1

Animal Spirits and Slow Recovery

Vladimir Gligorov

Contents

Recession and recovery

Issues Growth models

Recession and Recovery

Business cycle synchronisation

The better performers The Balkans The big neighbours Return of domestic demand

External environment: growth and growth forecasts

Development of GDP change in % against preceding year
USA EURO Area Germany Japan ASEAN-5* Latin America&Carrib. China NMS-11 GPS SEE Russia Ukraine Turkey

12 10 8 6 4 2 0 -2 -4 2010 2011

2012

2013

2014

2010

2011

2012

2013

2014

GPS: Greece, Portugal, Spain. ASEAN-5: Indonesia, Malaysia, Philippines, Thailand and Vietnam. NMS-11 incl. Croatia. Source: wiiw Database incorporating national and Eurostat statistics. IMF, World Economic Outlook, April 2013. European Commission, Spring Report, April 2013. wiiw forecast.

Fiscal balances, 2010-2014

Advanced economies United States Euro area

2010 -11.1 -6.2

2011 -10.0 -4.1

2012 -8.5 -3.6

Projections 2013 2014 -5.9* -2.9 -4.8* -2.6

Germany
Japan United Kingdom

-4.1
-9.3 -10.1

-0.8
-9.9 -7.9

0.2
-10.2 -8.3

-0.3
-9.8 -7.0

-0.1
-7.0 -6.4

Source: World Economic and Financial Surveys, April 2013, Table 1. *The US figures for 2013 and 2014 are updated from IMF (2013b), June 2013.

Druck! Exports of goods (nominal, euro-based)

change in % against preceding year, 3-month moving average
CZ SI 60 40 20 0 -20 HU SK PL 60 40 20 0 -20 BG LT EE LV HR RO 60 40 20 0 -20 ES IT GR PT IE

-40 -40 -40 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 ME 100 50 0 MK RS TR 100 50 0

AL 100 50 0

BA

KZ

RU

UA

-50 -50 -50 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13

Source: wiiw Monthly Database incorporating national and Eurostat statistics.

show Exports of goods (nominal, euro-based)

change in % against preceding year, 3-month moving average
CZ SI 60 40 20 0 -20 Jan-11 HU SK PL 60 40 20 0 -20 Jan-11 BG LT EE LV HR RO 60 40 20 0 -20 Jan-11 ES IT GR PT IE

Jul-11

Jan-12

Jul-12

Jan-13

Jul-11

Jan-12 MK

Jul-12 RS

Jan-13 TR

Jul-11

Jan-12

Jul-12

Jan-13

AL 60 40 20 0 -20 Jan-11

BA 60 40 20 0

ME

KZ 60 40 20 0

RU

UA

Jul-11

Jan-12

Jul-12

Jan-13

-20 Jan-11

Jul-11

Jan-12

Jul-12

Jan-13

-20 Jan-11 Jul-11 Jan-12 Jul-12 Jan-13

Source: wiiw Monthly Database incorporating national and Eurostat statistics.

Druck! Gross industrial production

change in % against preceding year, 3-month moving average
CZ SI 30 HU SK PL 30 ES IT 30 GR PT IE

BG LT

EE LV

HR RO

20
10 0 -10 -20

20
10 0 -10 -20

20
10 0 -10 -20

-30 -30 -30 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 ME 50 25 MK RS TR 30 20 10 BA 30 20 10

KZ

RU

UA

0
-25

0
-10 -20

0
-10 -20

-50 -30 -30 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13

Remark: Data refer to NACE Rev. 2. BA, ME, RU and UA until 2011 refer to NACE Rev.1. IE: Seasonally adjusted data. Source: wiiw Monthly Database incorporating national and Eurostat statistics.

show! Gross industrial production

change in % against preceding year, 3-month moving average
CZ SI 20 10 0 -10 -20 Jan-11 HU SK PL 20 10 0 -10 -20 Jan-11 ES IT 20 10 0 -10 -20 Jan-11 GR PT IE

BG LT

EE LV

HR RO

Jul-11

Jan-12

Jul-12

Jan-13

Jul-11

Jan-12 BA

Jul-12

Jan-13

Jul-11

Jan-12

Jul-12

Jan-13

ME 20 10

MK

RS

TR 20 10

KZ 20 10

RU

UA

0
-10 -20 Jan-11

0
-10 -20 Jan-11

0
-10 -20 Jan-11

Jul-11

Jan-12

Jul-12

Jan-13

Jul-11

Jan-12

Jul-12

Jan-13

Jul-11

Jan-12

Jul-12

Jan-13

Remark: Data refer to NACE Rev. 2. BA, ME, RU and UA until 2011 refer to NACE Rev.1. IE: Seasonally adjusted data. Source: wiiw Monthly Database incorporating national and Eurostat statistics.

Druck! Development of quarterly GDP

real change in % against preceding year
CZ HU PL SI SK BG EE HR LT LV RO

10

20 10 0 -10 -20 1Q'08

20 10 0 -10 -20

1Q'09

1Q'10

1Q'11

1Q'12

1Q'13

1Q'08

1Q'09 KZ

1Q'10 RU

1Q'11 UA

1Q'12

1Q'13

20 10 0 -10

MK

RS

TR

AL

ME 20 10 0 -10

-20
1Q'08 4Q'08 3Q'09 2Q'10 1Q'11 4Q'11 3Q'12

-20 1Q'08 1Q'09 1Q'10 1Q'11 1Q'12 1Q'13

Source: Eurostat and national statistics.

show! Development of quarterly GDP

real change in % against preceding year
CZ HU PL SI SK BG EE HR LT LV RO

11

10 8 6 4 2 0 -2 -4 -6 1Q'11

10 8 6 4 2 0 -2 -4 -6 1Q'13 1Q'11

1Q'12

1Q'12 KZ RU UA

1Q'13

10 8 6 4 2 0 -2 -4 -6 1Q'11

MK

RS

TR

AL

ME 10 8 6 4 2 0 -2 -4 -6 1Q'11

3Q'11

1Q'12

3Q'12

1Q'13

1Q'12

1Q'13

Source: Eurostat and national statistics.

12

GDP during the crisis

2008=100
130 120 110 100 90 80 70 BG 130 120 110 CZ EE HR 1Q 13 HU LT LV PL RO SI SK ES GR IT PT* 1Q 12 1Q 13

3Q 2008

1Q 12

100
90 80 70 ME MK RS TR AL BA RU UA KZ

1Q 2008

* PT data 2013 refer to 4Q12. Source: Eurostat, national Statistics.

13

Development of gross industrial production (real),

September 2008 = 100

Mar-12 130 120 110 100 90 80 70

Mar-13

60
CZ HU PL SI SK BG EE HR LT LV RO ES EL IE IT PT BA*ME MK RS TR KZRU*UA

* NACE Rev. 1. Source: wiiw Monthly Database incorporating national and Eurostat statistics.

4 3 2 1 0 -1 -2 -3 -4

Nov-12 Nov-12 Feb-13 Jun-13 Nov-12 BG Feb-13 Jun-13 Nov-12 HR Feb-13 Jun-13 Nov-12 CZ Feb-13 Jun-13 Nov-12 EE Feb-13 Jun-13 Nov-12 HU Feb-13 Jun-13 Eurozone

GDO growth, 2013

MK
Feb-13

2013

Jun-13 Nov-12

ME
Feb-13 Jun-13 Nov-12

RS
Feb-13 Jun-13 Nov-12

TR
Feb-13 Jun-13 Nov-12

AL
Feb-13 Jun-13 Nov-12

Revisions (November 2012, March 2013 and June 2013)

* Kosovo. Quelle: wiiw-Prognosen, Europische Kommission fr Eurozone.

Nov-12
LV Feb-13 Jun-13

BA
Feb-13 Jun-13 Nov-12

Nov-12
LT Feb-13 Jun-13 Nov-12 PL Feb-13 Jun-13

XK
Feb-13 Jun-13 Nov-12

KZ RU UA

Feb-13 Jun-13 Nov-12 Feb-13 SK Jun-13 Nov-12 RO

Nov-12 Feb-13 Jun-13 Nov-12 Feb-13 Jun-13 Nov-12

Feb-13
Jun-13

SI

Feb-13 Jun-13

14

6 5 4 3 2 1 0 -1

6 5 4 3 2 1 0 -1 Nov-12 MK Feb-13 Jun-13 Feb-13 Eurozone Nov-12

2014

Jun-13 Nov-12 BG Feb-13 Jun-13 Nov-12 HR Feb-13 Jun-13 Feb-13 Nov-12 CZ Feb-13 Jun-13 Nov-12 EE Feb-13 Jun-13 Nov-12 AL Feb-13 Jun-13 Nov-12 LV BA Feb-13 Jun-13 HU Nov-12 Feb-13 Jun-13 Nov-12 Feb-13 Jun-13 Nov-12 LT Feb-13 Jun-13 Nov-12 Jun-13 PL Nov-12 KZ RU Feb-13 RO Jun-13 Nov-12 Feb-13 SK Jun-13 Nov-12 Feb-13 Jun-13 Nov-12 Feb-13 Jun-13 Nov-12 Feb-13 Jun-13 Nov-12 Jun-13 Nov-12 ME Feb-13 Jun-13 Nov-12 RS

GDP growth, 2014

Nov-12
TR Feb-13 Jun-13

Revisions (November 2012, March 2013 and June 2013)

* Kosovo. Quelle: wiiw-Prognosen, Europische Kommission fr Eurozone.

Nov-12
XK* Feb-13

UA

Feb-13 Jun-13

SI

Feb-13 Jun-13

15

16

GDP growth, wiiw forecast 2013-2015

2013 2014 2015

2013 2014 2015

Kazakhstan
Lithuania Albania Turkey Kosovo Latvia Russia Estonia Romania Montenegro Poland

5.0
3.5 3.5 3.4 3.0 2.8 2.4 2.0 1.9 1.3 1.2

6.0
3.8 2.5 4.5 5.0 3.1 3.1 3.2 2.0 2.0 2.7

6.5
4.2 3.0 5.0 4.0 3.5 3.2 3.5 2.1 3.0 3.5

Macedonia
Slovakia Serbia Bulgaria Bosnia and Herzegovina Ukraine Hungary Czech Republic Croatia Slovenia

1.2
1.0 1.0 0.9 0.8 0.5 0.0 -0.8 -1.0 -3.3

2.2
2.4 2.0 2.0 2.0 2.5 1.2 1.4 1.0 -0.4

2.6
3.0 3.0 3.0 3.0 3.5 2.3 2.4 2.0 1.0

Source: wiiw (June 2013).

17

Recession and recovery

Divergent performances
Better performers: PL, SK, Baltics, RO, AL Worse performers: HU, CZ, Sl, Balkans (BU, HR, RS)

Big neighbours: RU, UA, KZ, TR

Overall: dimmed prospects in most parts

18

Issues

Interest rates and animal spirits

Growing out of debt Liquidity trapped or not The curious case of euro attraction Dealing with imbalances

Searching for jobs

Social and political risks

20

GDP growth in 2013 (in %)

and contribution of individual demand components in percentage points
6 4 2 0 -2 -4 -6 BG 6 4 2 0 -2 -4 1.2 1.3 1.0 HR CZ EE HU LV LT PL RO 5.0 SK SI 0.0 -1.0 -0.8 -3.3 0.9 Consumption Investment 2.0 Trade balance 2.8 3.5 1.2 1.5 1.0 GDP growth (%)

3.4

3.5 0.8

2.4 0.5

-6
MK ME RS TR AL BA KZ RU UA Source: wiiw forecast (July 2013). European Commission, Spring Report 2013.

21

GDP growth in 2014 (in %)

and contribution of individual demand components in percentage points
6 4 2 0 -2 -4 -6 BG 6 4 2 0 -2 -4 -6 MK ME RS TR AL BA KZ RU UA 2.2 2.0 2.1 HR CZ EE 4.5 2.5 2.0 HU LV LT PL RO 6.0 SK SI 2.0 1.0 Consumption 1.4 Investment 3.2 1.2 Trade balance 3.2 3.8 2.7 1.8 GDP growth (%) 2.4

-0.3

3.1

2.5

Source: wiiw forecast (July 2013). European Commission, Spring Report 2013.

22

Issues

Interest rates and animal spirits

Growing out of debt Dealing with imbalances The curious case of euro attraction Liquidity trapped or not

Searching for jobs

Social and political risks

23

Interest rates and animal spirits

Decompression and compression (sovereign)

Given the growth expectations, interest rates too high
even though they are mostly where they were before the crisis (private)

24

Spreads of 10-year sovereign debt yields to the German equivalent, %

30 2012M6 2013M3

25

20

15

10

0 CZ LV BG IE PL SK LT HR IT ES SI MK KZ RO PT HU TR RU CY AL UA GR RS

Source: ECB, National Banks; wiiw calculations.

25

Spreads of 10-year sovereign debt yields to the German equivalent, %

BG 14.0 12.0 10.0 8.0 6.0 4.0 2.0 0.0 -2.0 2007M1 CZ HU LV LT PL RO IIPS

2008M1

2009M1

2010M1

2011M1

2012M1

2013M1

Source: ECB, National Banks; wiiw calculations.

26

Spreads of 10-year sovereign debt yields to the German equivalent, %

IIPS 20.0 18.0 16.0 14.0 12.0 10.0 8.0 6.0 4.0 HR MK TR AL RS

2.0
0.0 2007M1 2008M1 2009M1 2010M1 2011M1 2012M1 2013M1

Source: ECB, National Banks; wiiw calculations.

27

Interest rates on loans to non-financial corporations, value below 1 EUR million, maturity between 1 and 5 years, %
DE 8.5 IE ES IT NL AT SI SK

7.5

6.5

5.5

4.5

3.5

2.5 2004Q1

2005Q1

2006Q1

2007Q1

2008Q1

2009Q1

2010Q1

2011Q1

2012Q1

2013Q1

Source: ECB, National Banks; wiiw calculations.

28

Impact of sovereign yield spread on interest rates

(big loans and small loans); impact of interest rates on gross investment

big-loan spread_lag big-loan_lag small-loan_lag crisis ecb const Number of observations R2 0.060*** (0.018)

small-loan 0.140*** (0.036)

gfcf

gfcf

-1.460*** (0.405) -1.713*** (0.939)

-1.298*** (0.250)
-0.693** (0.324) 5.281*** (0.153) 253 0.203

-1.046*** (0.183)
-0.342** (0.134) 5.498*** (0.171) 309 0.313

-10.455*** (2.278)
-0.793 (2.253) 10.366*** (1.681) 409 0.290

-10.320*** (2.125)
-0.889 (2.180) 12.682** (5.200) 491 0.321

Standard errors are in parentheses; *** denotes 1% significance, ** 5% significance, * 10% significance

29

Interest rates - loans to non-financial corporations

domestic currency, amount outstanding, maturity >5 years, % p.a.
CZ 20 15 10 5 0 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 ES 20 15 10 5 0 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 GR IE IT PT 20 15 10 5 0 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 HU PL SI SK 20 15 10 5 0 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 MK ME RS KZ BG LT EE LV HR RO

Remark: Croatia: Long-term. Montenegro: Over one year. Serbia: Refers to all currencies . Source: Eurostat, National bank statistics.

30

Interest rates - loans to households for housing

in domestic currency, amount outstanding, maturity >5 years, % p.a.
CZ 20 15 10 5 0 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 ES 20 15 10 5 0 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Remark: Kazakhstan: Loans to individuals. Source: Eurostat, National bank statistics. GR IE IT PT 20 15 10 5 0 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 HU PL SI SK 20 BG EE LT LV RO

15
10 5 0 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 KZ

31

Interest rates on loans outstanding

domestic currency, maturity > 5 years, % p.a.
loans to non-financial corporations
20 15 10 5 0 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 CZ HU PL SI SK 20 15 10 5 0 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 BG EE HR LT LV RO

loans to households for housing

20 15 10 5 0 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 CZ HU PL SI SK 20 15 10 5 0 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 BG EE LT LV RO

Source: Eurostat, National Bank statistics.

33

Non-performing loans % total loans

35 30 25 20 15 10 5 0 BG 35 30 25 20 15 10 HR CZ EE HU LV LT PL RO SK SI 2009 2010 2011 2012 Mar-13

5
0 MK ME RS TR AL BA KZ RU UA

Source: National banks statistics, wiiw calculations.

34

Gross fixed capital formation

real change in % against preceding year
60 40 20 0 -20 -40 -60 1Q'08 1Q'09 1Q'10 1Q'11 1Q'12 1Q'13 CZ HU PL SI SK 60 40 20 0 -20 -40 -60 1Q'08 1Q'09 1Q'10 KZ 60.0 40.0 20.0 1Q'11 RU
KZ 71.5

BG

EE

HR

LT

LV

RO

1Q'12 UA

1Q'13

60.0 40.0 20.0 0.0 -20.0 -40.0 -60.0 1Q'08

MK*

RS

TR

0.0
-20.0 -40.0 -60.0 1Q'09 1Q'10 1Q'11 1Q'12 1Q'13 1Q'08 1Q'09 1Q'10 1Q'11 1Q'12 1Q'13

* Macedonia: Gross Capital Formation

Source: Eurostat and national statistics.

35

Gross fixed capital formation, public sector

real change in % against preceding year

2011 30 20 10 0 -10

2012

-20 -30
BG CZ EE HU LV LT PL RO SK SI MK TR KZ UA

Estonia 2012: 39.7% Source: National and Eurostat statistics, wiiw own calculations.

36

Private and public investments,

average growth p.a., 2006-2012
20.0

15.0

10.0 private

5.0

0.0

-5.0

-10.0 -15.0

-10.0

-5.0

0.0

5.0

10.0

15.0

public

Source: Eurostat, wiiw own calculations.

37

Fiscal policy, public debt, public and private investment

Fiscal policy largely restrictive Public debt situation depends on growth: 5 percent
nominal growth would largely resolve the sovereign debt issue

Mostly negative developments in public investments Private investment gets no/little stimulus from public
investment

38

Total fiscal revenues,

in % of GDP
CZ 60 50 40 30 20 2007 2008 AT IE 2009 DE IT 2010 ES PT 2011 2012 GR 55 50 50 40 30 20 2007 2008 2009 2010 2011 2012 45 40 35 30 25 SI HU SK PL 60 50 40 30 20 2007 2008 AL 2009 BA 2010 ME 2011 MK 2012 RS

BG
LT

EE
LV

HR
RO

60

20
2007 2008 2009 2010 2011 2012

ESA'95 definition for all EU countries, national definition for the rest of the countries. Sources: Eurostat, Government Finance Statistics (IMF), National Ministries of Finance, National Banks.

39

Total fiscal expenditures,

in % of GDP
CZ 60 50 40 30 20 2007 2008 2009 2010 2011 2012 SI HU SK PL 60 50 40 30 20 2007 2008 AL 60 50 40 30 20 2007 2008 2009 2010 2011 2012 2007 2008 2009 2010 2011 2012 MK 2009 2010 BA RS 2011 2012 ME BG LT EE LV HR RO

AT
60 50 40 30 20 IE

DE
IT

ES
PT

GR

Remark: Ireland: 2010 66.1%. ESA'95 definition for all EU countries, national definition for the rest of the countries. Sources: Eurostat, Government Finance Statistics (IMF), National Ministries of Finance, National Banks.

40

Public debt in % of GDP, 2002, 2008 and 2012

100 80 60 40 20 0

2008

2012

BG 80 60 40 20 2008

HR 2012

CZ

EE

HU

LV

LT

PL

RO

SK

SI

0
MK ME RS TR AL BA KZ RU UA

Source: Eurostat, IMF, wiiw own calculations.

41

Implicit interest rates on public debt compared with GDP growth

30 25 20 15 10 5 0 -5 -10

Greece

30 25 20 15 10 5 0 -5

Germany

30 25 20 15 10 5 0 -5

IIR

GDP

Serbia

-10 -10 2000 2002 2004 2006 2008 2010 2012 2014 2000 2002 2004 2006 2008 2010 2012 2014 2000 2002 2004 2006 2008 2010 2012 2014

30 25 20 15 10 5 0 -5

Croatia

30 25 20 15 10 5 0 -5

Czech Republic

30 25 20 15 10 5 0 -5

Hungary

-10

-10 -10 2000 2002 2004 2006 2008 2010 2012 2014 2000 2002 2004 2006 2008 2010 2012 2014 2000 2002 2004 2006 2008 2010 2012 2014

Source: Eurostat, AMCEO.

42

Liquidity trapped or not

M1 rising but not M2 and M3 in reserve currencies

(liquidity trap)

But not in non-reserve currency countries

43

Money M1 change in % against preceding year

60 40 CZ HU PL SI SK 60 40 BG EE HR LT LV RO

20
0 -20 -40 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 AL BA ME MK RS

20
0 -20 -40 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 KZ RU UA

60 40 20 0 -20

60 40 20 0 -20

-40 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13

-40 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13

Source: wiiw Monthly Database incorporating National bank statistics.

44

Money M2 change in % against preceding year

60 40 CZ HU PL SI SK 60 40 BG EE HR LT LV RO

20
0 -20 -40 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 AL BA ME MK RS

20
0 -20 -40 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 KZ RU UA

100 50 0

60 40 20 0 -20

-50 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13

-40 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13

Source: wiiw Monthly Database incorporating National bank statistics.

45

Money M3 change in % against preceding year

60 40 CZ HU PL SI SK 60 40 BG EE HR LT LV RO

20
0 -20 -40 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 MK

20
0 -20 -40 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 KZ UA

40 30 20 10 0

60 40 20 0 -20

-10 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13

-40 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13

Source: wiiw Monthly Database incorporating National bank statistics.

46

Euro attraction

Reserves mostly in euro very high: on average 35

percent of GDP

Less in Russia, Turkey, other big neighbours

Euro and nominal vs. real stability

Exchange rate regime and trade

47

Exchange rates, consumer prices and wages 2005-2013 change in % against preceding year
Real exchange rates, EUR per NCU, CPI-deflated* 30 20 10 0 -10 -20 -30 Jan-05 Consumer price inflation 30 20 10 0 -10 -20 -30 Jan-05 Real gross monthly wages

Czech Republic

Hungary

Jan-07

Jan-09

Jan-11

Jan-13

Jan-07

Jan-09

Jan-11

Jan-13

30 20 10 0 -10 -20 -30 Jan-05

Slovakia

Jan-07

Jan-09

Jan-11

Jan-13

30 20 10 0 -10 -20 -30 Jan-05

Bulgaria

Jan-07

Jan-09

Jan-11

Jan-13

* positive values indicates real appreciation Source: wiiw Monthly Database incorporating national and Eurostat statistics.

48

Exchange rates, consumer prices and wages 2005-2013 change in % against preceding year (ctd.)
Real exchange rates, EUR per NCU, CPI-deflated* Consumer price inflation Real gross monthly wages

30 20 10 0 -10 -20 -30 Jan-05

30 20 10 0 -10 -20 -30 Jan-05

Latvia

Jan-07

Jan-09

Jan-11

Jan-13

30 20 10 0 -10 -20 -30 Jan-05

Croatia

Jan-07

Jan-09

Jan-11

Jan-13

Romania

30 20 10 0 -10

Serbia

Jan-07

Jan-09

Jan-11

Jan-13

-20 Jan-05

Jan-07

Jan-09

Jan-11

Jan-13

* positive values indicates real appreciation Source: wiiw Monthly Database incorporating national and Eurostat statistics.

49

Exchange regime, trade and GDP growth, average p.a., 2009-2012

exports 12 10 exports and imports 8 6 4 2 0 -2 -1.5 -1 -0.5 0 GDP Note: Currency boards (BG, LT, LV, BA); Fixed (HR, MK); Float (CZ, PL, HU, RU, RS, AL); Euro (EE, SI, SK); Other (KZ, UA; RU, TR). Source: wiiw Annual Database incorporating national and Eurostat statistics, wiiw own calculations. 0.5 1 1.5 2 2.5
Fixed
Euro

imports
Other

Currency boards

Float

50

Dealing with imbalances

Non-optimal currency area policies

Contain imbalances External, fiscal, financial, labour market

The Macroeconomic Imbalance Procedure (MIP) Scoreboard with values for 2012
Year 2012 3 year average of Current Account Balance as % of GDP Net International Investment Position as % of GDP % Change % Change (3 years) of (5 years) in Real Effective Export Market Exchange Rate Shares with HICP deflators % Change (3 years) in Nominal unit labour cost % y-o-y change Private Sector Private Sector in deflated Credit Flow Debt House Prices as % of GDP as % of GDP General Government Debt as % of GDP

51
Unemployment y-o-y % change rate in Total 3-year average Financial Sector Liabilities, nonconsolidated data 10% 11.3 13.7 7.0 13.1 11.0 16.7 15.5 9.8 7.2 14.0 8.1 4.3 7.7 6.2 18.2 14.4 9.2 13.3 22.3 31.5 19.7 22.1 9.2 14.2 27.6 5.5 6.4 7.8 16.5% 5.6 2.9 4.4 -4.4 -7.5 -4.5 8.9 4.4 4.3 1.2 -0.8 -0.3 -4.2 2.1 -3.9 -0.7 3.8 -3.6 3.7 4.9 7.0 10.2 14.4 5.1 4.2 10.2 21.5 13.1
1) 1) 1) 1) 1) 1) 1) 1) 1) 1) 1) 1) 1) 1) 1) 1)

Thresholds Bulgaria Croatia Czech Republic Estonia Hungary Latvia Lithuania Poland Romania Slovakia Slovenia Austria Belgium Germany Greece Ireland Italy Portugal Spain Macedonia Montenegro Serbia Turkey Albania Bosnia and Herzegovina Kazakhstan Russia Ukraine

-4%/+6% -0.9 -0.6 -3.0 1.3 1.2 -0.3 -1.4 -4.5 -4.3 -1.2 0.6 2.2 -0.2 6.5 -7.7 2.4 -2.4 -6.4 -3.1 -3.0 -19.5 -9.0 -7.3 -11.7 -7.9 3.8 4.6 -5.6

-35% -80.8 -88.1 -49.7 -53.0 -103.3 -65.1 -52.2 -65.7 -64.5 -63.8 -44.6 0.5 66.8 40.5 -114.1 -95.8 -24.4 -116.7 -93.0 -55.8 . -92.5 -51.3 -41.4 -59.3 -12.2 7.8 -32.9
1) 1) 1)

5% & 11% 3.1 -3.3 0.3 0.8 -3.3 -0.6 3.6 -10.9 -2.4 4.3 -0.3 -1.0 -0.5 -3.9 3.1 -9.1 -2.1 -1.9 -1.3 0.6 -0.1 -1.6 . -3.9 0.1 21.2 24.7 16.4
2) 2) 2) 2) 2) 1) 2) 1) 1) 1) 1) 1) 1) 1) 1) 1) 1) 1) 1) 1) 1) 1) 1) 1) 2) 2) 2)

-5% 5.0 -24.1 -3.8 6.8 -16.6 12.0 30.0 0.6 4.9 4.7 -19.5 -20.5 -15.7 -12.7 -27.0 -15.7 -23.4 -15.5 -14.2 -7.3 -12.8 -0.5 11.9 4.5 -29.6 44.4 16.6 8.5

+9% & +12% 9.0 -3.9 3.3 -2.3 5.7 -5.9 -5.2 3.3 4.8 -1.2 0.5 4.1 6.2 3.2 -8.1 -9.4 3.0 -5.7 -6.7 0.4 0.2 9.8 . 3.7 0.5 33.8 30.9 45.7
3) 3) 3) 3) 3) 3) 3) 3) 3)

+6% -5.3 . 4) -3.6 3.7 -8.5 0.7 -3.4 -5.8 -9.2 -5.7 -8.6 -7.9 -0.4 1.4 -5.1 -12.8 -5.3 -9.1 -15.8 . 4) . . . . . . . .
4) 1) 1) 1) 1)

+15% -6.7
1)

160% 146.0 144.2 78.6 132.9 150.1

1) 1) 1) 1) 1) 1) 1) 1)

60% 18.5 53.0 45.8 10.1 79.2

1) 1) 1) 1) 1)

. 5) 2.8 6.8 -7.8 -2.5 -0.8 7.1 1.8 3.3 -4.1 4.1 9.4 4.8 -6.4 4.0 2.6 -6.1 -4.1
1) 1) 1) 1) 1) 1) 1)

125.1 70.1 79.5 71.8 76.3 125.2 160.7 241.3 127.8 130.3 309.5 128.6 255.6 218.1 47.1 54.7 56.3 46.3 41.3 58.1 39.5 49.9 56.0

40.7 40.7 55.6 37.8 52.1 54.1

1)

73.4 99.6

1)

81.9 156.9

1) 1)

117.6 127.0 123.6

1)

84.2 36.0 51.9 58.9 36.8 58.6 43.1 12.7 9.6 36.6

. 5) . 5) . 5) . . 5) . . . .
5)

1) Year 2011. - 2) Real exchange rate with CPI deflators. - 3) Gross wages per employee relative to labour productivity (real GDP per employed person, LFS). - 4) We do not have data, but it is likely that house prices have fallen. - 5) We don't have the data, but it is highly likely that private credit flows are well below the threshold.

Sources: Eurostat, National Statistics, wiiw calculations.

53

Labour markets

Adjustment processes take place through declining employment

Employment rates in some instances at very low levels High youth and long-term unemployment

Expected prolonged correction of real wages

55

Employment rates either fall or stagnate

Employment rates total (15-64, LFS)

1Q 08 70 65 60 55 50 45 40 35

1Q 13

30
CZ HU PL SI SK BG EE HR* LT LV RO ME* MK TR

* Data 1Q 2013 refer to 4Q 2012. Source: wiiw Monthly Database incorporating national and Eurostat statistics.

56

Social tensions and political adjustments

Two directions:

In less democratic polities, polarisation between autocratic

tendencies and popular/ist demands for democratisation

In more stable democracies either collapse of the existing party

systems or more intense ideological competition (emergence of more radical parties)

Examples: Balkans (BU, Sl, RS, Bosnia); HU, CZ, TR, RU; EUSouth: Greece, Italy

57

EU and stability vs. polarisation or a shift in policy space

voters

left

right

58

Whither convergence growth?

Stress on imbalances
The implication is that there should be more reliance on domestic
savings and investments

Not much support for cross-border investments until bank union

and fiscal union issues are resolved

Significant national action on sustainability of balances needed to

switch to the new growth model

59

Returning to forecasts

This year and the next:

- some recovery with downside risks

Medium term:
- continued growth below potential - restructuring to adapt to new growth model

Longer term:
- some succeed, others do not - most likely scenario: club convergence, inter-club divergence