including the impact of China Hans Timmer April 7, 2016 Chief - - PowerPoint PPT Presentation

ECA Economic Update April 2016

1

Hans Timmer Chief Economist Europe and Central Asia Region

The economic outlook for Europe and Central Asia, including the impact of China

April 7, 2016 Kiev, Ukraine

• 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 the new normal.

• This is also true for the slowdown in China, which has a

pervasive impact on ECA. The impact creates both

• pportunities and challenges.
• Policies have to adjust to new circumstances.

2

Overview

3

Subdued growth in new forecast

4

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 Russian Federation Azerbaijan Moldova Kazakhstan Armenia Georgia Kyrgyz Republic Turkey Tajikistan Uzbekistan GDP growth (%) Private consumption growth (%)

5

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

6

Strong growth of agriculture in the east

• 15
• 10
• 5

5 10 15 UKR BLR RUS MDA KAZ AZE GEO KGZ ARM TUR TJK UZB

Agriculture Industry Services GDP Percentage change in 2015

• 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.

7

Big shifts in relative prices are affecting consumption and exports

8

Ruble exchange rate closely follows oil price

• 30
• 20
• 10

10 20

Monthly percentage change

US$ per ruble brent oil price in US$

• 10
• 8
• 6
• 4
• 2

2 4 6 8 10

• 4
• 3
• 2
• 1

1 2 3 4 5 6

Daily percentage changes

US$ per ruble brent oil price in US$

9

Sharp declines in remittances in 2015

• 40
• 35
• 30
• 25
• 20
• 15
• 10
• 5

BLR ARM UKR MDA KGZ GEO

Percentage growth in 2015 of remittances, deflated by import price

10

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

CHN CZE DEU DNK ESP FIN HUN ITA NLD POL SLK SWE USA

• 15
• 10
• 5

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

Change of real effective exchange rate (%) Change of export volume growth (%)

Relative price changes might require changes in monetary policy regimes:

• Oil-exporting and remittance-receiving countries need

flexible exchange rate in wake of fall in oil prices.

• Central Banks in oil-exporting countries might consider oil

price in local currency as a new policy target.

• Other Central Banks could reconsider inflation target, with

more emphasis on the GDP deflator and housing prices.

11

Central Banks need to rethink monetary policy

12

Large differences in 2015 between GDP and CPI deflators

change in 2015 over 2014 GDP deflator CPI difference percent percent percentage point Russia 6.0 15.5

• 9.5

Norway

• 2.0

2.2

• 4.2

Canada

• 0.5

1.1

• 1.6

Netherlands 0.3 0.6

• 0.3

United States 1.0 0.1 0.9 Japan 2.0 0.8 1.2 Germany 2.0 0.2 1.8 Sweden 2.0 0.0 2.0

13

Home prices recovering in most countries, but falling in oil-exporting countries

• 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 will fundamentally change labor markets, and requires new social contract.

14

Labor markets affected by cyclical and structural factors

15

Unemployment falling in the west and rising in the east

• 2.5
• 2.0
• 1.5
• 1.0
• 0.5

0.0 Change 2014-2015 Change 2015-2016

• 0.2

0.0 0.2 0.4 0.6 0.8 1.0 Kazakhstan Ukraine Turkey Russian Federation Belarus Moldova Change 2014-2015 Change 2015-2016

Percentage points

• 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

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Growth moderation and rebalancing in China

17

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

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China is catching up to the European Union

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

19

China’s share of imports by ECA has expanded rapidly

Share of imports from China in total imports, percent

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.

20

But region can export even more to China

21

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

500 1000 1500 2000 2500 Central Asia Central Europe Eastern Europe Northern Europe Russia South Caucasus Southern Europe Turkey Western Balkans Western Europe

Agriculture

Actual Predicted 5000 10000 15000 20000 25000 Central Asia Central Europe Eastern Europe Northern Europe Russia South Caucasus Southern Europe Turkey Western Balkans Western Europe

Low Skill Manufacturing

Actual Predicted 20000 40000 60000 80000 100000 120000 140000 160000 Central Asia Central Europe Eastern Europe Northern Europe Russia South Caucasus Southern Europe Turkey Western Balkans Western Europe

High Skill Manufacturing

Actual Predicted 5000 10000 15000 20000 25000 30000 35000 Central Asia Central Europe Eastern Europe Northern Europe Russia South Caucasus Southern Europe Turkey Western Balkans Western Europe

Natural Resources

Actual Predicted

22

China’s potential to increase import penetration in ECA is limited

200 400 600 800 1000 1200 Central Asia Central Europe Eastern Europe Northern Europe Russia South Caucasus Southern Europe Turkey Western Balkans Western Europe

Agriculture

Actual Predicted

5000 10000 15000 20000 25000 30000 35000 40000 45000 50000 Central Asia Central Europe Eastern Europe Northern Europe Russia South Caucasus Southern Europe Turkey Western Balkans Western Europe

Low Skill Manufacturing

Actual Predicted

20000 40000 60000 80000 100000 120000 140000 Central Asia Central Europe Eastern Europe Northern Europe Russia South Caucasus Southern Europe Turkey Western Balkans Western Europe

High Skill Manufacturing

Actual Predicted

50 100 150 200 250 300 350 400 Central Asia Central Europe Eastern Europe Northern Europe Russia South Caucasus Southern Europe Turkey Western Balkans Western Europe

Natural Resources

Actual Predicted

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

23

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

Azerbaijan Belarus Russian Federation Kazakhstan Ukraine Georgia Moldova Kyrgyz Republic Poland Turkey Sweden Cyprus Romania Greece Hungary Spain Bosnia and Herzegovina Lithuania Croatia Slovenia Estonia Slovak Republic Macedonia, FYR Ireland Finland France Bulgaria Germany Italy Latvia Denmark Luxembourg Portugal Netherlands Austria Malta Belgium Czech Republic Albania United Kingdom Armenia Tajikistan

24

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
• 1

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

Agriculture

• 14
• 12
• 10
• 8
• 6
• 4
• 2

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

High Skill Manufacturing

• 16
• 14
• 12
• 10
• 8
• 6
• 4
• 2

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

Low Skill Manufacturing

• 4
• 3
• 2
• 1

1 2 3 4 5 6 7 Central Asia Central Europe Eastern Europe Northern Europe Russia South Caucasus Southern Europe Turkey Western Balkans Western Europe

Natural Resources

25

Exchange rate depreciation could boost ECA’s exports to China

Percent change in volume of total exports

2 4 6 8 10 12 14 Central Asia Central Europe Eastern Europe Northern Europe Russia South Caucasus Southern Europe Turkey Western Balkans Western Europe

Agriculture

2 4 6 8 10 12 14 16 18 20 Central Asia Central Europe Eastern Europe Northern Europe Russia South Caucasus Southern Europe Turkey Western Balkans Western Europe

High Skill Manufacturing

5 10 15 20 25 Central Asia Central Europe Eastern Europe Northern Europe Russia South Caucasus Southern Europe Turkey Western Balkans Western Europe

Low Skill Manufacturing

2 4 6 8 10 12 14 Central Asia Central Europe Eastern Europe Northern Europe Russia South Caucasus Southern Europe Turkey Western Balkans Western Europe

Natural Resources

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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

0.5 1 1.5 Russia Kazakhstan Azerbaijan Kyrgyz Republic Ukraine Poland Bulgaria Turkey and Other ECA EU and EFTA

27

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

2 4 6 8 Russian Federation Kazakhstan Azerbaijan Kyrgyz Rep Ukraine EU and EFTA Full Rebal Slow Down

28

China’s slowdown improves wages, particularly of unskilled workers

Percent change in China slowdown versus business as usual scenarios

• 0.1

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 and Other ECA EU and EFTA wage/rental rate unskilled/skilled wages

• 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.

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Conclusions

ECA Economic Update April 2016

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Hans Timmer Chief Economist Europe and Central Asia Region

Thank you!

April 7, 2016 Kiev, Ukraine