world bank eu10 regular economic report safeguarding recovery brussels, 16 july 2010

World BankEU10 Regular Economic Report

Safeguarding RecoveryBrussels, 16 July 2010

MESSAGES

• Return to growth but volatile financial markets, fiscal pressures, and high unemployment cast shadow on future prospects

• Bolstering financial sector stability, shoring up fiscal sustainability, and tackling structural unemployment are essential for safeguarding the recovery

Return to Growth

Back in positive territory …

Source: Eurostat, World Bank staff calculations

Year-on-year GDP growth in EU10 and EU15, percent

… helped by the base effect …


Quarter-on-quarter GDP growth in EU10 and EU15, percent

… with continued contraction in some countries

Year-on-year GDP growth in EU10 and EU15, percent


-20

-15

-10

-5

0

5

10

15

1Q 0

7

2Q 0

7

3Q 0

7

4Q 0

7

1Q 0

8

2Q 0

8

3Q 0

8

4Q 0

8

1Q 0

9

2Q 0

9

3Q 0

9

4Q 0

9

1Q 1

0

BG

CZ

EE

LV

LT

HU

PL

RO

SI

SK

Recovery will be slow …

Source: Convergence Program Updates 2010, EC Spring Forecast 2010, World Bank

Forecasted GDP growth rates, percent

… synchronized with EU15 …


EU10 and EU15 GDP growth, exports growth, credit growth, percent

-30

-20

-10

0

10

20

30

40

1Q 0

7

2Q 0

7

3Q 0

7

4Q 0

7

1Q 0

8

2Q 0

8

3Q 0

8

4Q 0

8

1Q 0

9

2Q 0

9

3Q 0

9

4Q 0

9

1Q 1

0

EU15_Credit EU15_Growth EU15_Exports

EU10_Credit EU10_Growth EU10_Exports

… reliant on net exports in 2010…

Source: EC Ameco database, World Bank staff calculations

Forecasted contribution of net exports and domestic demand to GDP growth in EU10 and EU15 countries, percent

… and public investment in 2010 and 2011 …


Forecasted growth of consumption and investment in EU10 and EU15 countries, percent

-15

-10

-5

0

5

10

2009 2010 2011 2009 2010 2011

EU10 EU15

Public investment Private investment

-15

-10

-5

0

5

10

2009 2010 2011 2009 2010 2011

EU10 EU15

Public consumption Private consumption

… and varied within EU10

Source: World Bank

Forecasted GDP growth rates for EU10 countries, percent

-18.0

-14.8 -14.1

-7.8 -7.1 -6.3-5.0 -4.7 -4.1

1.8

-3.5

0.5 1.0 1.5

-0.5

0.9 0.2

3.71.9

3.03.3 3.14.0

2.13.6 3.0

2.0

4.02.9

3.7

-20

-15

-10

-5

0

5

LV LT EE SI RO HU BG SK CZ PL

2009 2010 2011

Volatile Financial Markets

Risk appetite receding …

Source: Bloomberg, Reuters, World Bank staff calculationsNotes: Decrease indicates deterioration

Asset class performance, percent change

0102030405060708090100

-900-800-700-600-500-400-300-200-100

0100

2008 peak 2009 trough 2010 peak current

Banks 5Y CDS spreads Sovereign 5Y CDS spreads

Interbank rates spreads Stocks market performance (RHS)

… and capital flows stalling in May …

Source: DECPG, World Bank staff calculations

Capital inflows to global emerging markets, USD billions

0

20

40

60

80

100

120

1Q 0

8

1Q 0

9

1Q 1

0

Jan-

10

Feb-

10

Mar

-10

Apr

-10

May

-10

Total flows to Emerging Markets Flows to Eastern Europe

… and negative credit growth to enterprises in most countries

Source: ECB, World Bank staff calculations

Credit growth from December 2009 to April 2010, percent

-3

-2

-1

0

1

2

3

4

5

EU10 PL CZ RO SI SK HU BG EE LV LT

Credit to HHS Credit to enterprises Credit growth

Fiscal Pressures

As financial markets focus on sovereign debt …


MT

CY BE

DKDE

IEGR

ES

FR

IT

LU

NL

AT

PT

FI

SE

UK

BG

CZ

EE

LVLT

HU

PL

RO

SI

SK EU15EU10

-16

-14

-12

-10

-8

-6

-4

-2

0

0 20 40 60 80 100 120 140

Fisc

al d

efici

t as

perc

ent o

f GD

P, 2

009

Public debt as percent of GDP, 2009

Forecasted general government overall and primary deficits in EU10 and EU15

Source: Convergence and Stability Program Updates from January/February 2010, EC Spring Forecast 2010, World Bank staff calculations

… governments reduce fiscal deficits gradually …

-4.2 -3.9-3.5

-4.3

-3.3

-2.2

-4.3 -4.5

-3.6

-6.5 -6.4 -6.1-6.5

-5.8

-4.7

-7.2 -7.4

-6.7

-8

-7

-6

-5

-4

-3

-2

-1

0

2009 2010 2011 2009 2010 2011 2009 2010 2011

EU10_EC EU10_CP EU15_EC

Forecasted general government debt in EU10 countries and EU15


… to keep public debt sustainable

0

10

20

30

40

50

60

70

80

90

CP EC CP EC

EU10 EU15

2009

2010

2011

High Unemployment

Unemployment remains high …


Forecasted unemployment rates for EU10 countries, percent

7.5

8.0

8.5

9.0

9.5

10.0

2009 2010 2011

EU10 EU15

… especially for young and less educated …


Change in unemployment rate by subgroup, percent

0

5

10

15

20

25

EU10 EU15 EU10 EU15 EU10 EU15

Overall Young Less educated

1Q 08 Increase up to 1Q 10

… and in Latvia, Estonia, Lithuania & Slovakia …


Forecasted unemployment rates, percent

4

6

8

10

12

14

16

18

20

22

SI CZ BG RO PL HU SK LT EE LV

2009

2010

2011

… with employment falling more than output in few countries …


Change in output vs. change in employment, percent

-25

-20

-15

-10

-5

0

5

EU15 EU10 LV EE LT SI RO BG HU CZ SK PL

Change in output 1Q 08 - 1Q 10 Change in employment 1Q 08 - 1Q 10

… even though wages are moderating in most countries

Total nominal hourly labor costs, % change, yoy, working day adjusted

Source: Eurostat, World Bank staff calculations.

-15

-10

-5

0

5

10

15

LT LV EE CZ HU SK AT MT PT NL PL DE CY ES LU

EU27 NO SE FR UK SI FI

*RO BG

Safeguarding Recovery

Answering the 1.7% question …Potential growth in 2007 and 2011 by EU member country

Source: European Commission Ameco database, World Bank staff calculations.

EU10

BGCZ

EE

LV

LTHU

PL

RO

SI

SK

EU15

BE

DK

DE

IE

GRESFRIT

LU

NLAT

PT

FI

SE

UK

-4

-2

0

2

4

6

8

-4 -2 0 2 4 6 8

Pote

ntial

gro

wth

in 2

011

Potential growth in 2007

… requires a stable European banking system with stable exposure to EU10 region …

European Banks’ 5-year CDS (bps)

Source: Bloomberg, Datastream, World Bank staff calculations

0

100

200

300

400

500

600

Jan-

08

Apr

-08

Jul-0

8

Oct

-08

Jan-

09

Apr

-09

Jul-0

9

Oct

-09

Jan-

10

Apr

-10

Jul-1

0

Raiffeisen

Deutsche Bank

Soc Generale

Unicredit

Intesa

ERSTE

SEB Bank

… and lower expenditures and higher revenues …

Composition of fiscal deficit reduction from 2009 to 2011, percent of GDP


… to keep borrowing costs low …

Yield curves, percent

Source: Bloomberg, World Bank staff calculations

PL 1.03.2009

PL 1.02.2010

PL 7.07.2010

RO 1.03.2009

RO 1.02.2010

RO 7.07.2010

0

2

4

6

8

10

12

14

16

1M 2M 3M 6M 1Y 2Y 3Y 4Y 5Y 8Y 10Y 20Y 30Y

CZ 1.03.2009

CZ 1.02.2010 CZ 7.07.2010

HU 1.03.2009

HU 1.02.2010 HU 7.07.2010

0

2

4

6

8

10

12

14

16

3M 6M 1Y 2Y 3Y 4Y 5Y 6Y 7Y 9Y 10Y 11Y 13Y 15Y 30Y

… as well as more people working longer… Employment rate of 15-64 year-olds, EU27=100


50

52

54

56

58

60

62

64

66

68

70

HU RO PL LT SK LV BG EE CZ SI

2003 2009

EU15 2003

EU15 2009

… in productive jobsChange in employment by a skill level from 1Q 08 to 1Q 10, percent


-40

-35

-30

-25

-20

-15

-10

-5

0

5

10

BG CZ EE LV LT HU PL RO SI SK

White collar workers Blue collar workers Employment growth

… also to get ready for the euro area

Compliance with convergence criteria, March to May 2010

Source: Poland Ministry of Finance, World Bank staff calculations.

Government

deficit Government debt

Inflation rate

Long-term interest rates

ERM II Membership

2010 Reference

value below 3% of GDP below 60% of GDP

less than 0.8%

less than 6.0% minimum 2

years BG

CZ

EE

LV

LT

HU

PL

RO

SI

Euro Area

SK

Euro Area

THANK YOU

For more information visit:www.worldbank.org/eca/eu10rer

[email protected]

http://www.worldbank.org/eca/eu10rer

http://www.worldbank.org/eca/eu10rer

world bank eu10 regular economic report safeguarding recovery brussels, 16 july 2010

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