10 12

Change in unemployment rate (2008-2010)

Cum

ulat

ive

outp

ut d

rop

(200

8-20

10)




What should be doneWhat should be done

What should be doneWhat should be doneFiscal policy – stimulus spending possible in some economiesFiscal policy – stimulus spending possible in some economies

G20 Fiscal Stimulus Packages, 2008-2010, % of GDP

-2 0 2 4 6 8 10

TurkeyItaly

BrazilIndia

FranceArgentinaIndonesia

UnitedJapan

MexicoCanada

KoreaGermany

RussiaSouth Africa

ChinaUnited States

AustraliaSpain

Saudi Arabia

2008 2009 2010

Source: World Bank, IMF, Staff Calculations

What should be doneWhat should be doneFiscal policy – stimulus spending not an option for most EU10 countriesFiscal policy – stimulus spending not an option for most EU10 countries

EU10 countries deficit forecasts (% of GDP)

-16

-14

-12

-10

-8

-6

-4

-2

0

2

4

BG EE HU CZ SK RO LT SI PL LV

2008 2009 2010

-10

-8

-6

-4

-2

0

2

4

BG CZ EE LV LT HU PL

2009 CP

2009 EDP

Fiscal balance 2009 - Convergence Program vs. Forecast (% of GDP)


Source: EC, Eurostat, Staff calculations

What should be doneWhat should be doneFiscal policy – stimulus spending not an option for most EU10 countriesFiscal policy – stimulus spending not an option for most EU10 countries

Ongoing procedures under article 104 of the Treaty (Excessive Deficit Procedure)

Country Date of the

Commission report

Council Decision on existence of

excessive deficit Deadline for correction

PL 13-May-09 RO 13-May-09 LT 13-May-09 MT 13-May-09 FR 18-Feb-09 27-Apr-09 2012 LV 18-Feb-09 IE 18-Feb-09 27-Apr-09 2013 EL 18-Feb-09 27-Apr-09 2010 ES 18-Feb-09 27-Apr-09 2012 UK 11-J un-08 08-J ul-08 financial year 2013/ 14 HU 12-May-04 05-J ul-04 2009

Source: EC

What should be doneWhat should be doneMonetary policy – cautious easing to support demand Monetary policy – cautious easing to support demand

Consumer Price Inflation, (annual % change, median) Policy interest rates (percent)

0

2

4

6

8

10

12

Jan-

01

Jul-0

1

Jan-

02

Jul-0

2

Jan-

03

Jul-0

3

Jan-

04

Jul-0

4

Jan-

05

Jul-0

5

Jan-

06

Jul-0

6

Jan-

07

Jul-0

7

Jan-

08

Jul-0

8

Jan-

09

EU-10

Developing Countries

High Income Countries

0

2

4

6

8

10

12

14

16

May

-08

Jul-0

8

Sep

-08

Nov

-08

Jan-

09

Mar

-09

CZ PL HURO EURO

Source: DEC PG, World Bank Staff calculations Source: Central Banks

What should be doneWhat should be doneMonetary policy – mindful about exchange rate volatilityMonetary policy – mindful about exchange rate volatility

Exchange rates vs. Euro

2021222324252627282930

Jan-0

8

Apr-

08

Jul-08

Oct-

08

Jan-0

9

Apr-

09

CZK

220

240

260

280

300

320

Jan-0

8

Apr-

08

Jul-08

Oct-

08

Jan-0

9

Apr-

09

HUF

3.03.23.43.63.84.04.24.44.64.85.0

Jan-0

8

Apr-

08

Jul-08

Oct-

08

Jan-0

9

Apr-

09

PLN

3.4

3.6

3.8

4.0

4.2

4.4

Jan-0

8

Apr-

08

Jul-08

Oct-

08

Jan-0

9

Apr-

09

RON

Source: ECB

What should be doneWhat should be doneMonetary policy – households are exposed to exchange rate risksMonetary policy – households are exposed to exchange rate risks

Foreign Currency Denominated Loans 2008, percent of bank loans to households

0

20

40

60

80

100Bu

lgar

ia

Cze

ch

Esto

nia

Hun

gary

Latv

ia

Lith

uani

a

Pola

nd

Rom

ania

Slov

ak

Arm

enia

Cro

atia

Kaza

khst

an FYR

Russ

ia

Turk

ey

Ukr

aine

EU10 Other countries

Source: National Central Banks

What should be doneWhat should be doneFinanical policy – restoring market confidence in home and host countriesFinanical policy – restoring market confidence in home and host countries

Foreign bank claims of home and on host countries (end 2007), % of GDP

0.0

10.0

20.0

30.0

40.0

50.0

60.0

70.0

80.0

Austria Belgium Greece Sw eden Netherlands Italy Germany France Sw itzerland

0

20

40

60

80

100

120

140

160

180

Home Countries (left axis)

Host Countries (right axis)

0.0

10.0

20.0

30.0

40.0

50.0

60.0

70.0

80.0

Croatia Estonia Hungary Czech Rep Bulgaria Lithuania Romania Latvia Poland

0

20

40

60

80

100

120

140

160

180

Source: BIS, World Bank Staff calculations.

What should be doneWhat should be doneFinanical policy – strengthening home-host country coordinationFinanical policy – strengthening home-host country coordination

Geographic Breakdown of Foreign Claims in the Banking Sector

EU7 and Croatia

24.2%

8.9%

9.6%

14.0%

19.1%

4.8%

0.4%

18.9%Austria

Belgium

France

Germany

Italy

Netherlands

Sw eden

Other

Baltics

66.5%

24.4%

1.9%

7.2%

Source: BIS, World Bank Staff calculations.

What should be doneWhat should be doneLabor policy – keep labor market linkages openLabor policy – keep labor market linkages open

0

1

2

3

4

5

6

Bulgaria Romania Croatia Lithuania Poland Estonia Latvia Slovenia

147

-742

861

1,4131,640

1,012

-1,000

-500

0

500

1,000

1,500

2,000

Households w ithno migrants

1. Householdsw ith citizens

born in other EUcountries

2. Householdsw ith citizens

born outside theEU

3. Householdsw ith non-

citizens fromother EUcountries

4. Householdsw ith non-

citizens bornoutside the EU

All householdsw ith migrants(Groups 1-4)

Eur

os p

er c

apita

per

yea

r

Migrant Households Tend to Pay Higher Net Taxes than Households with no Migrants Workers’ Remittances as % of GDP in 2007

Source: World Bank Staff calculations based on 2006 EU-SILC data

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