European Economic Forecast - Spring 2011ec.europa.eu/economy_finance/publications/european...European Economic Forecast Spring 2011 EUROPEAN ECONOMY 1/2011 CONTENTS iii Overview 1

ISSN 0379-0991

European EconomicForecast - Spring 2011EUROPEAN ECONOMY 1|2011

EUROPEAN COMMISSION

The European Economy series contains important reports and communications from the Commissionto the Council and the Parliament on the economic situation and developments, such as the Economicforecasts, the annual EU economy review and the Public finances in EMU report.

Subscription terms are shown on the back cover and details on how to obtain the list of sales agentsare shown on the inside back cover.

Unless otherwise indicated, the texts are published under the responsibility of theDirectorate-General for Economic and Financial Affairs of the European Commission, BU24, B-1049Brussels, to which enquiries other than those related to sales and subscriptions should be addressed.

LEGAL NOTICE

Neither the European Commission nor any person acting on its behalf may be heldresponsible for the use which may be made of the information contained in thispublication, or for any errors which, despite careful preparation and checking, may appear.

More information on the European Union is available on the Internet (http://europa.eu).

Cataloguing data can be found at the end of this publication.

Luxembourg: Publications office of the European Union, 2011

ISBN 978-92-79-19146-6

10.2765/10433

© European Union, 2011

Reproduction is authorised provided the source is acknowledged.

Printed in Luxembourg

doi:

Printed on Elemental Chlorine Free bleached paper (ECF)

European CommissionDirectorate-General for Economic and Financial Affairs

COMMISSION STAFF WORKING DOCUMENT

European Economic ForecastSpring 2011

EUROPEAN ECONOMY 1/2011

CONTENTS

iii

Overview 1

PART I: Economic developments at the aggregated level 51. European recovery maintains momentum amid new risks 7

1.1. A subdued recovery in its third year 71.2. The external environment 101.3. Financial markets in Europe 141.4. The economic recovery in the EU 171.5. Heightened uncertainty 36

2. Macroeconomic impact of higher sovereign risk 402.1. Introduction 402.2. Measuring the increase in the sovereign-risk premium 412.3. Impact of sovereign risk on public sector activity 462.4. Effects of higher sovereign risk on the financing of the corporate sector 482.5. Spillover to private consumption via wealth and confidence effects 55

3. Developments in and prospects for saving and investment trendsacross the European Union and the euro area 603.1. Introduction 603.2. Aggregate and Sectoral patterns in saving and investment 613.3. An assesment of potential driving forces behind developments in Saving

and investment 653.4. Near-term adjustment prospects for saving and investment 76

PART II: Prospects by individual economy 79

Member States 811. Belgium: Recovery continues as labour market improves 822. Bulgaria: Moderate recovery alongside ongoing fiscal

consolidation 853. The Czech Republic: A moderate recovery driven by external

demand 884. Denmark: A gradual and moderate recovery 915. Germany: Steady, broad-based growth supported by sound

fundamentals 946. Estonia: Economic recovery gaining further ground 987. Ireland: Ready for a gradual recovery after facing up to the full

costs of the banking crisis 1018. Greece: Rebalancing growth amidst ongoing fiscal

consolidation 1059. Spain: Subdued growth despite strong external demand 10810. France: Continued recovery increasingly supported by

investment 11211. Italy: Slow recovery continues 11612. Cyprus: Imbalances weighing on the economic recovery 12013. Latvia: Economic and budgetary re-balancing continues at full

speed 12314. Lithuania: Strong recovery as domestic demand picks up 12615. Luxembourg: Strong growth, but still below pre-crisis average

pace 129

16. Hungary: Recovery firming up, with a gradual rebalancing ofgrowth 131

17. Malta: Moderate growth outlook after a strong rebound in 2010 13518. The Netherlands: Gradual rebalancing of growth 13819. Austria: Stronger growth, but subject to greater risk 14120. Poland: Recovery continues as strong private demand

counterbalances rapid fiscal consolidation 14421. Portugal: Times of adjusting and rebalancing 14722. Romania: Signs of recovery after a long recession 15023. Slovenia: Momentum slow to build after particularly pronounced

downturn 15324. Slovakia: An externally-driven recovery continues 15625. Finland: Economic recovery on a firm path 15926. Sweden: Strong growth set to moderate as recovery matures 16227. The United Kingdom: New growth sources to sustain the

moderate recovery 165

Candidate Countries 16928. Croatia: Sluggish growth in the run-up to EU accession 17029. The former Yugoslav Republic of Macedonia: Between post-crisis

and catching-up 17330. Iceland: Slow recovery after long and severe recession 17531. Montenegro: A recovery of sorts 17832. Turkey: Robust growth driven by private sector demand 180

Other non-EU Countries 18333. The United States of America: A subdued recovery after the

financial crisis 18434. Japan: Darkened outlook after the earthquake 18735. China: A soft landing? 19036. EFTA: Well beyond the crisis 19337. Russian Federation: V-shaped recovery continues 196

Statistical Annex 201

LIST OF TABLESI.1.1. International environment 10I.1.2. Main features of the spring 2011 forecast - EU 17I.1.3. GDP growth forecast, additional features 18I.1.4. Main features of the spring 2011 forecast - euro area 18I.1.5. Euro-area debt dynamics 36I.2.1. CDS spreads of sovereign debt 43I.2.2. OLS Regression: Relationship between the change in bond

spreads and public debt 46I.2.3. Simulations of bank losses of 1% of GDP: Impact in first year. 55I.3.1. Main long-run determinants of the private sector gross

saving ratio 72I.3.2. Main long-run determinants of the priv. investment ratio 75

iv

LIST OF GRAPHSI.1.1. Real GDP, EU 7I.1.2. Comparison of recoveries, current against past average -

GDP, euro area 8I.1.3. A global multi-speed recovery - real GDP, annual growth 8I.1.4a. GDP per capita, advanced economies 8I.1.4b. GDP per capita, emerging and developing economies 8I.1.5a. A multi-speed recovery in the EU - real GDP, annual growth

(unweighted) 9I.1.5b. A multi-speed recovery in the EU - real GDP, annual growth

(unweighted) 9I.1.6. Real GDP 2008-10 9I.1.7. World trade and PMI global manufacturing output 10I.1.8. Commodity-price developments 11I.1.9. Policy interest rates, euro area, UK and US 14I.1.10. Bank lending to households and non-financial corporations,

euro area 16I.1.11. Government-bond yields, selected Member States 16I.1.12. Corporate spreads over euro-area government benchmark

bonds 16I.1.13. Stock-market performance 17I.1.14. Real GDP, euro area 17I.1.15. Industrial new orders and industrial production, EU 18I.1.16. Economic Sentiment Indicator and PMI composite index, EU 20I.1.17. EU real GDP growth 2010-12, largest contributions by

Member States 20I.1.18. Economic Sentiment Indicator (ESI) and components - April

2011, difference from long-term average 22I.1.19. PMI manufacturing output index 22I.1.20. GDP growth and its components, EU 22I.1.21. Private consumption and consumer confidence, euro area 23I.1.22. Expected major purchases over the next year and car sales,

EU 23I.1.23. Retail trade volumes and retail confidence, euro area 23I.1.24. Private consumption, real disposable income and saving

rate, euro area 24I.1.25. Equipment investment and capacity utilisation in

manufacturing, euro area 25I.1.26. Profit growth, euro area 25I.1.27. Housing investment and building permits, euro area 26I.1.28. Global demand, euro-area exports and new export orders 27I.1.29. Current-account balances, euro-area Member States 28I.1.30. Current-account balance for deficit and surplus EU Member

States 28I.1.31. The labour market, EU 29I.1.32. Industrial producer prices, euro area 30I.1.33. PMI manufacturing input prices and output prices, EU 31I.1.34. HICP, euro area 31I.1.35. Inflation breakdown, EU 31I.1.36. Inflation expectations, euro area 32I.1.37. Inflation dispersion of euro area Member States - HICP

inflation rates 32I.1.38. General government budget balance 35

v

I.1.39. Taxes and expenditure, euro area 36I.1.40. Euro area GDP forecasts - Uncertainty linked to the balance

of risks 37I.2.1. Sovereign-bond yields 41I.2.2. Changes in sovereign-bond and sovereign-CDS spreads,

5-year maturities, 12/2009 to 4/2011 43I.2.3. Rating events and sovereign-yield spreads 44I.2.4. Changes in interest-rate spreads and debt/GDP across euro-

area Member States 46I.2.5. Debt-servicing costs by general government in 2011 47I.2.6. Stock-price developments 48I.2.7. Sovereign- and corporate-bond spreads 2008-11 49I.2.8. Yield on bonds issued by Portuguese corporate issuers 49I.2.9. CDS spread of sovereign and corporate debt 50I.2.10. Spreads on CDS contracts on Spanish corporates, 5-years

maturity 50I.2.11. CDS spread on sovereign and banks senior debt 51I.2.12. Correlation between sovereign and bank CDS 52I.2.13. Credit standards on loans to NFIs 53I.2.14. NFI Credit Rate Spreads - versus Euribor rates 53I.2.15. Loans to NFI relative to GDP 54I.2.16. Value of sovereign bonds 55I.2.17. Impact of a 10-year lasting 400-basis-point sovereign-risk

shock 56I.2.18. Euro area - Consumers' assessment of the general economic

situation 57I.3.1. EU - Investment and saving 61I.3.2. Changes in saving and investment ratios: pre-crisis period

(2005-07 vs. 1996-98) 61I.3.3. Changes in saving and investment ratios: crisis period

(2008-10 vs. 2005-07) 62I.3.4a. Changes in the saving ratio: pre-crisis period (2005-07 vs.

1996-98) 63I.3.4b. Changes in the saving ratio: crisis period (2008-10 vs.

2005-07) 63I.3.4c. Changes in the investment ratio: pre-crisis period (2005-07 vs.

1996-98) 63I.3.4d. Changes in the investment ratio: crisis period (2008-10 vs.

2005-07) 63I.3.5. Equipment: Investment-to-GDP ratios in EU countries, before

and during the crisis 64I.3.6. Construction: Investment-to-GDP ratios in EU countries,

before and during the crisis 65I.3.7. EU and EA: Output gap and general government deficit

(1997-2009) 65I.3.8. Dependency ratio and general government deficits 66I.3.9. Sectoral saving, EU 67I.3.10. Real interest rates and savings, EU15 67I.3.11. Gross government and private sector saving, EU 67I.3.12. Loans, financial assets and private saving 68I.3.13. Private saving and demographics 68I.3.14. Investment and economic activity, EU 69I.3.15. Investment-to-GDP ratios and price deflator of capital

goods, 1996-2007 70

vi

vii

I.3.16. Equipment investment-to-GDP ratios and price deflator ofcapital goods, 1996-2007 70

I.3.17. Investment-to-GDP ratios and wage share, 1996-2007 70I.3.18. Loans of non-financial corporations, euro area (Jan. 2000-

Aug. 2010) 71I.3.19a. Private saving: actual and predicted long-run equilibrium

ratio, 2008 73I.3.19b. EU15: contribution to change in private gross saving ratio 73I.3.20. Private investment: actual and predicted long-run

equilibrium ratios, 2008 75I.3.21. EU15: contribution to change in private gross investment

ratio 75I.3.22b. Changes in the investment ratio: forecast period (2012 vs.

2010) 76I.3.22a. Changes in the saving ratio and the current account

balance: forecast period (2012 vs. 2010) 76

LIST OF BOXESI.1.1. The impact of the Tōhoku earthquake in Japan on the world

economy 12I.1.2. How far is the private sector in its deleveraging process? 15I.1.3. How do business and consumer survey readings depict the

ongoing recovery? 19I.1.4. The macroeconomic impact of higher oil prices 21I.1.5. Inflation differentials in the EU and euro area 33I.1.6. Some technical elements behind the forecast 38I.2.1. Measurement of the risk-free interest 42I.2.2. Contagion between Member States 45I.2.3. Econometric model to identify expectations shocks 58

EDITORIAL

ix

The spring 2011 forecast confirms the continuing recovery of the EU economy. With private domesticdemand gradually taking over as the main engine of growth and despite the ongoing sovereign-debttensions in some countries, economic growth in the EU is set to become increasingly self-sustaining overthe forecast horizon. Even though the pace of growth remains varied across Member States and rathermuted when compared to past up-turns, the expectation of firmer growth is a welcome prospect to helpheal the EU's wounded economy.

The historic shock inflicted by the global financial crisis in 2008 has led in many Member States tounsustainably high levels of public debt, distressed private-sector balance sheets and a surge inunemployment. Moreover, trend growth seems to have taken a hit due to slower capital deepening andincreased labour mismatches. As pointed out in previous forecasts, the scope and time needed for theadjustment to these daunting macro-structural challenges varies across countries and goes beyond thetwo-year horizon of this forecast. But important progress is being made:

− Fiscal consolidation is making headway. Well-anchored in the EU fiscal framework, budget balancesare projected to improve substantially over the forecast horizon. By 2012, the average fiscal deficit isprojected to come down to 3¾% of GDP in the EU and 3½% in the euro area from the 2009 peaks ofrespectively 6¾% and 6½%.

− Financial-market conditions, for instance in terms of lending activity, are steadily improving, althoughstress in some sovereign-debt markets remains high, and banking sector consolidation is stillincomplete.

− Labour markets, which on average have shown remarkable resilience during the crisis, stabilised inthe course of 2010 and are set to improve, albeit only gradually, over the forecast horizon.Productivity has bounced back to pre-crisis levels, but there are many Member States whereunemployment remains unacceptably high.

− Adjustment of intra-EU current-account imbalances is making some headway. Largely owed to theretrenchment of domestic consumption, the adjustment is most marked in countries where deficitswere very large at the onset of the crisis. But some structurally high current-account surpluses alsoappear to be gradually coming down on the back of stronger domestic demand and dynamic imports.

However, the global economic outlook remains plagued with unusually high uncertainty. Politicaltensions in the Middle East and North Africa, commodity-price developments, and potentialrepercussions from the tragic events in Japan represent new risks to growth and inflation.

Within Europe, sovereign-debt tensions continue to loom large in several countries. The thematic chaptercontained in this European Economic Forecast examines the channels through which high sovereign risksaffect the macroeconomic performance of the EU. Bold and comprehensive measures are being takenwith a view to safeguard the macro-financial stability in the EU economy. Following Greece and Irelandin 2010, EU Ministers of Finance and Economy at their meeting of 16 May 2011 are expected to agree aneconomic adjustment programme for Portugal which is designed to pave the way for a sustainable andmore competitive Portuguese economy. EU Heads of State and Government in March decided to raise theeffective lending capacity of the European Financial Stabilisation Facility and established with theEuropean Stability Mechanism a permanent crisis resolution mechanism to provide conditional financialassistance to vulnerable euro-area Member States. With a total lending capacity of €500 billion, the ESMwill replace the temporary lending facilities of the European Financial Stability Mechanism and theEuropean Financial Stabilisation Facility, which will be in operation until June 2013. Moreover, with theadoption of the so-called 'Euro Plus Pact' all euro-area Member States and six non-euro area MemberStates reinforced their political commitment for economic reform.

European Economic Forecast, Spring 2011

x

Determined and sustained implementation of policy reform is vital in order to harness the EU economy'spotential in the face of possible new headwinds and to complete its return to strong, balanced andsustainable growth. The European Commission's 2011 Annual Growth Survey stresses the key economicpolicy priorities at this juncture: continuing coordinated implementation of rigorous fiscal consolidationto bring public finances back on a sustainable track; completing the financial repair of banks; as well asmeasures to correct macroeconomic imbalances and to boost long-term growth and competitiveness.Tackling unemployment, facilitating the reallocation of resources and preventing long-term exclusionfrom the labour market are essential ingredients of this mix. While relevant for the EU as a whole, thiscomprehensive policy agenda is particularly pertinent for the EU Member States implementing economicadjustment programmes supported by financial assistance from the EU and the IMF.

Marco ButiDirector GeneralEconomic and Financial Affairs

OVERVIEW

1

The economic recovery in the EU continues to make headway, despitepersistent volatility and tensions in financial markets and the emergence ofnew risks that have made the external environment more challenging. TheEuropean Commission's spring 2011 forecast confirms that the EU economyis set to further consolidate its gradual and fairly muted recovery over theforecast horizon. Prospects for 2011 have been slightly upgraded comparedwith last autumn, while the projections for 2012 remain broadly unchanged.Upward revisions for inflation are more marked, reflecting the surge incommodity prices, an important part of the new challenges that have come tothe fore since last autumn.

EU recovery makesfurther headway,amid the emergenceof new risks

After a strong performance in the first half of 2010, real GDP growth in boththe EU and the euro area slowed down in the second half of last year. Thedeceleration was expected and in line with a soft patch in global growth andtrade, which reflected the withdrawal of stimulus measures and the fading ofpositive impulses from the inventory cycle. Nonetheless, the global economy,particularly the US and emerging market economies, proved more dynamicin the fourth quarter, in particular thanks to the strengthening of (private)domestic growth drivers. This provided a positive offsetting impulse to theadverse weather effects observed in the final part of the year in someMember States.

EU GDP growth wentthrough a soft patchin the second half oflast year …

Looking ahead, EU GDP growth in 2011 is set to gather pace. This outlook issupported, inter alia, by better prospects for the global economy and byupbeat EU business sentiment. The former owes mainly to a better outlookfor the US, continued buoyant growth in major emerging market economiesand the expectation of a limited global macroeconomic impact from theearthquake and tsunami in Japan. As regards EU business sentiment,notwithstanding the tensions observed in some euro-area sovereign-bondmarkets, it has continued to improve since autumn. This points to economicactivity gathering pace this year and shows signs that the recovery is alsobroadening across sectors, a picture corroborated by hard data readings.

… but, withstrengthening globalgrowth and upbeatEU industrial sentiment,it is expected togather pace again in2011-12

Financial markets conditions have generally continued to improve since lastautumn, but stress in some sovereign-bond markets has remained high.Lending activity to the private sector, including to non-financial corporations,has turned positive, broadly in line with past cyclical patterns. As theeconomic recovery gains firmer ground and concerns about fiscalsustainability are addressed, financial-market conditions should continue togradually improve and provide support to the recovery. For the bankingsector, the new EU-wide stress tests and the implementation of appropriatefollow-up measures should help to enhance the resilience of the system as awhole. However, with balance-sheet adjustments remaining incomplete inseveral sectors/countries and lingering concerns about developments incertain market segments, the situation remains generally precarious anduncertainty high.

With financial marketsexpected to continuegradually recoveringand providingsupport, …

In terms of demand components, a broadening out of the recovery is takinghold and is projected to continue, largely as envisaged in the autumn. Anupward revision to export growth is supporting a rebound of investment,which is set to return to positive growth this year. This reflects brighterprospects for equipment investment on the back of improved corporate

… a broadening outof the recovery ismaterialising, largelyas expected lastautumn …


profits and higher capacity utilisation rates. In contrast, reflecting the ongoingadjustments in several Member States, construction investment is set tocontract again this year, albeit at a lower pace than in 2010. As for privateconsumption, a modest pick-up is envisaged for this year in the EU. Furtherahead, slowly improving labour markets, moderate income growth, and lowersaving rates should underpin the gradual recovery of private consumption.However, higher inflation rates have slowed the pace of this gradualstrengthening compared to the autumn. In addition, the still ongoingdeleveraging process in the corporate and household sectors, heightened riskaversion and the impact of fiscal consolidation are set to weigh on capital andconsumer spending in the short term.

With private domestic demand gradually strengthening, the recovery is set tobecome increasingly self-sustaining over the forecast horizon. Overall, EUGDP growth is expected to gather pace in the first quarter of this year, thenease somewhat in the next three quarters, before regaining ground in 2012,when it reaches a pace of some ½% quarter-on-quarter. In terms of annualaverages, GDP growth is expected to edge up from just above 1½% in theeuro area and 1¾% in the EU this year, to some 2% in both regions in 2012.This implies slightly higher growth for 2011 than expected in the autumn.The EU economy continues to slowly close the sizeable output gap thatopened up during the recession.

… leading to GDPgrowth of about 1¾%in 2011 and about 2%in 2012

Yet, the EU recovery is expected to be more muted than the average ofprevious upturns. This is in line with the pattern that has in the pastcharacterised recoveries following deep financial crises. It has been arguedsince autumn 2009, when the recovery had just started, that the EU facessignificant legacy headwinds that are set to restrain domestic demand, whilethe economy transits to a new steady state in the coming years. These includethe downsizing of construction sectors, which is still ongoing in a number ofMember States; the increase in unemployment, which following financialcrises tends to be accompanied by higher structural unemployment; the surgein government deficits and debt, which, as seen repeatedly last year, can havea direct bearing on financial stability; and the adverse impact of the financialcrisis on potential output, which is estimated to remain well below pre-crisislevels over the forecast horizon. Against this background, the two thematicchapters in this document provide in depth analysis of two highly topicalissues: (i) the macroeconomic impact of developments in sovereign riskpremia, and (ii) savings and investment developments across the EU.

This is a sluggish (post-crisis) recovery, wherethe EU grapples withlegacy headwinds …

The aggregate picture masks marked differences in developments acrossMember States. Some countries, in particular Germany but also some smallerexport-oriented economies, have registered a solid rebound in activity, whileothers, notably some peripheral countries are lagging behind. Factorsexplaining the divergences include trade orientation, the product mix ofexports, degree of openness, exposure to the financial-sector disturbances andthe existence of sizeable internal and/or external imbalances. Lookingforward, the expectation remains for a differentiated pace of recovery withinthe EU, reflecting the challenges individual economies face and the policiesthey pursue. Lingering concerns about fiscal sustainability, especially insome euro-area Member States that remain under intense market scrutiny,and differences in competitiveness positions appear among the mostimportant challenges in this regard.

… and one withmultispeed recoveriesacross EU countries,particularly betweencore and periphery …

2

Overview

Among the largest economies, the upturn is set to be markedly strong inGermany, where, after posting a remarkable 3.6% GDP growth last year, thepace of economic activity is expected to ease but remain noticeably above theeuro-area average this year as well. France is set to grow at just above thearea average, whereas Italy at about ½ pp. below and Spain at half of theeuro-area average. Outside the euro area, the strong German performance isoutpaced by Poland, the only EU economy to have escaped a recession in2009, while growth in the United Kingdom is set to be more subdued,roughly on a par with the EU average. Among the smaller economies, therebound is particularly pronounced for Slovakia (3.5%) and Sweden (4.2%).In the EU, only two Baltic countries have higher growth rates than Sweden in2011. In contrast, GDP is projected to contract in Greece and Portugal, whileLatvia, Romania, Bulgaria, Ireland are expected to be out of recession. With,inter alia, the strong momentum in Germany pulling other countries, and ageneral gradual strengthening of domestic demand, GDP growth will tend tofirm up in the course of 2011 and 2012 for most Member States.

… reflectingheterogeneity inindividual challenges

Labour-market conditions stabilised in the course of last year and haverecently begun to improve. Employment in the EU increased slightly in thelast quarter of 2010, driven by improvements in all sectors except industryand construction. The unemployment rate edged down in the first months of2011, after having held mostly steady for over a year, at just above 9½% inthe EU and 10% in the euro area. The situation is, however, highlydifferentiated across countries, with the rate of unemployment ranging from4-5% in the Netherlands and Austria to 17-21% in Spain and the BalticStates.

EU labour marketconditions expectedto graduallyimprove …

Looking ahead and taking into account the usual lag between output andemployment growth, the outlook is for a gradual improvement in labourmarkets over the forecast horizon. After contracting by around ½% in the EUand the euro area in 2010, employment is projected to grow modestly thisyear. The outlook for unemployment is for a decline of some ½ pp. over theforecast horizon. However, despite brightening somewhat since the autumn,and given the extent of labour hoarding during the recession, the outlookremains for rather subdued job growth and potentially persistent highunemployment at the aggregate level.

… albeit with rathersubdued job growth insight and with highunemployment levelsgenerally prevailing

Consumer-price inflation has taken a sharp upward turn since the autumn, onthe back of a surge in commodity prices. Lately, fears of disruptions to oilsupply from developments in the Middle East and North Africa (MENA)region have taken oil prices to 125 USD per barrel, a level last seen in thesummer of 2008 and some 35 USD above the price assumed in the autumn.However, core inflation has remained subdued. Going forward, the stillsizeable slack in the economy is expected to keep wage growth in check,partly offsetting expected increases in energy and commodity prices. HICPinflation is projected to average 3% in the EU and 2½% in the euro area thisyear, before easing to about 2% and 1¾% respectively in 2012. Thisrepresents an upward revision of some ¾ pp. in both regions for 2011compared to the autumn.

Headline inflationheads higher, whileremaining economicslack keeps underlyinginflation in check

Public finances, which had been severely hit by the crisis, albeit to differingdegrees in different countries, began to improve last year. Most EU MemberStates posted lower general government deficits in 2010 than in 2009. Onaccount of stronger growth, the end of the temporary stimulus measures and aswitch to fiscal consolidation, the general government deficit in the EU isprojected to fall from about 6½% of GDP in 2010 to around 4¾% in 2011

Public deficitscontinue toimprove …

3


4

and 3¾% in 2012, with a broadly similar pattern – but at a somewhat lowerlevel – for the euro area. This is a slightly better profile than envisaged in theautumn, with the adjustment expected to be mainly expenditure-based in theEU and euro area.

The government debt ratio, in contrast, remains on an increasing path overthe forecast horizon, reaching some 83% of GDP in the EU and 88% in theeuro area by 2012. Thus, correcting the upward debt path remains a keyeconomic challenge for safeguarding long-term fiscal sustainability, givenlower potential growth than in the past and unfavourable demographicdevelopments in the not-too-distant future.

… while debt remainson an upward path

Developments in the MENA region and Japan have heightened uncertaintyand constitute predominantly downside risks to global economic activity. Atthe same time, downside risks to EU growth previously mentioned in theautumn have not disappeared. Hence, the balance of risks is regarded as tiltedto the downside for the economic growth outlook presented here.

New risks heightenuncertainty …

The impact of unrest in the MENA region, the disasters in Japan andincreases in commodity prices are developments that have come to the foresince the autumn and risk leading to globally higher inflation and lowergrowth than included in the baseline. Related to these are risks from tensionsin exchange rates and rekindled protectionist impulses. Domestically, thefragility of financial markets, particularly of some sovereign-bond segments,remains an important source of concern, with damaging negative feedbackloops still possible. Moreover, fiscal consolidation, given uncertainty on thetiming of measures and continued market concern on fiscal sustainability,may weigh on domestic demand more than currently envisaged. In contrast,on the upside, stronger-than-projected global growth, as a result of domesticdemand in emerging markets being more buoyant than currently expected,could further benefit EU export growth. Domestically, the rebalancing of EUGDP growth towards domestic demand could prove stronger than envisagedin the forecast, with, for instance, the labour market surprising positively.Similarly, spill-overs from the strong momentum in Germany to otherMember States could materialise to a larger extent than is currently expected.Finally, policy measures to redress the fiscal situation could prove moreeffective than presently foreseen in dissipating market concerns and thusfurther raising confidence among businesses and consumers.

… and tilt the balanceof risks to thedownside for thegrowth outlook …

Turning to the inflation outlook, risks appear tilted to the upside. While theconsiderable slack remaining in the economy, weak labour market conditionsand overall well-anchored inflation expectations should keep underlyinginflation in check, the upward pressures stemming from developments incommodity prices could come to the fore more than is currently projected. Inparticular, should political tensions spread further in the MENA region,disruptions to oil supplies could not be excluded, fuelling oil-price increasesbeyond what was assumed in this forecast.

… and to the upsidefor the inflationoutlook

PART IEconomic developments at the aggregatedlevel

1. EUROPEAN RECOVERY MAINTAINS MOMENTUMAMID NEW RISKS

7

The global economic recovery continues to make headway, but it is becoming more uneven, acrossmajor regions and within them. In the EU, the moderate economic recovery is generally developing asexpected, with pronounced differences across countries and uncertainty at elevated levels. A positivecontribution from the external side has started to impact positively on components of private domesticdemand. The process of achieving a more balanced composition of economic growth has made furtherprogress in the faster growing EU countries. Conversely, countries facing substantial economicadjustment challenges are understandably lagging behind, though there are encouraging signals thatthe recovery could materialise and gain momentum in 2011 and 2012. This leaves the Europeaneconomies with a multi-speed recovery and the area as a whole, as with most other advancedeconomies, lagging behind the group of emerging market economies.

An array of survey-based indicators points to a continued expansion of economic activity in the EU,a picture that is corroborated by hard data. Economic growth is expected to continue along a trajectoryof around 2%, slightly higher in 2011 than forecast last autumn, but broadly unchanged in 2012. On theback of higher commodity prices, inflation rates are forecast to increase to close to 2½-3% in 2011,before falling back to around 2% in 2012. The resulting pressure on real disposable income isdampening private consumption growth in 2011. More moderate inflation and, with the usual laggedresponse to developments in output, higher employment are set to brighten growth prospects in 2012.Economic growth is expected to be strong enough to support the progressing fiscal consolidation.

The uncertainty surrounding the forecast has increased over recent months as the news about unrest inthe Middle East and North Africa (MENA) and cascading disasters in Japan pose additional downsiderisks in the near future, while previously existing downside risks, in particular those related to thesituation in financial markets (e.g. sovereign bonds) remain. Therefore, the balance of risks is regardedas tilted to the downside for the growth outlook and to the upside for the inflation outlook.

1.1. A SUBDUED RECOVERY IN ITS THIRD YEAR

In spring 2011, the European economic recovery isprogressing. Almost four years after the sub-primecrisis in the US triggered the global financial crisisand almost two years after the exceptionally deeprecession ended, the economy is approaching itspre-crisis level in terms of output. Following theinitial push from the extraordinary policymeasures, external demand, and the inventorycycle, the recovery now shows signs of abroadening across components. Private domesticdemand is contributing more strongly, although itis – particularly in 2011 – subject to additionalconstraints due to higher inflationary pressures.

With short-term indicators pointing to an ongoingexpansion in the EU, the growth outlook for thisyear and next looks favourable (see Graph I.1.1).However, at the current juncture there is noconvincing evidence that the economic upturn willgain substantially more pace over the forecasthorizon.

-2.5-1.5-0.5

0.51.52.53.5

4.55.5

05 06 07 08 09 10 11 1290

95

100

105

110

GDP growth rate (lhs)GDP (quarterly), 2005=100 (rhs)GDP (annual), 2005=100 (rhs)

Graph I.1.1: Real GDP, EU

forecast

q-o-q% index, 2005=100

3.2

3.0 0.5

-4.21.8

2.0

1.8

1.9

Figures above horizontal bars are annual growth rates.

Overall, the recovery is expected to continue to bemore muted than recoveries in the past (see GraphI.1.2), not only in Europe but in almost alladvanced economies. The main explanation for thesubdued recovery can be found in the type ofrecession the economy is emerging from.


Graph I.1.2: Comparison of recoveries, currentagainst past average - GDP, euro area

100

101

102

103

104

0 1 2 3 4 5

Past recoveries Current recovery

Quarters

index

Note: Real GDP following the recessions of the mid 1970s, early 1980sand early 1990s

"This time is different", but not everywhere ...

Recoveries following financial crises are typicallybeing more subdued and sluggish than otherrecoveries.(1) Differences in the speed of recoveryare accordingly related, inter alia, to the degree towhich economies were hit by the shock and thenumber of challenges that had to be faced. Thesechallenges include the deleveraging of householdsand firms, the repair of balance sheets in thefinancial sector, adjustment needs in the realeconomy, and, where needed, structural reforms toraise growth potential. Evidence from the firstyears of the recovery points to two major recoveryspeeds in the world economy (see Graph I.1.3).(2)

0

1

2

3

4

5

6

7

8

2010 2011 2012

Advanced economies Emerging and developing economies

%

Graph I.1.3: A global multi-speed recovery -real GDP, annual growth

(1) See Reinhart, C. M. and K. S. Rogoff, This time isdifferent: eight centuries of financial folly, Princeton 2009;European Commission (DG ECFIN), Economic crisis inEurope: causes, consequences and responses, EuropeanEconomy, 7/2009; and Kannan, P., Credit conditions andrecoveries from recessions associated with financial crises,IMF Working Paper 10/83, March 2010.

(2) See e.g. IMF, Tensions from the two-speed recovery,World Economic Outlook, April 2011; Jannsen, N. and J.Scheide, Growth patterns after the crisis: This time is notdifferent, Kiel Policy Brief no. 22, December 2010.

The highest speed is observed in countries thatwere almost unaffected by housing and real-estatebubbles, had few links to the financial sectors ofthe most affected countries and were mainly hit viatrade links. Most emerging market economies,including China and India, belong to this groupand managed to recover strongly, almost followinga V-shape in terms of rebound of industrial outputand real GDP. Many of them have completedcatching up from crisis-related declines in outputor are already approaching their pre-crisis growthtrajectory. A much lower speed of recovery isfound in advanced economies that were in generalmuch more closely linked to the epicentres of theglobal crisis (see Graph I.1.4).

60

80

100

120

140

98 99 00 01 02 03 04 05 06 07 08 09 10 11 12

2007=100

Graph I.1.4a: GDP per capita, advanced economies

Exponential trend 98-07

50

70

90

110

130

150

98 99 00 01 02 03 04 05 06 07 08 09 10 11 12

Graph I.1.4b: GDP per capita, emerging and developingeconomies

2007=100

Exponentialtrend 98-07

While the growth differences between emergingmarket economies and advanced economies areundisputed, the differences among advancedeconomies tend to receive less attention. Ingeneral, two types of slowly recovering advancedeconomies can be distinguished. Some, like theUS, were hit by a homemade financial crisis andthe shock to world trade. These most severely hitadvanced economies, almost entirely countries thathad been large capital importers before the crisis,are experiencing a more sluggish recovery asfinancial sectors, firms, and households are going

8

Economic developments at the aggregated level

through a period of deleveraging. Ongoingdeleveraging delays the pick-up in privateconsumption and investment. In several of thesecountries, public debt has moved up, eventuallyresulting in fiscal retrenchment that weighs on thespeed of the recovery. A second group of advancedcountries (e.g. Germany) was also hit by the crisis,but mostly via linkages of financial sectors (e.g.knock-on effects to their banking sectors) andtrade links without experiencing sharp correctionsin domestic housing markets. Many of thesecountries were able to recover more quickly andstrongly than the others.

... with the EU facing the expected subduedand differentiated recovery.

The different recovery speed among advancedeconomies is clearly visible in differences in thepace of economic growth in the Member States in2010. The group of countries with above-averagegrowth comprises countries – such as Germany,Poland and Sweden – that did not experience thebursting of a housing or real estate bubble.

Graph I.1.5a: A multi-speed recovery in the EU -real GDP, annual growth (unweighted)

0

1

2

3

2010 2011 2012Member States with below-average growth in 2010Member States with above-average growth in 2010

%

Graph I.1.5b: A multi-speed recovery in the EU -real GDP, annual growth (unweighted)

-1

0

1

2

3

Economies with above-average govt. debt increase (2007-10)Economies with below-average govt. debt increase (2007-10)

%

2010 2011 2012

Among the economies that grew below EUaverage are Member States hit by a banking crisis(the UK) or a housing crisis (Spain), as well as

debt-troubled euro-area economies (Greece,Ireland, Portugal), where debt has been an obstacleto economic growth.(3) As adjustment continues,however, the speed difference between the fastgrowers and the followers is expected to diminishover time. The speed difference between countriesthat had above- and below-average increases ingovernment debt is expected to narrow slowly (seeGraph I.1.5).

However, due to the relatively moderate pace ofthe recovery in both groups, by the end of 2010only a minority of EU Member States had fullyrecovered the output losses experienced during therecession. For instance, in the group of the sevenlargest economies, only Poland has clearlyexceeded its pre-crisis level of output, whereasGermany just returned to the output level of thefourth quarter of 2007 (see Graph I.1.6).

90

95

100

105

110

08 09 10

DE ES FR ITNL PL UK

index '07Q4=100

Graph I.1.6: Real GDP 2008-10

A similar picture emerges from estimated outputgaps. They had widened substantially during thedownturn in 2009 and have not yet returned topre-crisis levels. In line with the observeddifferences in growth momentum, wide outputgaps in several Member States continue to signalan extended period of low resource utilisation,making a continuation of subdued economicrecovery more likely. These observations supportboth the hypotheses that "this time is different", asput forward in previous forecast documents,(4) andthat the EU economy is experiencing a multi-speedrecovery.

(3) See Reinhart, C. M. and K. S. Rogoff, A decade of debt,CEPR Discussion Paper no. 8310, April 2011 (particularlySection IV).

(4) See e.g. European Commission (DG ECFIN), EuropeanEconomic Forecast – Autumn 2009, European Economy10/2009

9


1.2. THE EXTERNAL ENVIRONMENT

Recovery of the world economy continues ...

The world economy is recovering gradually, fasterin some regions than in others, and the pattern ofworld output growth remains broadly unchanged.World output (excl. EU) is forecast to grow at anannual rate of 4½% in 2011 and 2012, which isslightly above the autumn forecast in both years.

Advanced economies are growing more sluggishlythan emerging market economies, particularly inAsia (see Table I.1.1). The upward revision to USgrowth compared to the autumn forecast is themain driver behind the slightly improved outlookfor 2011 and partly offsets the downward revisionsto economic growth in Japan and the effect ofhigher oil prices.

Emerging economies are forecast to continue togrow more strongly than advanced economies in2011 and 2012, leaving little spare capacity andmaking them now more vulnerable to inflationarypressures. Monetary tightening that has started(e.g. in China) or is expected to start in severalemerging countries is attracting capital flows fromadvanced countries, leading to appreciation trendsin emerging markets' currencies and therebypotentially contributing to the reduction of externalimbalances.

... with solid world trade growth ...

World trade volumes grew by 12% in 2010 andhave already returned to pre-crisis levels, thoughnot to the pre-crisis growth path. The carry-overfrom the re-acceleration after the soft patch in thethird quarter of 2010 and readings of surveyindicators such as the global PMI for themanufacturing sector (see Graph I.1.7) point toa continuation of strong world trade growth in2011 and 2012, though it will be slightly lessdynamic as the contribution from the inventorycycle fades away.

Graph I.1.7: World trade and PMI globalmanufacturing output

-20-15-10

-505

10152025

99 00 01 02 03 04 05 06 07 08 09 10 11303540455055606570

World trade, CPB data (lhs)PMI global manufacturing output (rhs)

y-o-y% 3-month moving average

... despite higher commodity prices ...

Oil prices have increased substantially over thepast months, in particular due to higher demand on

Table I.1.1:

International environment(Annual percentage change) Spring 2011 Autumn 2010

forecast forecast( a ) 2007 2008 2009 2010 2011 2012 2011 2012

Real GDP growthUSA 20.5 1.9 0.0 -2.7 2.9 2.6 2.7 2.1 2.5Japan 6.0 2.4 -1.2 -6.3 3.9 0.5 1.6 1.3 1.7Asia (excl. Japan) 26.4 10.3 6.9 6.1 9.2 7.7 7.7 7.6 7.5- China 13.0 14.2 9.6 9.1 10.3 9.3 9.0 9.2 8.9- India 5.2 9.2 6.7 7.4 10.4 8.0 8.2 8.3 7.8

Latin America 8.5 5.8 4.3 -1.7 5.9 4.2 3.9 4.0 4.2- Brazil 2.9 6.1 5.1 -0.2 7.5 4.4 4.3 4.8 5.1

MENA 5.0 6.0 4.8 1.4 3.8 3.1 3.7 4.0 4.0CIS 4.3 8.9 5.3 -6.8 4.5 4.7 4.5 4.1 4.2- Russia 3.0 8.5 5.2 -7.9 4.0 4.5 4.2 3.8 4.0

Sub-Saharan Africa 2.5 7.1 5.6 2.8 5.0 5.5 6.0 5.5 6.0Candidate Countries 1.4 4.8 0.9 -4.9 7.6 5.6 5.1 5.1 4.3World (incl. EU) 100.0 5.4 2.9 -0.6 4.9 4.0 4.1 3.9 4.0

World merchandise trade volumesWorld import growth 6.7 2.7 -12.7 14.0 7.8 7.9 7.4 7.3Extra EU export market growth 8.9 3.6 -11.0 13.7 8.2 8.2 7.9 7.3

(a) Relative weights in %, based on GDP (at constant prices and PPS) in 2009.

10


the back of the recovery, especially in emergingeconomies where growth is relatively energy-intensive, a harsh winter in Europe and NorthAmerica, and geopolitical tensions in some oil-exporting countries with contagion risks in theregion (see Graph I.1.8). In the first four months of2011, the price of Brent rose from 95 to 125 USDper barrel. High inventory levels and sufficientspare capacity, mostly in Saudi Arabia, containedthe increase and were in place to step in fordelayed and disrupted delivery from Libya, whichis not among the largest oil exporters. Uncertaintyabout how events will develop in the region adds ageopolitical risk premium to oil prices. Apart fromthese exceptional factors, the structural upwardtrend in oil prices, in line with long-run growth inoutput and demand in emerging market economies,seems to be intact.

406080

100120140160180200220

08 09 10 11 12110

130

150

170

190

210

Brent crude oil (lhs), assumption (annual average, a.a.)Non-energy commodities* (rhs), assumption (a.a.)

Graph I.1.8: Commodity-price developments

USD/barrel index, 1996=100

* ECFIN calculations

assumption

Non-energy commodities are also on an upwardtrend. In the first quarter of 2011, metal pricessurged, after already strong increases in the secondhalf of 2010. Scarcity has become a structuralfeature to which supply is only respondinggradually. Although high prices and slightlymoderating growth in emerging market economiesexert some downward pressure, metal prices areexpected to increase by about 25% in 2011, beforeeasing somewhat in 2012. This implies that priceswill remain at or close to historical peaks. Foodprices surged by 15% in the second half of 2010and continued their ascent in early 2011 due toboth short-term supply-side factors (weather-related supply shocks, exports bans and rising oilprices) and rising global demand. The latter isdriven by strong population and income growth inemerging market economies and its impact ondietary preferences, and increased biofuel demand,particularly in advanced economies. Food pricesare assumed to remain high as future markets point

to a stabilisation. Due to base effects, this impliesan annual increase of close to 20% in 2011 and aslight moderation in 2012.

... and the impact of natural disasters in Japan.

The combination of natural disasters on March 11and the subsequent nuclear catastrophe havechanged the economic outlook for Japan (see BoxI.1.1). It is difficult to gauge the impact on theeconomy of the Tōhoku earthquake and thetsunami it caused, but available preliminaryestimates point to the need of a downward revisionto the growth outlook in 2011 and an upwardrevision in the following year, when rebuildingefforts are expected to exert a positive impact. Asfor spillovers to the region and beyond, they can beexpected to be manifold, including impacts on thereal economy (e.g. production chains, tradelinkages, and sentiment), financial markets (e.g.more adverse risk attitudes and "flight from fear",stock prices), commodity markets (e.g. oil andliquefied natural gas) or in other areas (e.g.repatriation of Japanese funds). While thespillovers cannot be quantified with precision atthe current juncture, they are not expected to derailthe recovery of the world and EU economy goingforward.

While advanced economies continueexpanding at moderate pace ...

The US economy showed an impressive reboundin 2010, expanding at a rate of nearly 3% aftera contraction of about the same size in the yearbefore. This rebound benefited from extraordinaryfiscal and monetary policy measures (e.g.Quantitative Easing 2). Some of the momentumhas been lost in the first quarter of 2011 asdomestic demand weakened and net exportscontributed negatively to growth. In particular,higher commodity prices will continue to weigh onthe growth momentum in 2011, which is alsohampered by still-sluggish employment growthand ongoing housing-market corrections. Despitethese downward factors, economic growth in 2011is expected to be higher than projected in theautumn forecast, mainly due to the prolongation offiscal stimulus. The improved outlook is capturedin upward revisions of growth in real GDP, privateconsumption and gross fixed capital formation in2011. As some of the policy measures are expectedto expire at the end of 2011, their support will fadeaway.

11


Box I.1.1: The impact of the Tōhoku earthquake in Japan on the world economy

Two months after the large earthquake in Japan,which triggered a tsunami and substantial nuclearfallout from one of the damaged power plants, theeconomic consequences for Japan and the rest ofthe world are hard to quantify. A significantamount of productive capital was destroyed anda number of roads, ports, airports and plants wereout of operation for some time after the quake,causing bottlenecks in production and transport.The immediate effect of the events wasa synchronous short-term drop in stock marketsaround the world. The Japanese governmentestimated in end-April the direct damages at JPY25 trillion (5.2% of GDP), representing less than1% of the total capital stock of the Japaneseeconomy. Furthermore, the catastrophe will implysignificant costs for public finances and insurancecompanies.

The unspeakable human tragedy notwithstanding,past experience tells that natural disasters in matureand affluent economies like Japan usually causeonly a brief interruption to economic growth. Forinstance the 1995 Kobe earthquake caused onlya temporary interruption of production, mainly inthe most affected region, followed by a strongrebound of economic activity, which boostedoutput in subsequent quarters, and resulted inoverall minor short-term losses to GDP growth.

Also, the impact on the rest of the world economythrough the trade channel is typically assessed to belimited. In recent years, the share of exports fromJapans in world trade has declined considerablyand constituted in 2010 around 5% of worldexports. The share of EU's merchandise trade withJapan is still smaller, with 1.2% of EU exportsgoing to and 1.6% of imports originating fromJapan. However, for most Asian countries Japan isa significant trading partner with import sharesvarying between 5-10%. In 2010, 56.1% ofJapanese exports were directed to Asia compared to11.3% going to the EU.

Standard simulations in line with past experienceproject rather limited implications for economicgrowth in Japan and the rest of the world. In lateMarch, the Japanese authorities presented anestimate of GDP growth losses for the Fiscal Year2011 (April 2011 – March 2012) of 0.5-1.25 pps.compared to the baseline, including the effects ofpower outages and supply chain disruptions withinthe country. The Bank of Japan projects GDPgrowth for Fiscal Year (FY) 2010 to be 0.5-0.6 pp.lower than estimated in January 2011. The GDP

growth estimate for FY 2011 was revised down by1 pp. to 0.6%. At the same time, it expects GDPgrowth for FY 2012 to be 0.9 pp. stronger thanpreviously assumed. The IMF projects a 0.2 pp.dent compared to the baseline in 2011 expectinga 1 pp. drop in domestic demand to be partlycompensated for by a series of fiscal packages.

However, the March 2011 triple disaster ofearthquake, tsunami and nuclear fallout ischaracterised by a number of specific featureswhich may aggravate the economic impact at thisjuncture. In particular, the consequences ofwidespread power outages, infrastructure andtransport problems in a relatively wide area,supply-chain disruptions are important elements forassessing the economic consequences of the events,but also the impact of the lingering nuclear risks onconfidence. Electricity supply in the Greater Tokyoarea is currently still around 20% below thepre-quake capacity. Disruptions in manufacturingproduction have led to a shortage of keycomponents in industries such as automotives andelectronics, affecting temporarily productionsprocesses world wide. In addition, the evolution ofconsumer and investor confidence is of majorimportance for the future development in Japan.The considerable scope of the disaster anduncertainty related to the nuclear fallout may haveprolonged effects on sentiment curbing privateconsumption and investments for a longer period oftime and with potential spillover effects to the restof the world.

The Commission simulated the impact of theJapanese crisis on economic growth in the EU andin the rest of the world, using the QUEST model.The damage to the capital stock is assumed at 4%of GDP (JPY 20 trillion). Public infrastructure isassumed to be rebuilt within three years, after aninitial delay of one quarter for the reconstruction tostart in earnest. The announced power outages inthe Greater Tokyo area are captured in the model asefficiency losses in the magnitude of 0.6% of GDPin the first quarter following the disasters. TheGreater Tokyo area represents approximately 40%of Japanese GDP. Forced closures of productionfacilities in the days after the catastrophe are alsocomputed in the simulation. The resultingefficiency losses are halved every subsequentquarter.

Due to the lower capital stock and the delayedresumption of economic activity by companies,stock prices would decline by around 10% over one

(Continued on the next page)

12


Box (continued)

quarter before gradually recovering. In addition, theshock to market confidence would causea temporary decline of 3% in stock markets aroundthe world capturing lower confidence by investorsand consumers.

According to this scenario, on an annual basis,Japanese GDP would fall by some 1¼ pp. in 2011compared to the baseline. Against the backgroundof initially encouraging data in late 2010 and early2011, the no-disaster baseline comprised a GDPforecast of around 1¾% to 2%, implying that thedisasters lowered the growth rate to about ½% in2011. As regards the impact on the EU, the loss interms of GDP would be of around 0.2% in 2011,

mostly triggered by lower investor confidence.

The negative growth effect for the world economyis likely to be noticeable but by far not largeenough to derail the ongoing recovery. Under theassumption that supply-chain disruptions will notlast beyond the second quarter and no significantchanges in the energy-mix will occur, the effects ofthe Japanese crisis are unlikely to deduct more than0.2 pp. from world growth. Japan's increaseddemand for oil and the debate in several countriesabout changing the energy mix, triggered by thenuclear accident, could have further consequenceson commodity prices over the medium-term.

In Europe, the recovery in EFTA countries iscontinuing. In Norway, the prospects for privateconsumption, oil revenues and oil investment haveimproved over the past months, providing reasonto expect stronger economic growth ahead. InSwitzerland, the economy rebounded stronglydespite the strength of the (safe haven) currency.In the five EU candidate countries, the picturecontinued to be mixed. Turkey's economyexperienced a strong broad-based recovery and itsfavourable outlook lifts the average growthforecast for the candidate countries (Croatia,Iceland, Turkey, the former Yugoslav Republic ofMacedonia, and Montenegro) as a whole.

... strong growth in emerging and developingcountries is expected to continue.

Asia continues to be home to some of the mostimportant drivers of global growth. Driven bystrong fixed-asset investment and buoyant privateconsumption, China's growth accelerated in 2010.To counteract strongly increased inflationarypressures, the central bank has started to tightenmonetary policy, which should result in a slightgrowth moderation. In India, strong economicgrowth continues to be driven by buoyant domesticdemand. The other main economies in South-EastAsia are benefiting from the strong expansion inglobal trade and, in particular, demand from China.

Latin America continues to surpass expectations,having grown by about 6% last year – the fastestrate in two decades,– and solid economic growth isexpected to continue at rates of about 4%.Particularly in South America, countries arethriving on a surge in domestic demand, capitalinflows and a rebound in prices of raw materials.

In Brazil, GDP growth accelerated strongly, drivenmainly by strong domestic demand, which is nowexpected to moderate somewhat in response to thetightening of fiscal and monetary policies.

In the MENA region, economic growth resumed atan annual rate of 4% last year, with the oil-producing countries in the region supported byhigher oil prices. The economic outlook for theregion, which has a share of about 40% in globaloil supply, is closely associated with the price ofoil and the region's ability to avoid oil-supplydisruptions. Geopolitical upheaval and the conflictin Libya are expected to weigh on growthprospects, lowering output growth this year.

In the CIS region, the recovery resulted last year inan average growth rate of 4%, which is expected tobe maintained over the forecast horizon. Theregion's largest economy, Russia, grew by 4% in2010, supported by inventory investment, privateconsumption and fixed investment, but withagricultural output hit by an exceptional heat waveand droughts. Increases in commodity pricesimprove the growth outlook and explain upwardrevisions as compared to the autumn forecast.

Particularly in emerging economies, the rise incommodity prices and strong demand growth haveraised inflationary pressures, which generallyexceed those in advanced economies.Policymakers have started to address the challengeof containing inflation without endangeringeconomic growth, mostly by monetary tightening.It is assumed that this approach will be continuedover the forecast horizon.

13


1.3. FINANCIAL MARKETS IN EUROPE

Given the key role played by credit in recoveries,developments in financial markets are always animportant determinant of the economic outlook.This is particularly the case at the current juncture,since almost all countries emerging from recessionhad been subject to financial disruptions such asdistortions to credit supply and sharp declines inasset prices, notably in housing markets. Historicalevidence suggests that interactions betweendevelopments in the financial sector and realeconomic activity are shaping not only recessionsbut also recoveries.(5) In that regard, gradualimprovements in several segments of financialmarkets have sent encouraging signals. Over theforecast horizon, a further gradual improvement infinancial markets is expected, as the economicrecovery continues and fiscal consolidationprogresses.

Economic recovery and sovereign-debt crisisin the focus of market participants ...

Two factors driving financial markets stood out inrecent months. One was the ongoing economicrecovery, which was accompanied by a revisedinflation outlook and first steps towardsa normalisation of the monetary policyenvironment. The other was persisting concernsabout the sustainability of public finances inseveral euro-area Member States, which wereaffected by a number of factors. These includesuccessful auctions by peripheral euro-areasovereigns and by the EFSM and the EFSF as wellas the 'comprehensive package' including theadoption of the so-called Euro Plus Pact, adoptedby the March European Council.(6) Several marketsegments have continued to recover, while thesovereign-debt crisis has continued despite thecomprehensive measures taken by Europeaninstitutions since May last year. The unrest in theMENA region and the disasters in Japan had anonly temporary impact on some segments offinancial markets.

(5) See e.g. Claessens, S., M. A. Kose and M. E. Terrones,How do business and financial cycles interact?, IMFWorking Paper 11/88, April 2011. The interaction betweenfinancial markets and real activity has been analysed inEuropean Commission (DG ECFIN), European EconomicForecast – Spring 2010, European Economy 2/2010.

(6) For an overview see European Commission (DG ECFIN),Quarterly Report of the Euro Area, April 2011, 10(1), pp.7-14.

... as money-markets interest rates increase ...

The functioning of euro-area money markets hasimproved since the beginning of the year aftera pick-up in tensions last autumn. However, the setof bidders in the Eurosystem operations remainssegmented, with a small number of institutionsexcessively reliant on central bank liquidityaccounting for a substantial share of the overallrefinancing volumes. At the same time, for themajority of banks there have been signs ofa further normalisation in access to market-basedfinancing. Apart from liquidity management,money-market rates have reflected expectationsabout the future path of policy rates after the ECBhas in April, for the first time since the recession,raised its key policy rates (by 25 bp), whereasother large central banks have kept policy ratesunchanged (see Graph I.1.9). In April, slightlyincreased short-term rates reflected lower excessliquidity and an upward revision in marketexpectations about future monetary policydecisions. This development is behind the upwardrevisions to the interest-rate assumptions of thisforecast (see Box I.1.6), which are derived fromfutures contracts.

Graph I.1.9: Policy interest rates,euro area, UK and US

0

1

2

3

4

5

6

7

07 08 09 10EA (3m EURIBOR) ECB's main policy rateUK (3m LIBOR) BoE's main policy rateUS (3m LIBOR) US target rate

%

... and the better overall situation of EU bankingsector supports lending ...

The overall situation of the EU banking sector hasimproved, but considerable variation at the level ofindividual banks persists. Returns on equity and onassets have both increased in 2010, suggestinga further strengthening of bank profitability for thesector as a whole. But bank profitability prospectsremain very heterogeneous, as some banks have tocope with ongoing deleveraging (see Box I.1.2),further loan losses, high funding costs and lowbusiness growth.

14


Box I.1.2: How far is the private sector in its deleveraging process?

Historical evidence suggests that financial crisesare typically followed by an extended period ofsizeable balance-sheet adjustments by the mostheavily indebted economic actors. Last autumn, theCommission's forecast assessed the state ofdeleveraging across the non-financial corporate(NFC) and the household (HH) sector in the EUuntil mid 2010.(1) This box provides an update ofthis adjustment process, based on the latest dataavailable, i.e. including the third quarter of 2010.

In the EU, the overall progress of deleveragingremains slow by historical and internationalstandards. In the NFC sector, the expansion of debtwitnessed prior to the crisis continued well into thecrisis. However, since mid-2010 a reduction ofcorporate debt levels has set in. Euro-area corporatedebt to GDP peaked in the second quarter of 2010at 107.1% and fell back slightly to 106.7% in thethird quarter (see Graph 1).

Progress of corporate balance-sheet adjustment isunevenly spread across Member States andcompanies: the debt-to-GDP ratios have fallen insome Member States (e.g. Belgium, Estonia,Greece, Ireland, and the United Kingdom) while inother Member States they are still trending higher(e.g. Cyprus, Finland, Spain). Large companieshave issued significant volumes of corporate bonds.On the other hand, small and medium-sizedenterprises (SMEs), which are often heavilydependent on bank lending, have experiencedtighter credit constraints. Moreover, takingadvantage of low interest rates, many companieshave improved their external financing situation.Many have lengthened the maturity structure oftheir debt over the last couple of years, therebyreducing the refinancing risk over the comingyears. 70% of euro-area companies' liabilities arenow labelled 'long-term'.

Corporate debt is again backed by higher equitycushions. Following the gradual recovery incorporate earnings and the rebound in equityvaluations, the debt-to-equity ratios have fallen inmost Member States from their peaks in the firstquarter of 2009 and were at 60% in the thirdquarter of 2010. Notable exceptions to the largeequity buffers are Greece and Latvia (see Graph 1).Furthermore, many companies have built amplecash balances, but this trend seems to have

(1) See Box I.1.4 "How much deleveraging has takenplace?", European Economic Forecast – Autumn2010, European Economy 7/2010

stabilised over 2010 or reversed in some countries(e.g. in Ireland, Italy and Greece).

Against this general trend, in particular moredomestically focussed companies in Member Statesmost affected by the sovereign-debt crisis areexperiencing increasing borrowing rates and haveon average more vulnerable balance sheets whilecash flows have diminished owing to the slowdownin economic activity.

Graph 1: Non-financial corporations' debt to GDPand to equity

-250

255075

100125150175200225

AT BE CY CZ DE

DK EE ES FI FR EL HU IE IT LT LV NL PL PT SE SI SK UK EA

%, pps.

-

25

50

75

100

125

150%

'07 debt/GDP (lhs) '08 change in debt/GDP (lhs)'09 change in debt/GDP (lhs) '10Q3 change in debt/GDP (lhs)'10Q3 debt/equity (rhs)

Along with rising residential real estate prices,HHs' gross debt, relative to gross disposableincome (GDI), has risen steadily over the pastdecade to 97.3% in the third quarter of 2010 (euroarea). Euro-area aggregate debt levels remain wellbelow those of other advanced economies, such asthe US and Japan (117.6% and 101.0% resp.).However, HHs' debt ratios are nevertheless high ininternational perspective in several Member States(i.e. Denmark, the Netherlands, Ireland, the UK,Sweden, Portugal, Spain and Cyprus).

Deleveraging has been necessarily more profoundin countries facing strong housing marketcorrections, notably in Ireland, the UK and Spain.However, little progress has been made in the euroarea at large: net growth of housing loans sloweddown during the crisis and became even slightlynegative in 2009; yet it has picked up since andstood at 3.8% in February 2011. Moreover, inseveral Member States, house prices seem to bepicking up (modestly) again (e.g. in France). Thehistorically low level of interest rates and theincreased use of variable interest rates in severalEU Member States have eased the debt-servicingburden and may have also reduced pressure toadjust debt levels, leaving still highly indebtedhouseholds vulnerable to interest rate changes.

15


As for lending activity, bank credit provision to theeconomy has expanded further in early 2011. Inthe first three months of 2011, bank lending tohouseholds has continued to increase, but remainsgenerally subdued (see Graph I.1.10). The growthrate of bank loans to the non-financial corporatesector has recovered further until March.According to the ECB Bank Lending Survey(April 2011), demand for loans from enterprisesexpanded notably in the first quarter of 2011,mainly driven by increased financing needs forinventories, working capital, and, for the first timein two years, fixed investment. The surveysuggests a moderate tightening of credit standardson loans to enterprises, which has mainly affectedlarge companies, whereas credit standards on loansto small and medium-sized enterprises remainedbroadly unchanged. Looking forward, euro-areabanks expect a further moderate tightening ofcredit standards in the second quarter of the year.

Graph I.1.10: Bank lending to households andnon-financial corporations, euro area

-6

-4

-2

0

2

4

6

8

00 01 02 03 04 05 06 07 08 09 10 11-4-20246810121416

GDP (lhs)Loans to households (rhs)Loans to non-financial corporations (rhs)

y-o-y% y-o-y%

... while some sovereign-bond markets remaina concern ...

In sovereign-bond markets, benchmark yields hadbeen on an upward trend since September 2009,rebounding from historical lows during the periodof the "Great Moderation". Increases were drivenby an improved economic outlook, lower safe-haven demand (less risk aversion) and risinginflation expectations, with fluctuations around thetrend linked to tensions in the euro-area sovereign-bond markets. After the steep widening in autumn,bond spreads of distressed European sovereignshave remained at elevated levels (see GraphI.1.11). Particularly this holds, though to differentdegrees, for Greece, Ireland, and Portugal, thethree countries that have requested financialassistance from the EU and the IMF.

Graph I.1.11: Government-bond yie lds, selectedMember States

2

4

6

8

10

12

14

16

Jan07

Jul07

Jan08

Jul08

Jan09

Jul09

Jan10

Jul10

Jan11

Jul11

DE IT ESPT IE EL

%

The relief seen in markets following measurestaken at the European level has repeatedly turnedout to be temporary, since market participants haveremained concerned about mutually-reinforcinginteractions between fiscal retrenchment, weakeconomic development and lasting banking-sectorproblems. Financial-market concerns aboutselected Member States have also been reflected inreduced – or no – access to market-based fundingfor their domestic banks and more frequentrecourse to ECB liquidity.

Fears that the sovereign-debt problems in someMember States would spill over to other marketsegments have not been supported by investment-grade corporate bonds. Declining default risks andan improved economic outlook narrowed theirspreads vis-à-vis government benchmark bondsclose to pre-crisis levels (see Graph I.1.12).(7)

Graph I.1.12: Corporate spreads over euro-areagovernment benchmark bonds

050

100150200250300350400450500

Jan07

Jul07

Jan08

Jul08

Jan09

Jul09

Jan10

Jul10

Jan11

Jul11

bps.

BBB

AAA

AA

A

(7) For a more detailed analysis see chapter I.2 of thispublication,

16


... and stock markets rise further.

Stock markets have benefited from continuedpositive economic data on both sides of theAtlantic in the first months of 2011. Geopoliticaltensions, higher and volatile oil prices anduncertainty about the impact of the situation inJapan had temporarily erased some of the gains inMarch, but the most recent data show a continuedupward movement. As compared to the pre-crisislevel, gains are still unevenly distributed acrosssectors, with financial stocks lagging somewhat(see Graph I.1.13).

Table I.1.2:

Main features of the spring 2011 forecast - EU(Real annual percentage change Spring 2011 Autumn 2010unless otherwise stated) forecast (a) forecast

2007 2008 2009 2010 2011 2012 2011 2012GDP 3.0 0.5 -4.2 1.8 1.8 1.9 1.7 2.0Private consumption 2.1 0.7 -1.7 0.8 0.9 1.3 1.2 1.6Public consumption 1.9 2.3 2.2 0.7 0.3 0.2 -0.2 0.0Total investment 5.8 -0.8 -12.0 -0.7 2.5 3.9 2.8 4.2Employment 1.7 0.9 -1.9 -0.5 0.4 0.7 0.4 0.7Unemployment rate (b) 7.2 7.1 9.0 9.6 9.5 9.1 9.5 9.1Inflation (c) 2.4 3.7 1.0 2.1 3.0 2.0 2.1 1.8Government balance (% GDP) -0.9 -2.4 -6.8 -6.4 -4.7 -3.8 -5.1 -4.2Government debt (% GDP) (d) 59.0 62.3 74.4 80.2 82.3 83.3 81.8 83.3Adjusted current-account balance (% GDP) -1.0 -2.0 -0.9 -0.9 -0.6 -0.3 -0.5 -0.3

Contribution to change in GDPDomestic demand 2.8 0.7 -3.1 0.5 1.0 1.5 1.2 1.7Inventories 0.2 -0.3 -1.1 0.8 0.1 0.1 0.1 0.0Net exports -0.1 0.1 -0.1 0.5 0.7 0.4 0.4 0.3

(a) The European Commission spring 2011 forecast is based on available data up to May 2, 2011.(b) Percentage of the labour force. (c) Harmonised index of consumer prices, annual percentage change.(d) Unconsolidated general goverment debt. For 2010, this implies a debt ratio, which is 0.2 pp. higher than the consolidated

general government debt ratio (i.e. corrected for intergovernmental loans) published by Eurostat on April 26, 2011.

17

Graph I.1.13: Stock-market performance

102030405060708090

100110

Jan07

Jul07

Jan08

Jul08

Jan09

Jul09

Jan10

Jul10

Jan11

Jul11

EURO STOXX (financials) EURO STOXX 50

Jan 2007=100

1.4. THE ECONOMIC RECOVERY IN THE EU

The economic recovery in the EU and the euroarea gained momentum in 2010, the first year with

positive real GDP growth after the recession. In2010, real GDP growth accelerated to 1.8% in theEU (see Table I.1.2) and the euro area (see TableI.1.4). Within the year, the growth momentumeased in the second half of 2010 (see GraphI.1.14), reflecting the soft patch in global growthafter the end of the push from the inventory cycleand the fading away of fiscal support.

-2.0

-1.0

0.0

1.0

2.0

3.0

4.0

05 06 07 08 09 10 11 1290

95

100

105

110

GDP growth rate (lhs)GDP (quarterly), 2005=100 (rhs)GDP (annual), 2005=100 (rhs)

Graph I.1.14: Real GDP, euro area

forecast

q-o-q% index, 2005=100

3.12.9

0.4-4.1 1.8

1.7

1.6 1.8

Figures above horizontal bars are annual growth rates.

In the last quarter of 2010, real GDP grew by 0.3%(q-o-q) in the euro area and by 0.2% (q-o-q) in theEU. This resulted in a carry-over for GDP growthin 2011 of 0.6% in areas (see Table I.1.3).(8)

(8) Carry-over effects have been shown to be useful for short-term forecasting; see e.g. Toedter, K.-H., How useful is thecarry-over effect for short-term economic forecasting?,Deutsche Bundesbank Discussion Paper Series 1, 21/2010.


Table I.1.3:GDP growth forecast, additional featuresEU, (%) 2010 2011 2012Carry-over from preceding year 0.3 0.7 0.7

Y-o-Y in Q4 2.2 1.8 2.1

Annual average 1.8 1.8 1.9

Euro area, (%) 2010 2011 2012Carry-over from preceding year 0.3 0.6 0.6

Y-o-Y in Q4 2.0 1.6 2.0

Annual average 1.8 1.6 1.8

The recovery is evolving at moderate paceover the forecast horizon ...

On the supply side, industrial production has beenon an upward trend for some time. Sincebottoming out in April 2009 it has gained about15% up to February 2011 (latest available data).However, the pre-crisis levels have not yet beenreached. In the euro area, industrial output was stillaround 10% below the levels recorded in early2008. Even in relatively strongly growingcountries like Germany, pre-crisis levels have notyet been reached. Industrial production growth(excl. construction) was robust in early 2011 andindicators that lead industrial production growth,e.g. order inflows, showed upward movements inlate 2010 and in the first months of this year (seeGraph I.1.15). In February 2011, industrial neworders in the EU manufacturing sector were 20%higher than a year ago (21% in the euro area),whereas industrial production had only increasedby 9% (in both areas). This supports expectationsthat industrial production will approach itspre-crisis levels over the forecast horizon.

Graph I.1.15: Industrial new ordersand industrial production, EU

70

80

90

100

110

120

130

05 06 07 08 09 10 1185

90

95

100

105

110

Industrial new orders (lhs)Industrial production (rhs)

index, 2005=100 index, 2005=100

The prospects for economic growth as provided bysurvey indicators are generally favourable. TheEconomic Sentiment Indicator followed an upwardtrend in the EU and the euro area until March2011. In April 2011 it declined, but remained wellabove the long-term average, whereas the readingsof the euro-area and EU PMI Composite OutputIndex were close to the highest levels sincemid-2006 (see Graph I.1.16).

The continued positive readings of leading surveyindicators, not only in manufacturing but also inthe services sector, suggest that the industrialupswing is broadening. This is in line with thehistorical evidence that the more cyclicalmanufacturing output, where stocks and export-oriented production have a key role, leads activityin the services sector (see Box I.1.3).

Table I.1.4:

Main features of the spring 2011 forecast - euro area(Real annual percentage change Spring 2011 Autumn 2010unless otherwise stated) forecast (a) forecast

2007 2008 2009 2010 2011 2012 2011 2012GDP 2.9 0.4 -4.1 1.8 1.6 1.8 1.5 1.8Private consumption 1.7 0.4 -1.1 0.8 0.8 1.2 0.9 1.4Public consumption 2.2 2.3 2.5 0.7 0.2 0.3 -0.1 0.2Total investment 4.7 -0.8 -11.4 -0.8 2.2 3.7 2.2 3.6Employment 1.7 0.6 -2.0 -0.5 0.4 0.7 0.3 0.6Unemployment rate (b) 7.6 7.6 9.6 10.1 10.0 9.7 10.0 9.6Inflation (c) 2.1 3.3 0.3 1.6 2.6 1.8 1.8 1.7Government balance (% GDP) -0.7 -2.0 -6.3 -6.0 -4.3 -3.5 -4.6 -3.9Government debt (% GDP) (d) 66.2 69.9 79.3 85.4 87.7 88.5 86.5 87.8Adjusted current-account balance (% GDP) : -1.5 -0.3 -0.1 0.1 0.2 : :

Contribution to change in GDPDomestic demand 2.4 0.5 -2.6 0.5 0.9 1.5 0.9 1.5Inventories 0.2 -0.2 -0.9 0.5 0.0 0.1 0.1 0.0Net exports 0.2 0.1 -0.7 0.8 0.7 0.2 0.5 0.2

(a) The European Commission spring 2011 forecast is based on available data up to May 2, 2011.(b) Percentage of the labour force. (c) Harmonised index of consumer prices, annual percentage change.(d) Unconsolidated general goverment debt. For 2010, this implies a debt ratio, which is 0.3 pp. higher than the consolidated

general government debt ratio (i.e. corrected for intergovernmental loans) published by Eurostat on April 26, 2011.

18


Box I.1.3: How do business and consumer survey readings depict the ongoing recovery?

After almost two years of strong and nearlycontinuous rise, the Economic Sentiment Indicator(ESI) has been increasing more modestly since thebeginning of 2011 and recorded a marked drop inthe latest April reading. However, its level remainssignificantly above historical average, suggestingthe ongoing recovery to remain on track.

Survey data highlight several peculiar features ofthe current recovery, which follows theunprecedentedly deep recession of 2008/2009.

First, the recovery so far has been ratherunbalanced at the sectoral level, being primarilydriven by industry. Until the latest reading, surveydata had shown continuous and steady gains inconfidence in industry, with both order books andactivity showing a broadly steady upward trendover the last two years. Furthermore,manufacturers’ assessment of stocks is close tohistoric lows, suggesting that stock-building willcontribute significantly to demand in the comingmonths. This sectoral pattern is in line with thepattern of a sharp rebound in world trade acting asthe initial engine of the current recovery, which hasmainly boosted industrial activity, while domesticdemand has been slower to get going. Latestreadings of the surveys, with managers expressingincreasing concerns for weakening demand, pointto a softening of performance in the services sector.

Second, an unbalanced pattern is also visible at thecountry level. Whereas the crisis-related shock washighly synchronised, with confidencesimultaneously plunging in all the Member States,the ensuing recovery has been characterised byrenewed country divergence with markeddifferences in the rebound of sentiment (Graph 1).

Graph 1: Rebound of ESI in EU Member States(since March 2009)

0

5

10

15

20

25

30

35

40

45

50

BG EL CY PT RO ES CZ M PL LV IT FI SK SI SE LT FR LU UK

AT EE EU NL

DE BE DK

HU

balance

In particular the rebound of the ESI observed incore and Nordic countries has so far beensignificantly stronger than in peripheral countries.

Third, the ongoing recovery is characterised byunusually sluggish GDP growth. Signals from harddata have so far not been as strong as relativelyupbeat survey readings would have suggested (seeGraph 2). Discrepancies between soft and hard datahave been rather common throughout the crisis andin the subsequent recovery. While the decouplingaround the trough of the cycle can be mainlyexplained by the existence of non-linearity at timesof very deep recessions, the present decouplingcould either signal an overshooting in householdand business confidence, or reflect a downwardshift of the EU economy onto a lower growth pathin the wake of the crisis.

Graph 2: GDP growth and Economic SentimentIndicator, EU

60

70

80

90

100

110

120

06Q1 07Q1 08Q1 09Q1 10Q1 11Q1

balance

-6-5-4-3-2-1012345y-o-y %

ESI (lhs) GDP growth (rhs)

While latest survey data indicate that the currentrecovery remains on track, a comparison withdevelopments in sentiment in the recovery of1993-95 hints at a number of factors that couldweigh on growth in the more medium term.

Consumers continue to express uncertainties aboutthe general economic situation and concern aboutthe effect of the crisis on their personal financialsituation. Thus, precautionary household savingscould remain high for some time, dampening theprospects for private consumption. Corporateinvestment plans, albeit improving, are still weakerthan in the 1993-95 recovery, raising furtherconcerns about prospects for domestic demand.Finally, survey evidence suggests that the latestrecession has had a bigger negative impact onproduction capacity in industry than previouscyclical episodes.

19


Graph I.1.16: Economic Sentiment Indicatorand PMI composite index, EU

55

70

85

100

115

130

99 00 01 02 03 04 05 06 07 08 09 10 1120

30

40

50

60

70

PMI composite (rhs)Economic Sentiment Indicator (lhs)

3-month moving average (ma) 3-month ma

Over the forecast horizon, the outlook for realGDP growth is almost unchanged from theautumn. While the stronger-than-expected growthin the US economy, as well as improvements inleading indicators, would support a somewhatmore optimistic outlook, higher commodity pricesand increased concerns about consumer priceinflation dampen the outlook. Moreover, thewithdrawal of policy support will be felt. RealGDP growth is expected to continue along atrajectory of around 2% in the EU and in the euroarea, slightly higher in 2011 than forecast lastautumn and in March (interim forecast), butbroadly unchanged in 2012. Against thebackground of somewhat less buoyant growth inworld output, less supportive fiscal and monetarypolicy, and commodity prices remaining atelevated levels, economic growth in the EU isexpected to strengthen only marginally in 2012.

... despite higher commodity prices ...

Higher oil prices are weighing on Europeangrowth, but much less than in earlier episodes ofrising oil prices, since the channels through whichthey could affect Europe have changed. Theenergy intensity of production is much lower dueto a change in the sectoral composition of GDP(a higher share of services that are less energy-intensive) and better energy efficiency. Thislowers the cost pressures emerging from higher oilprices and it reduces the impact on the profitoutlook of companies and – via equity prices – thewealth impact on consumption. While the majorpost-war oil-price shocks were followed byeconomic downturns,(9) the current oil-priceincrease is not expected to cause a downturn. Thedirect impact via lowering real disposable income

(9) See Hamilton, J. D., Historical oil shocks, NBER WorkingPaper no. 16790, February 2011.

and the indirect effect on consumer confidencehave been rather limited during recent periods ofoil-price increases (e.g. in 2008). Nevertheless, theoil-price increases are expected to be strongenough to cast a shadow on the European growthoutlook (see Box I.1.4).

... but with persisting cross-country differences

The state of the recovery differs across MemberStates, with euro-area growth owing much to thestrong rebound in economic activity in Germany,whereas at the EU level the growth performancesof Poland and Sweden also stand out. The relativeimportance of these economies is reflected in theircontribution to the aggregate growth rate of realGDP (see Graph I.1.17).

Graph I.1.17: EU real GDP growth 2010-12,largest contributions by Member States

0.0

0.5

1.0

1.5

2.0

2010 2011 2012

DE UK FR IT SE PL NL ES Others

pps.

Since impulses to economic activity in Germanystem to a large extent from non-EU demand, thecountry's outstanding growth performance createspositive spillovers for other Member States, mostnotably via higher demand for imported inputs,but, as domestic demand strengthens in Germany,also via imports of consumer goods andtourism.(10)

There are hints that these cross-country differenceswill persist in the short term. The latest readings ofleading indicators differ across Member States. Forinstance, the Economic Survey Indicator, derivedfrom the Commission surveys, in April 2011 stoodabove its long-term average in 15 Member States(10 in the euro area) and below in 11 MemberStates (Ireland not covered in the surveys).

(10) See the analysis of spillovers from Germany in Box I.1.3 inEuropean Commission (DG ECFIN), European EconomicForecast – Autumn 2010, European Economy 7/2010.

20


Box I.1.4: The macroeconomic impact of higher oil prices

Uncertainty regarding the evolution of oil prices isa major downside risk to growth and upside risk toinflation over the forecast horizon. Against thisbackground, this box presents the macroeconomicimpact of rising oil prices on the basis of modelsimulations (Commission's QUEST model).

Global oil markets started to tighten last year, whendemand growth outstripped supply by ½ millionbarrels a day (mb/d). Robust economic growth,especially in Asia, coupled with stronger-than-expected oil demand in OECD countries, pushedoil prices above the 70-80 USD per barrel (bbl)range at the end of 2010 (see Graph 1). InDecember 2010 Brent oil averaged 92 USD/bbl(69 EUR/bbl).

In the first quarter of 2011, oil prices rose furtheron the back of supply risks and disruptions in theMiddle East and North Africa. By the end of April,Brent oil was trading at 125 USD/bbl, a 2½ yearhigh.

The rise in prices occurred as the spare capacity fellto its lowest level since late 2008, following theloss of 1.3 mb/d of Libyan exports. This loss waspartly offset by increased production by otherOPEC members such as Saudi Arabia. In additionto tight fundamentals, markets have concerns overunrest spreading to other regional producers. Thishas triggered a 'geopolitical' risk premium.

Graph 1: O il-price developments, 2008-11

0

20

40

60

80

100

120

140

160

Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11

Oil price in USD Oil price in EUR

How will higher oil prices affect the economicrecovery? Oil dependency of the EU economy hasbeen much reduced since the oil-price shocks in the1970s and 1980s, thanks to improvements inenergy efficiency and more diversified energy mix.Extra-EU oil imports amounted to around 1.7% ofGDP in 2010.

The impact of higher oil prices on the real economydepends on substitution possibilities, which will belimited in the short run. Higher oil prices implya terms-of-trade loss and a wealth transfer to oilexporting countries. It also affects relative prices,by raising the cost of energy inputs in theproduction process.

Simulations with the energy module of the QUESTmodel illustrate the potential impact of oil-priceshocks on the EU economy. The model capturesboth supply and demand channels as energy servesas an input in the production process and isconsumed by households.

Table 1 shows the effects of a USD 30/bbl. increasein the price of oil on GDP, prices andunemployment. Such an increase is equivalent tothe increase in prices between December 2010 andend-April 2011 and to the upward revision to oil-price assumptions since the autumn forecast. Withlimited substitution possibilities in the short run,the oil-price increase has an immediate negativewealth effect and reduces income. GDP falls by0.3% in the first year and by a further 0.4% in thefollowing year. Prices rise as costs of higher oilprices feed through into higher energy prices andraise costs for companies. The unemployment rateis 0.5 pp. higher compared to the baseline level.This simulation assumes the shock is exogenousand permanent. To the extent the increase in oilprices is partly driven by higher global demand, thetrade effects could partly mitigate the impact ofhigher oil prices on the EU economy. A temporaryshock would have smaller effects. Themacroeconomic impact of higher oil prices willdiffer (particularly on prices) across countries asthe oil dependency varies.

Table 1:

EU27: Effects of a USD 30/bbl. increase in the price of crude oil:(% difference from baseline) year 1 year 2GDP level -0.3 -0.7GDP deflator 0.2 0.7Unemployment rate 0.3 0.5

As with any simulations, the results should beinterpreted with caution. Three sources ofuncertainties should be highlighted. First, theimpact of an oil-price shock on the economydepends crucially on how wages respond. Second,the price-elasticity of oil demand also influencesthe magnitude of the effects of oil-price shocks onthe economy. Finally, the impact of higher oilprices could have non-linear effects that the modeldoes not capture adequately.

21


In the seven largest EU Member States thedifferences between the readings in April 2011 andlong-term averages were in a range between 15(Germany) and -10 (Spain). In addition, a lot ofvariety is indicated by the components, withpronounced differences in construction confidence(see Graph I.1.18).

-60-50-40-30-20-10

0102030

ES PL IT UK EA EU NL FR DEManufacturing Services ConsumersConstruction Retail ESI

Graph I.1.18: Economic Sentiment Indicator (ESI)and components - April 2011, difference from long-

term average

Other survey indicators, such as the PMImanufacturing output index, also point tosubstantial cross-country differences. The indexvaried in the first quarter of 2011 in the euro area(59.7) between 42.8 in Greece and 63.2 inGermany (see Graph I.1.19).

Graph I.1.19: PMI manufacturing output index

40

45

50

55

60

65

DE IT AT EA IE FR NL ES EL DK CZ UK EU PL

2010q3 2010q4 2011q1

The differences between the national readings ofthe short-term indicators point to the short-termpersistence of cross-country differences. Over thetwo-year forecast horizon, as more Member Statesbegin reaping the benefits of successfullyaddressing adjustment challenges, differences inthe pace of the recovery are expected to diminish,as explained in the introductory section of thischapter.

The rebalancing of economic growth acrosscomponents continues ...

The rebalancing of economic growth acrossdemand components was one of the key features in2010. An external stimulus from rebounding worldtrade, stimuli from extraordinary policy measures,and, last but not least, the positive influence of theinventory cycle, has helped the European economyto enter the recovery path. Over time, privateconsumption and investment demand have thenincreasingly supported the recovery, particularly inthe first half of 2010, implying a larger role fordomestic demand components (see Graph I.1.20).

-2.5-2.0-1.5-1.0-0.50.00.51.01.5

07Q1 08Q1 09Q1 10Q1

Private consumption InvestmentGovernment consumption Net exportsInventories GDP (q-o-q%)

pps.Graph I.1.20: GDP growth and its

components, EU

In the last quarter of 2010, this broadening wastemporarily interrupted, as exceptionally badweather conditions hit investment growth inseveral countries. Some economic activity isexpected to have been postponed and couldprovide an extra push to economic growth in thefirst half of 2011. The expectation of postponedeconomic activity is supported by the stronginflow of orders in the fourth quarter of 2010,which must be worked off in 2011. The describedrebalancing of economic growth is expected tocontinue as a closer look to the GDP demandcomponents in the subsequent sections indicates.

... as the outlook for private consumptionremains solid, ...

Following a decline during the recession, privateconsumption increased in 2010 by 0.8% in the EUand in the euro area, regaining more than half ofthe loss of the preceding year. The situationdiffered across countries, with nearly two thirds ofthe Member States recording increasing privateconsumption in 2010. The quarterly profile ofprivate consumption has been rather volatile sincethe beginning of the recovery. In the fourth quarterof 2010, household spending growth accelerated to

22


0.3% (q-o-q) in the euro area (0.2% in the EU)after 0.2% in each of the two preceding quarters.This implies a carry-over of 0.4% for 2011.

Looking ahead, survey indicators signal moderatechanges in the near term. The ConsumerConfidence Indicator has been rather stable in theEU and the euro area in the first quarter of 2011standing close to long-term averages, beforefalling in April, mainly reflecting increasedconcerns about the general economic situation andthe future financial situation of households (seeGraph I.1.21). However, as compared to autumn,the assessment of the general economic situationhas improved and unemployment fears havereceded.

Graph I.1.21: Private consumption andconsumer confidence, euro area

-2

-1

0

1

2

3

03 04 05 06 07 08 09 10 11-40

-35

-30

-25

-20

-15

-10

-5

0

Household consumption (lhs)Consumer confidence (rhs)

y-o-y % balance

The improvement in consumer confidence has notyet become visible in households' expected majorpurchases, which remain well below long-termaverages in the EU and the euro area (see GraphI.1.22), and between February and April 2011 thecomponent has been falling again.

Graph I.1.22: Expected major purchases overthe next year and car sales, EU

-30

-20

-10

0

10

20

30

03 04 05 06 07 08 09 10 11-30

-25

-20

-15

-10

-5

0

Car registration (lhs)Expected major purchases over next 12 months (rhs)Expected major purchases, long-term average (rhs)

y-o-y% % balance

Other consumption-oriented indicators such as thenumber of car registration in the EU, point to amore upbeat picture. Following the sharp increasein 2009/10, triggered by the car-scrapping schemesin a number of Member States, and the subsequentsharp increase in purchases of new cars, therebound from the trough had started andregistration numbers had already moved up in thefirst quarter of 2011.

But until April 2011, retail confidence declinedagain, though it remained well above the long-termaverage in both the EU and the euro area. Thisrelatively positive assessment is partlysubstantiated by retail sales volumes, which haverebounded after the sharp decline during therecession (see Graph I.1.23).

Graph I.1.23: Retail trade volumes and retailconfidence, euro area

-6

-4

-2

0

2

4

6

05 06 07 08 09 10 11-25

-20

-15

-10

-5

0

5

10

Retail trade volume, 3mma (lhs)Retail confidence (rhs)

y-o-y % balance

Beyond the short term, the outlook for privateconsumption remains on the up, as moderateemployment growth and the ongoing recovery areexpected to provide support, although higherinflation and – in a number of countries – tax rateswill partially offset this effect. Thus, the traditionaldrivers of private consumption are expected todeliver only moderate contributions in 2011.Employment growth is expected to remainsubdued and consumer price increases are takingaway real purchasing power from consumers. Realdisposable incomes are expected to grow at a mere½% in 2011 in the largest Member States, with theexception of Germany (1¼%), before growingmore strongly in 2012. While real compensationper employee, another driver of disposableincomes, is expected to shrink in 2011 in both theEU and the euro area (-¼%), relatively stronggrowth in non-labour incomes in both areas (about4% in 2011 and 4½% in 2012) is expected to pushdisposable incomes.

23


In addition private consumption growth shouldbenefit from higher real disposable income and anexpected further decline in the households' savingrates. Despite ongoing deleveraging (see BoxI.1.2) and saving incentives associated withincreases in interest rates, euro-area households areexpected to reduce their saving rate. (11) Thisexpectation is supported by Commissionhousehold surveys, particularly by the morepositive assessment of their financial situation andlower unemployment fears. Beyond the short term,the improving outlook and the stabilisation in thelabour markets in most Member States support theexpected decline in the savings rate.

Graph I.1.24: Private consumption, realdisposable income and saving rate , euro area

-0.9

-0.4

0.1

0.6

1.1

1.6

99 00 01 02 03 04 05 06 07 08 09 10 11 1213.013.514.014.515.015.516.016.517.0

Private consumption (q-o-q%, lhs), forecast (y-o-y%, lhs)Real disposable income (q-o-q%, lhs)Household saving rate (rhs)

% % of disposable income

forecast

All in all, private consumption growth is expectedto keep pace in 2011 and to accelerate moderatelyin 2012 (see Graph I.1.24). Among the largestMember States, Poland, France and Germany areexpected to record above average growth rates,whereas private consumption in Spain, Italy, theNetherlands and the UK will expand relativelymodestly.

... public consumption eases as consolidationmakes progress, ...

In 2010, public consumption increased by 0.7% inthe EU and the euro area, particularly on the backof relatively strong growth in the second half ofthe year. Thus, the carry-over is positive for 2011.

Over the forecast horizon, fiscal consolidation isforecast to take hold. In 2011, public consumptiongrowth is expected to fall to rates of 0.3% in theEU and 0.2% in the euro area. The impact of fiscalconsolidation is also expected to show up in

(11) This pattern of the savings rate is in line with historicalevidence as described in the analysis of savings andinvestment patterns in chapter I.3 in this document.

government consumption in 2012, keeping itsgrowth rate unchanged.(12)

The main contribution to the decline in the growthrate of government consumption comes from lowerexpenditures on the compensation of employees inthe public sector and a drop in intermediateconsumption in 2011, whereas social transfers areexpected to grow almost in line with prices.Compared to the autumn forecast, the outlook for2011 has been revised up by ½ pp., whereas theoutlook for 2012 has been revised up.

... but gross fixed capital formation is expectedto accelerate.

Investment, a very volatile component of GDP,had fallen sharply during the fierce recession, ascompanies trimmed business and reduced debt. In2010, another decline was registered, but it wassubstantially smaller than in the year before and inthe second quarter of 2010 positive growth rates(q-o-q) were recorded in the EU and the euro area.According to the most recent detailed nationalaccounts data, however, gross fixed capitalformation fell again in the fourth quarter of 2010,reflecting the impact of weather conditionstowards the end of 2010, particularly in the UK,where construction investment fell sharply.

All types of investment (equipment, construction,and other) were weak during the recession and inthe early phases of the recovery. As regardssectors, increases in government investment werenot strong enough to offset declines in othersectors.

Looking ahead, investment growth is expected toaccelerate on the back of growing domesticdemand, higher capacity utilisation – according toCommission surveys, in the second quarter of 2011it exceeded the long-term average in the EU for thefirst time since the trough – and still favourablefinancing conditions with real interest rates low byhistorical standards. Investment growth is alsoexpected to be supported by strong earnings andstrengthening balance sheets. Total investment isprojected to rebound in 2011, by around 2½% inthe EU and 2¼% in the euro area, and to increasein 2012 to 4% in the EU and slightly less in theeuro area. This mainly reflects a relatively strong

(12) For an in-depth analysis see chapter I.2 ("The impact offiscal consolidation on Europe's economic outlook") inEuropean Commission (DG ECFIN), European EconomicForecast – Autumn 2010, European Economy 7/2010.

24


outlook for equipment investment, but a moremuted one for investment in construction. It alsoreflects stronger growth momentum in the privatesector (around 5% in 2012 in both areas) thatoffsets the decline in government investment(4½% on average in each year in both areas).

As compared to the autumn forecast, however, theinvestment outlook for the EU looks slightly lessfavourable due to a substantial downward revisionin the forecast for investment in the UK (by 3½pps. in 2011 and by 2½ pps. in 2012). In the euroarea, the downward revisions introduced for debt-troubled Member States (on average 6 pps. in2011) are offset by the brighter investment outlookin other economies.

Equipment investment taking a leading role ...

Equipment investment is expected to increasemarkedly this year and next, recovering up forsome of the losses incurred during the downturn.The expected pick-up in equipment investmentreflects stronger demand on the back of somecatching-up of investment projects postponedduring the recession, the dissipating uncertaintyabout the economic outlook and demand prospects.Further support is received from increasingaverage rates of capacity utilisation (see GraphI.1.25).

-24

-16

-8

0

8

16

99 00 01 02 03 04 05 06 07 08 09 10 11 1268

72

76

80

84

88

Equipment investment (q-o-q%, lhs)Capacity utilisation rate (rhs)Equipment investment (y-o-y%, lhs)

% %forecast

Graph I.1.25: Equipment investment and capacityutilisation in manufacturing, euro area

Investors are able to benefit from favourablefinancing conditions, as the recovery of thefinancial sector is ongoing and the expectedtightening of monetary policy has as yet had arather limited impact on short- and long-terminterest rates. In addition, strong profit growth in2010 (see Graph I.1.26) has improved financialpositions of companies. In the euro area, recentinformation about access to credit (see also Section

1.3) indicates that there are no substantial obstaclesfrom the financial side over the forecast horizon.

-12

-8

-4

0

4

8

04 05 06 07 08 09 10

Profits (gross operating surplus and gross mixed incomes,current prices)

Graph I.1.26: Profit growth,euro area

y-o-y%

In 2011 and 2012, equipment investment isexpected to grow strongly, with the highest euro-area growth rates in Estonia, Luxembourg andGermany. In Germany, the rebound is not onlyreflecting the recent strengthening of economicactivity, but also a catching-up after more thana decade of low net investment, during which(financial) investments abroad had been perceivedas more attractive. In that regard, revised riskperceptions after the financial crisis show up in theregional distribution of investment activity.

... whereas construction and governmentinvestment remain weak ...

The shrinking of the EU construction sector hadalready started when the housing bubble burst insome peripheral countries. Since the trough in2009, the situation has only slightly improved.Indicators from the housing market point to somerecovery, albeit starting from low levels comparedwith pre-crisis levels. Construction sentiment isslightly improving and leading supply indicators,such as building permits, appear to gain ground. Inthe euro area the number of building permits is stillclose to its historical low after a long period ofdeclines (see Graph I.1.27). But, according toavailable national data, the stock of unsold housingremains substantial and can be expected to act as adrag on investment activity.

Government investment had been one of thestrongest components of investment during thecrisis, reflecting efforts to counterbalance theeconomic downturn. As the recovery takes hold,however, public stimuli are being phased out andthe needs of consolidation come to the fore.

25


Graph I.1.27: Housing investment and buildingpermits, euro area

-12

-8

-4

0

4

8

99 00 01 02 03 04 05 06 07 08 09 10 11 12-40

-30

-20

-10

0

10

20

Housing investment (lhs), forecast (lhs)Building permits (rhs)

y-o-y%y-o-y%

forecast

Note: Forecast figures relate to overall construction investment

... and inventory investment is losingimportance.

The inventory cycle has broadly followedhistorical patterns. In 2010, the increase indomestic demand was driven in part bya temporary boost from an end of the period ofde-stocking, with firms raising production toreplenish inventories. Inventories madea contribution of 0.7 pp. to GDP growth in 2010 inthe EU (0.4 pp. in the euro area). However,compared with historical patterns, the contributionto GDP growth was modest. This may reflect thatduring the recession, according to Commissionsurveys, the relationship between stocks andproduction expectations has diverged from itshistorical path. Inventory management becamemore responsive to short-term fluctuations andmanagers showed increased risk aversion, makingthem hold stocks down.(13)

Recent survey indicators suggest that stocks arecurrently at a very low level by historical standardsin some Member States. For instance, Commissionsurveys in early 2011 point to rather low inventorylevels, so that a further pick-up in the first half of2011 cannot be excluded, with inventoryinvestment contributing to domestic demand.Nevertheless, the contribution of inventoryinvestment should be moderate over the forecasthorizon.

Domestic demand is gaining importance ...

During the recession the sharp fall in domesticdemand made by far the largest negativecontribution to GDP growth, whereas contributionsfrom inventories and net exports were relatively

(13) See European Commission (DG ECFIN), EuropeanBusiness Cycle Indictors, April 2011, pp. 7-9.

small. In the initial phase of the recovery, thissituation changed substantially, as the upturn wasexport-led and the inventory cycle resulted in alarge contribution from companies replenishingstocks. As the recovery is matures, inventories andnet exports are contributing relatively less to GDPgrowth and domestic demand components aregaining importance. This rebalancing of economicgrowth, though still moderate, became visible in2010. While for the year as a whole thecontributions from inventories and externaldemand were still substantial, the largest increasein the contributions to GDP growth was recordedfor domestic demand. This was mainly driven byprivate consumption, since public consumptiongrowth weakened due to the beginning of fiscalretrenchment, and investment growth remained innegative territory. On the back of the expectedstrengthening of household consumption andprivate investment, further substantial increases inthe contribution of domestic demand are expectedover the forecast horizon. In 2011 and 2012,domestic demand is expected to exceed by far thecombined growth contributions of the othercomponents.

... while European net exports continue tosupport the recovery ...

The recovery of exports has been the initial driverof the recovery; with world trade bouncing backstrongly the contribution to economic growth wassubstantial. Following the sharp decline in exportand import volumes in 2009 in the EU (both downby about 12%) and the euro area (down by 13%and 12% respectively), the strong growth in tradevolumes in 2010 almost offset the declines in thepreceding year. In the EU and the euro area, butalso in all euro-area Member States except Italy,Luxembourg and Cyprus, the growth in exportvolumes exceeded that in import volumes. Thiscould be seen as a reflection of relatively stronggrowth in emerging and developing economies ascompared to the more moderate growth ofadvanced economies (see the first section of thischapter). With the EU export share to emergingand developing countries exceeding the importshare even during the crisis year 2009, thedifferent recovery speeds suggest that exports willgrow more strongly than imports, which are moredependent on subdued growth in the EU. And ontop of this, EU exporters gained market shares asoverall export growth exceeded growth in exportmarkets.

26


Developments throughout 2010 were affected bythe expected soft patch in the third quarter, whichshowed up in a slowdown of export growth. In thefourth quarter of 2010, however, euro-area exportgrowth continued to decelerate though at a slowerpace than in the previous quarter (2.0% q-o-q infourth quarter of 2010 after 2.1% in the third and4.5% in the second quarter) and than projected inthe autumn forecast (1.2% in the fourth quarter).At the same time, import growth decelerated aswell, by 1.0% compared to 1.3% in the thirdquarter, resulting in a positive contribution fromnet trade to GDP growth in the fourth quarter of2010. Given lags in the impact of world outputgrowth to EU exports, the deceleration was notnecessarily at odds with the rebound in globalactivity in the fourth quarter of 2010 and theacceleration in world trade (see Graph I.1.28).

Graph I.1.28: Global demand, euro-area exportsand new export orders

-12

-8

-4

0

4

8

12

99 00 01 02 03 04 05 06 07 08 09 10 11 1229

36

43

50

57

64

Exports (q-o-q%, lhs), forecast (y-o-y%, lhs)Output index (Global PMI composite, rhs)New export orders (manuf. PMI, euro area, rhs)

%

forecast

3-month moving average

Over the forecast horizon, continued export growthappears to be in the cards, although the exportcomponents in EU survey indicators (e.g. theexport orders in the Commission surveys) fellslightly in April 2011 after following an upwardtrend between the beginning of the recovery andFebruary 2011. But for the euro area, the indicatorsrecorded a slight increase in April, largely drivenby results from Germany, France and Italy. Themoderation in changes in indicators in recentmonths can be interpreted as signalling anincreasing role for domestic economic activity.Overall, the continued robustness of world tradegrowth and strong export market growth putEuropean exporters into a favourable position.Therefore the forecast for export growth in 2011has been revised up from the autumn forecast,whereas the forecast for 2012 remains unchanged.Most Member States are expected to gain marketshares in 2011 and 2012. Among them are

countries – for instance Spain – that had beenlosing market shares prior to the crisis.

On the import side, a deceleration in the growth ofimport volumes is expected in the EU (from 10%in 2010 to 5½% this year and next) and in the euroarea (from 9½% to 5½% in the respective years).European imports are closely related to the leveland composition of demand as well as to the termsof trade, where the recent sharp increase in importprices (including oil price effects) is expected topartially deter households and companies fromimports. Moreover, in countries experiencing arebalancing of production towards tradable goods(versus non-tradable goods), households' demandfor domestically produced (instead of imported)tradable goods might increase. While this wouldlower the growth of import volumes of final goods,increased demand for imported inputs could partlyoffset this increase. More generally, as therebalancing of economic growth towards domesticdemand components continues, imports shouldgrow slightly more strongly than in 2010.

... and current-account balances point toongoing adjustments.

In 2010, the rebound in world trade affected EUand euro-area exports and imports of goods almostsimilarly, raising them in nominal terms by 18¼%and 17½%, which almost offset the declines in theyear before. Services exports and imports alsoincreased almost in parallel, but at a lower rate ofabout 7¼% in the EU and the euro area. While thetrade balance surplus (goods and services) as apercentage of GDP remained almost unchanged in2010 in the EU (at about ¾%) and the euro area(1¼%), the small current-account deficit observedin the EU and the euro area narrowed marginally,to around ½% of GDP.

The rather moderate developments in the EU andeuro-area aggregates hide differences across EUMember States. While strong growth in exportmarkets, particularly in emerging and developingeconomies, has boosted exports, the still moresubdued growth of domestic demand in mostMember States has limited import growth. Thus,some of the slower growing European economieswere able to reap the benefits of the strong globalrebound in terms of improvements in their externalbalances. In contrast, in those euro-area MemberStates with above-average economic growth,import growth was also relatively strong.

27


Over the forecast horizon, the relatively smallcurrent-account deficit is expected to narrowslightly, approaching balance in 2012 in the EUand close to balance in the euro area. At theMember-State level, many of those countries indeficit in 2010 are expected to reduce theirexternal deficit in 2011 – in the euro area, seven ofthe ten countries, including Spain and Portugal, thecountries with the highest deficits –, whereas insome of the countries in surplus a downwardadjustment towards more balanced positions isexpected (e.g. Germany, Belgium and Finland).A comparison of the pre-crisis situation and therecovery years points to substantial progress inreducing imbalances in many Member States,particularly in the euro area (see Graph I.1.29).

-15

-10

-5

0

5

10

LU NL FI B E DE

AT EA F R IT IE SI

MT ES CY SK PT E E EL

-8

-6

-4

-2

0

2

4

Current-account balance, average 1999-2008 (lhs)Current-account balance, 2010 (lhs)Expected change, avg. 2011-2012 versus 2010 (rhs)

% of GDP pps. of GDP

Graph I.1.29: Current-account balances,euro-area Member States

All in all, the current-account forecasts for 2011and 2012 point to an ongoing adjustment of intra-EU current-account imbalances (see Graph I.1.30).

-6-4-20

2468

06 07 08 09 10 11 12

Surplus countries Deficit countries

Graph I.1.30: Current-account balance for deficitand surplus EU Member States

% of GDP

Note: Member States are identified as surplus or deficit countrieson the basis of their current-account position in 2006; current-account balances are not consolidated.

forecast

The adjustment is most marked in countries wheredeficits were very large at the onset of the crisis.But some structurally high current-account

surpluses also appear to be gradually to be comingdown on the back of stronger domestic demandand dynamic imports.

Only moderate labour-market improvementsso far ...

European labour markets have been remarkablyresilient during the recession, with employmentdeclining less than output. Drops in demand facedby firms were mainly met through a reduction inhours worked per person employed (labourhoarding), rather than through cuts in employment.These developments appear to be, to some extent,an aftermath of various labour-market supportschemes put in place by governments in MemberStates.

Looking for signs of the recovery in labourmarkets, it is in line with historical evidence frompast recoveries to find a lagged response todevelopments in GDP.(14) But this time, theresilience of the labour market during the crisis isstill exerting its impact on current developments.The relative stability of employment, achievedinter alia by the hoarding of labour, implieda temporary reduction in productivity during thedownturn. It now has now implications foremployment outlook as companies try to rebuildproductivity, thereby dampening the demand forlabour. The recovery had an immediate impact onlabour markets in terms of hours worked, whichhad already started to move up since mid-2009.Headcount employment, however, only started torecover in the course of 2010. As a result, theunemployment rate remained stable at high levels,lingering at 9½% in the EU and around 10% in theeuro area.

The muted recovery in employment, combinedwith stronger output growth, has implied a reboundin productivity since the start of the recovery.During the recession, however, developments incompensation (in the euro area, compensation perhour increased by 3% in 2008 and by 3¼% in2009) had not mirrored the decline in productivity(hourly labour productivity declined by ¼% and¾% respectively) so that more recent increases inproductivity can be understood as a catching-upwith almost-maintained contract wages. In fact,compensation of employees and hourly labour

(14) See for instance Holland, D., S. Kirby and R. Whitworth,An international comparison of employment in recovery,National Institute Economic Review, No. 214, October2010, pp. F35-F40.

28


costs rose only slightly during the first quarters ofthe recovery, resulting in declines in unit labourcosts in 2010.

... but ongoing recovery prepares the groundfor stronger employment growth ...

For 2011, the latest readings of survey indicatorsof firms' employment expectations, both from theEuropean Commission and PMI employmentindex, point to further improvements inemployment, with job creation flows only partiallyoffset by expected public sector job losses in someMember States. Further on, employment growth in2011 and 2012 will depend on developments inlabour costs, productivity and demand.

The moderate improvement in the EU labourmarket during the recovery may suggest thatcompanies that hoarded labour during therecession are (still) able to increase the hoursworked per employee or to raise the productivityof their current workforce. As the crisis loweredpotential output growth, it might also haveimpaired potential productivity growth, suggestingthat any further increases in demand over theforecast horizon could now trigger strongeremployment responses.

Developments in labour costs may not be anobstacle to such responses. During the recession,developments in compensation had only partiallymirrored productivity developments, which has ledto some cost pressures in companies, but hourlylabour costs rose only moderately during the firstquarters of the recovery (at an annual rate of 1.6%in the euro area and 2.0% in the EU in the fourthquarter of 2010, with the wage component risingsimilarly) and unit labour costs that had been risingduring the crisis declined in 2010.

Given broadly unchanged prospects for outputgrowth, labour markets should gradually improve,broadly as expected in the autumn forecast, withemployment expanding as of this year andunemployment rates decreasing over the forecasthorizon (see Graph I.1.31). This outlook comprisesemployment growth in many Member States butalso in the EU and the euro area (0.4% in 2011,0.7% in 2012 in both areas).

... with substantial cross-country differences.

However, the employment outlook for the EUcontinues to display rather different prospects at

the Member-State level. Employment growth ismost dynamic, and delivering new jobs, incountries with strong growth and relatively flexiblelabour markets. Unemployment is persisting incountries that are facing large structuraladjustments associated with downward revisionsof activity in construction and real estate as well asthe financial sector. Upside risks to thisemployment outlook are related to the size andspeed of ongoing structural reforms that couldimprove labour-market conditions over theforecast horizon.

Graph I.1.31: The labour market, EU

-1.0

-0.8-0.6

-0.4-0.2

0.00.2

0.40.6

0.8

03 04 05 06 07 08 09 10 11 126.5

7.0

7.5

8.0

8.5

9.0

9.5

10.0

Employment growth (q-o-q%,lhs), forecast (y-o-y%)Unemployment rate (rhs)

q-o-q % % of the labour force

forecast

Spain and Ireland are experiencing the highestunemployment rates in the euro area (20.6% and14.8%, respectively, in the first quarter of 2011),together with Estonia, Greece (14.3% and 14.1%in the fourth quarter of 2010, the latest availabledata), Slovakia and Portugal (14.0% and 11.1% inthe first quarter of 2011). However, in countrieslike Italy, France and Belgium, the impact of thecrisis on unemployment has been milder (withunemployment rates at 8.3%, 9.5% and 7.7%,respectively). In contrast, Germany (6.4%) haseven experienced a remarkable drop in itsunemployment rate since the onset of the crisis.

Looking ahead, in 2011 increases in theunemployment rates are expected for Greece,Ireland, Portugal, Spain, Slovenia and the UK.Apart from the UK, these are also the onlycountries where employment is expected to shrink.As the recovery gathers pace again and the laggedimpact of the European recovery becomes morevisible in labour markets, employment is expectedto grow in all Member States with the exception ofPortugal. In all Member States except Portugal andGreece, a decline in the unemployment rate isforecast for 2012.

29


The end of restrictions on labour mobility in theEU as of 1 May 2011 (except for citizens ofBulgaria and Romania) is not expected to havesignificant short-term effects on European labourmarkets, since most old Member States hadalready opened their labour markets in previousyears. The only countries now taking this step –Germany and Austria – are expected to face amoderate increase in migration with a high shareof employable persons. This expectation issupported by studies on the impact of migrationafter enlargement,(15) but also by recent country-specific analyses.(16)

Higher commodity prices feeding through thesupply chain ...

On the back of soaring commodity prices, EUimport prices have increased markedly throughout2010 (7½% in the EU and the euro area) and early2011. This upward trend impacts strongly onproducer prices, exceeding the upward pressurefrom labour costs by far, since the weak labour-market conditions kept wage growth subdued. Inthe fourth quarter of last year, wages increased atan annual rate of about 2% in the EU (1½% in theeuro area). Total hourly labour costs grew roughlyat similar rates. With employment growth laggingand accelerating only slowly, faster – but stillrelatively moderate – wage growth is expectedover the forecast horizon. Growing compensationper employee and lower productivity growth areexpected to bring unit-labour-cost growth in theEU and the euro area to 1% in 2011 and 1½% in2012.

Since July 2009, the annual rate of change inproducer prices has been on an upward trend inboth the EU and the euro area (see Graph I.1.32).Up to February 2011 (latest data), producer priceswere mainly driven by the energy pricecomponent. As seen in the last episode of sharplyincreasing oil prices in 2008, the acceleration inthe energy price component has exceeded that in

(15) See e.g. Barrell, R., J. Fitzgerald and R. Riley, EUenlargement and migration: assessing the macroeconomicimpact, Journal of Common Market Studies, 2010, 48(2),pp. 373-395. The European Commission expects the totalnumber of nationals from the EU-8 countries living in theEU-15 Member States to increase from currently 0.6% to0.8% of the population in 2015, see European Commission,Press Release IP/11/506, 28 April 2011.

(16) See for Germany e.g. Baas, T. and H. Brücker, Arbeitneh-merfreizügigkeit zum 1. Mai 2011: Mehr Chancen alsRisiken für Deutschland, IAB Kurzbericht, 10/2011; andfor Austria e.g. Nowotny, K., AFLA – labour mobility anddemand for skilled labour after the opening of the Austrianlabour market, WIFO, April 2011.

the general index (up at an annual rate of 7.1% inthe EU and 6.6% in the euro area in February2011) by far.

-20-15-10

-5

0

5

10152025

05 06 07 08 09 10 11

Total Energy

Graph I.1.32: Industrial producer prices,euro area

y-o-y%

Looking ahead, a key determinant of the pass-through of producer-price increases to other levelsin the supply chain, and finally to consumer prices,is the pricing power of manufacturers that isclosely associated with the amount of sparecapacity. According to the latest available data,labour productivity is well below the level it wouldhave reached if it had increased in line with its pre-crisis trend, suggesting a substantial amount ofunderutilised capacity. Also the situation in theEuropean labour markets, particularly therelatively high unemployment rate, suggestsa sizeable degree of slack on average. Thisbackward-looking analysis of hard data contrastssomehow with forward-looking information fromsurveys.

Survey indicators, capturing short-termdevelopments ahead, point to capacity utilisationlevels close to long-term averages, thus leavinga more limited amount of spare capacity and moreprice-setting power of producers. Such a situationcould explain responses to questions inCommission surveys about selling priceexpectations. In March, selling price expectationsin manufacturing increased to the highest level inmore than a decade. In the euro area, both the PMIcomposite input and output price index havereached the highest levels since mid-2008.A comparison of the input and output pricecomponent in PMI indices suggests thatmanufacturers expect to be able to pass on higherinput prices (see Graph I.1.33). This is less visiblefor services, which are more dependent on subdueddomestic demand.

30


Graph I.1.33: PMI manufacturing input pricesand output prices, EU

20

30

40

50

60

70

80

90

07 08 09 10 1130

40

50

60

70

PMI manufacturing input prices (lhs)PMI manufacturing output prices (rhs)

balance balance

Thus, hard data and surveys deliver differentsignals concerning the price-setting power ofmanufacturers. There are at least two ways to bringthese ends together. On the one hand, the EUeconomy may have shifted to a markedly lowergrowth path, which could then have implicationsfor the prospects of employment creation in theshort term. On the other hand, respondents tosurveys may slightly misperceive developments,a characteristic sometimes already observed inprevious cycles (see Box I.1.3). In this case, priceexpectations may be on the high side and the riskof a jobless recovery is limited. An overshootingof business confidence would imply a certaindecoupling of hard and soft (survey) data, whichwould not be surprising given the depth of thefinancial crisis.

… raising consumer price inflation …

In line with expectations, consumer pricesincreased in the course of 2010, with headlineinflation at an annual rate of 2.1% in the EU and1.6% in the euro area (see Graph I.1.34).

-0.50.5

1.5

2.53.5

4.55.5

6.57.5

05 06 07 08 09 10 11 1285

90

95

100

105

110

115

HICP inflation (annual rate) (lhs)HICP index (monthly) (rhs)HICP index (annual) (rhs)

Graph I.1.34: HICP, euro area

forecast

% index, 2005=100

2.22.1

3.3 0.31.6

2.2

2.61.8

Figures above horizontal bars are annual inflation rates.

The increase in HICP headline inflation reflects arise in commodity prices (e.g. oil, agro-commodities), increases in administered prices andindirect taxes, higher import prices, as well as theimpact of upward base effects from the food andenergy components. In 2010, headline HICPinflation in the EU (2.1%) and euro area (1.6%)turned out higher than expected in the autumnforecast. HICP inflation has picked up further inearly 2011 (in March it stood at 3.1% in the EUand the April flash HICP for the euro area was2.8%).

Core inflation (i.e. all items excluding energy andunprocessed food) has remained substantiallybelow headline inflation in 2010 in the EU and inthe euro area. The main explanation is the largecontribution of energy and unprocessed food toheadline inflation (see Graph I.1.35). There mayhowever be a new configuration as compared topast episodes of inflationary pressures in the EU,where lasting pressures would not primarily beassociated with the wage-employment nexus butcommodity prices. To the extent that energyinflation is driven by structural factors, thedifference between headline and core inflation maythis time not signal transitory, high-frequencyprice changes that will be reversed quickly.

Graph I.1.35: Inflation breakdown, EU

-1.0

0.0

1.0

2.0

3.0

4.0

5.0

06 07 08 09 10 11 12

%

Energy and unprocessed foodOther components (core inflation)HICP, all items

forecast

Overall, inflation prospects have worsened sincethe autumn forecast, but without endangering thedelivery of price stability in the medium term. Theremaining slack in the economy, along withmoderate wage and unit-labour cost growth, areexpected to keep inflation in check going forward,notwithstanding higher commodity prices andincreases in indirect taxation and administeredprices in some Member States.

31


… further in 2011 before easing in 2012…

Looking ahead, the annual rate of HICP inflation isexpected to stay at close to 3% in the EU this year,before easing to around 2% in 2012, on account ofa sharp fall in the UK (from 4% to 2½%). In theeuro area, the headline rate is expected to pick upto an average of about 2½% this year, beforefalling back to 1¾% in 2012. On a quarterly basis,the outlook is for a peak in headline inflation in thesecond quarter of 2011 at 3% in the EU (2¾% inthe euro area) and a gradual decrease throughoutthe rest of the year. This profile reflects thediminishing effects of pass-through from both thesurge in commodity prices at the turn of the yearand statistical base effects exerting a downwardpressure on inflation for most of 2011.

In the euro area, core inflation is set to increaseover the forecast horizon (1.5% in 2011, 1.6% in2012), as services inflation firms in years. In theEU the outlook for core inflation (2.1% in 2011,1.8% in 2012 in the EU) is different, most notablydue to increases in indirect taxes and/oradministered prices, particularly in the UK, butalso due to exchange-rate changes. Since the taxrate increases are one-off-measures, base effects in2012 should bring both headline and core inflationdown towards the end of the forecast horizon. Thedifference between headline and core also points tothe remaining slack in the economy, subdued wagegrowth and overall (still) well-anchored inflationexpectations.

Graph I.1.36: Inflation expectations, euro area

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

3.0

06 07 08 09 10 11-18-12-60612182430

Consumer inflation expectations (rhs)Implied inflation expectations (lhs)

y-o-y % balance

Note: Implied expectations derived from inflation-indexedgovernment bonds, 10 year horizon

According to Commission surveys, short-terminflation expectations of companies andhouseholds have increased in 2010 moderately andearly 2011 (see e.g. Graph I.1.36). A moderateincrease is also seen in inflation expectations asderived from inflation-indexed bonds. In contrast,long-term inflation expectations, for instance those

from the ECB's Survey of ProfessionalForecasters, have remained broadly stable. Theoverall slow pick-up of inflation expectations canbe associated with relatively stable core inflationand the market expectation of a subduedrecovery.(17)

... with wide inflation dispersion across MemberStates

The inflation aggregates hide marked inflationdifferentials across EU Member States that areexpected to remain above pre-crisis averages. Theincrease in HICP inflation rates is unevenlydistributed across countries. The different impactsof higher oil prices and the pass-through ofincreases in indirect taxes are among thedeterminants of these differences (see Box I.1.5),whereas differences in wage growth have not yetbeen pronounced and thus not affected differencesmarkedly.

-4

-2

0

2

4

6

07 08 09 10 11 12Highest national HICP inflation rate (%)Euro area HICP inflation rate (%)Lowest national HICP inflation rate (%)

%

forecast

Graph I.1.37: Inflation dispersion of euro areaMember States - HICP inflation rates

During the ongoing recovery the distance betweenthe lowest and highest national inflation rates inthe euro area initially widened, but then narrowedbetween June 2010 and March 2011 (see GraphI.1.37). The further narrowing over the forecasthorizon is a common feature of macroeconomicforecasts.

(17) Evidence supporting this linkage has recently beenpresented by Gerlach, P., P. Hördahl and R. Moessner,Inflation expectations and the great recession, BISQuarterly Review, March 2011, pp. 39-51.

32


Box I.1.5: Inflation differentials in the EU and euro area

This box looks at the drivers and implications ofinflation differentials across Member States.Inflation differentials are at present above pastaverages in the euro area, while in non-euro-areaEU Member States they have fallen back to thelevel observed before the 2007-08 price surge. Insome Member States, high inflation rates largelyreflect recent increases in indirect taxes, anddifferentials in tax-adjusted inflation areconsequently lower. More generally, inflationdifferentials owe much to large differences inenergy inflation across Member States. Differentenergy inflation has in the past contributed to theloss of competitiveness of some Member States andmay now also stand in the way of the necessaryadjustment. At the same time, looking at coreinflation measures, the process of adjustment seemsto have started, though it is still in an early stage.

Inflation differentials in the euro area increasedsince 2007 (Graph 1). The range of annual inflationrates across euro area Member States in 2010 was6.3 pps., its standard deviation was 1.4%. Theaverages of the two indicators since 1999(1) were3.5 pps. and 1.0% percent, respectively. Acrossnon-euro-area EU Member States inflationdifferentials were even higher, with a range of7.8 pps. and a standard deviation of 2.1% in 2010.However, measures of inflation dispersion forMember States outside the euro area havedecreased since the peak of inflation in the summerof 2008, while for the euro area they continued toincrease until the summer of 2010.

Graph 1: Range and standard deviation ofannual headline HICP inflation in euro-area

and non-euro-area Member States

02

468

10

121416

04 05 06 07 08 09 10 11

pps.

0

1

2

3

4

5

6%

Range EA Range non EA

Stdev EA (rhs) Stdev non EA (rhs)

Graph 2 displays annual headline HICP inflation in2010 and the constant-tax HICP measure (seebelow) by Member State. With many MemberStates having to consolidate public finances, the

(1) Euro area in varying composition.

inflation ranking is reshuffled somewhat once theimpact of indirect tax increases is taken intoaccount. The constant-tax measure (HICP-CT)excludes variations in indirect taxes from theinflation figure, assuming full pass-through toconsumer prices.(2)

Graph 2: Annual headline inflation andconstant-tax inflation, 2010

-2-101234567

RO

HU

GR

UK

BG LU EE PL CY BE

DK SI EU ES MT SE FR AT FI IT EA PT CZ LT DE

NL

SK LV IE

%

Headline HICP HICP-CT

In Romania, Hungary and Greece indirect taxincreases particularly affected headline inflation in2010. Hence, it appears that inflation differentialswere significantly lower on the basis of constant-tax inflation. For the euro area and EU aggregates,the impact of indirect taxes was minor in 2010.

Graph 3: Energy inflation in 2010 and itscontribution to headline inflation

-5

0

5

10

15

20

25

30

35

EL CY MT SI ES HU LU EE FI LT BE FR IE PT DK BG AT RO EA EU PL UK SE LV CZ IT DE

NL SK

%; ‰

Energy inflation (in per cent)Contribution to headline inflation (in per thousand)

A large part of Member-State inflation dispersionstems from differentials of energy inflation. Graph3 plots the annual rate of energy inflation in 2010,which in spite of the symmetry of the globaloil-price shock ranged from -1.3% in Slovakia to

(2) An incomplete inflation pass-through of indirect taxhike is, however, likely, which implies that thedifference between the headline and the HICP-CTmeasures indicates an upper bound for the impact ofchanges in indirect taxes.


33


Box (continued)

30.3% in Greece. Several factors contribute tothese differences, including an economy's energyintensity and mix, dependence on imported energy,taxation and subsidies as well as the functioning ofenergy markets.

Moreover, the weight of the energy component inhousehold consumption, which is 10.6% for the EUas a whole, differs significantly across countries(from 6.7% in Malta to 17.8% in Romania). Thus,the contribution of energy inflation to headlineinflation across Member States is not strictlyproportional to their level of energy inflation.

Energy inflation has accelerated towards the end of2010 and in the first quarter of 2011. In March2011, annual energy inflation in the EU stood at12.0%, ranging from 5.7% in Sweden to 20.4% inGreece.

Graph 4: Changes in energy prices and realeffective exchange rates, EU Member States,

2004-08

UKSE

FI

SK

SI

RO

PTPL

ATNL

MT

HU

LT

LV

CY

IT

FR

ES

ELIEEE

DE

DK

CZ

BG

BE

R2 = 0.1903

-30

-20

-10

0

10

20

30

40

50

0 20 40 60 80 100

Energy inflation, %

Real

effe

ctiv

eex

chan

gera

te,

%Graph 4 suggests that differences in energyinflation across Member States have contributedsomewhat to relative competitivenessdevelopments prior to the crisis. Going forward,high energy inflation could complicate thenecessary adjustments in the shorter run.

Abstracting from the most volatile HICP items –energy and unprocessed food – there are someindications that national core inflation patterns doreflect growth differences. Member States hitparticularly hard by the crisis are thus regainingcompetitiveness (Graph 5), helping over time withthe adjustment of macroeconomic imbalances.

Graph 5: Core inflation and output gaps, 2010

RO

UK

SE

FI

SK

SI

PTPL

AT

NL

MT

HULU

LT

LV

CY

ITFR

ESEL

IE

EE

DE

DK

CZ

BG

BE R2 = 0.037

-10

-9

-8

-7-6

-5

-4-3

-2

-1

0-3 -2 -1 0 1 2 3 4 5 6 7

Core inflation (y-o-y %)

Out

putg

apin

2010

(%)

In 2011, still large negative output gaps areexpected to continue contributing to moderate coreinflation in most Member States, in particular thoseless advanced in terms of the recovery. At the sametime, high and volatile energy prices are likely tofurther contribute to the dispersion of headlineinflation rates.

Fiscal positions: from stabilisation toconsolidation …

2011 is likely to mark the switch from fiscalstabilisation to fiscal consolidation in the euro areaand in the EU as a whole: the improvement ofbudget balances in both areas, which began in2010, is projected to further accelerate in 2011,and to continue in 2012 in the vast majority ofcountries, albeit at a slower pace and subject to theusual no-policy-change assumption.

Under the usual no-policy-change assumption forthe outer year of the forecast, a further decline of

In 2010, almost all Member States posted a lowergeneral government deficit than in 2009 on theback of moderate structural adjustment measuresand cyclical improvements of the budget, resultingin a slight improvement in the deficit ratio – thefirst since the onset of the crisis – in the euro areaand the EU as a whole. In the preceding years,

discretionary fiscal measures under the EuropeanEconomic Recovery Plan, in conjunction with theworking of automatic stabilisers had resulted in asharp deterioration in governments' fiscalpositions, reflected in a sharp increase of deficitand debt-to-GDP ratios.

In 2011, the general government deficit ratio isprojected to fall by a notable 1.7 pps. to 4.3% ofGDP in the euro area, and equally by 1.7 pps. to4.7% of GDP in the EU.(18)

(18) The improvement in the 2011 headline deficit figures forthe euro area and for the EU also reflects a notable one-offmeasure in Ireland. The intervention in 2010 by the IrishGovernment to support Anglo Irish Bank and two smallerbuilding societies had temporarily increased the deficit byabout 20 pps. in 2010.

34


th the autumn forecast, theCommission outlook on public finances improved

the deficit ratio is projected in 2012: in the order of0.8 pp. in the euro area and 0.9 pp. in the EU (seeGraph I.1.38).

Compared wi

somewhat. In 2011 and 2012, general governmentdeficits in both the euro area and the EU as awhole are now seen a couple of decimal pointslower. In the euro area, the improvement mainlyreflects lower government expenditure in percentof GDP. In non euro-area countries, revenues haveincreased in percent of GDP. In 2011, this islargely explained by a very significant one-offoperation in Hungary (see below). Beyond that,there is also a more general increase in governmentrevenues compared to GDP.

-8

-7

-6

-5

-4

-3

-2

-1

0

01 02 03 04 05 06 07 08 09 10 11 12

Euro area EU

% of GDP

Graph I.1.38: General government budget balance

forecast

In 2011, the projected improvement in the budgetbalance is expected to be mainly expenditure-

, total current expenditure of thegeneral government, as a share in GDP, is

eprojected improvement in the budget balance is

responsive to the pick up in economic growth and

ast horizon, the projectedimprovement in the headline deficits originates

based, with the bulk of the improvement in theeuro-area deficit due to a decline in theexpenditure ratio, and a slightly lower share for theEU. In almost all countries, expenditure ratios areset to decline.

By component

projected to decline markedly in both the euro areaand the EU over the forecast horizon, with a majorcontribution coming from a decline in socialbenefits, mainly due to the economic recovery.Yet, the share of expenditure on public investmentis declining by the same amount as social benefits,and is also expected to decline in nominal terms.

While the contribution of the revenue side to th

expected to be relatively modest, generalgovernment revenue as a share of GDP is projectedto rise in 2011 for the first time since 2006 in theeuro area and in the EU, thus slowly approaching

its pre-crisis levels over the forecast horizon. Thismasks, however, diverging developments at thecountry level, with 9 EU Member States showinga lower ratio in 2011 than in 2010. Theimprovement in the 2011 revenue figure of the EUas a whole also includes a notable one-off measurein Hungary, where pension assets amounting to 9%of GDP are transferred from the second pillar intothe public pillar. In Denmark, on the other hand,the revenue ratio is expected to decline by almost2 pps., after an unexpected and temporary surge inrevenues linked to pension yield taxation in 2010.

Overall, government revenues have proven fairly

are set to increase at an apparent elasticity aboveaverage in 2011. While in 2009, in the aftermath ofthe financial crisis and the economic downturn inthe EU, total current taxes(19) fell more sharplythan nominal GDP, their growth slightlyoutperformed GDP growth in 2010 (see GraphI.1.39). This development is expected to continueover the forecast horizon, likely most pronouncedin 2011, when total current taxes are expected toincrease by 3.8% in the euro area, while nominalGDP growth is set to be 0.7 pp. lower. Among themain revenue categories, income from direct taxesis expected to post the biggest increase (4.7% inthe euro area), followed by indirect taxes (4.2%)and social contributions (2.9%). The impact of theabove-average sensitivity of revenues to theeconomic recovery is measurable: if governmentrevenues were to grow at the same rate as nominalGDP in 2011, the general government deficit in theeuro area and in the EU would turn out to behigher by 0.3 pp.

Over the forec

from an improvement in the structural balanceaccompanied by smaller contributions from theeconomic cycle. In 2010, the structural balance,which denotes the budget balance net of cyclicalfactors and of one-off and other temporarymeasures, as a share of potential GDP, improvedfor the first time for the euro area and for the EUas a whole since 2007 – in the order of 0.3 pps.,signalling a moderate fiscal tightening.(20) This

(19) Total current taxes comprise direct and indirect taxes andsocial contributions. They account for about 90% of total

(20)

ed to cyclical developments,

general government revenue.As the structural balance comprises the part of the budgetbalance which cannot be linkor to temporary fiscal measures, and would hence not becorrected through the cycle, it signals the need forconsolidation of government finances.

35


development is expected to intensify in 2011, witha marked improvement in the structural balance ofaround 1 pp. in the euro area and 0.9 pp. in the EUas a whole. By components, the tightening isexpected to come mainly from the expenditure side(about four fifths for the euro area, and somewhatmore for the EU as a whole).

-6

-4-2

02468

01 02 03 04 05 06 07 08 09 10 11 12

Total current taxes* Nominal GDPPotential output** Total expenditure

* Direct and indirect taxes, social contributions** 10-year forward-looking average of potential output growthprojections + annual percentage change of GDP deflator

Graph I.1.39: Taxes and expenditure,euro area

y-o-y%

forecast

The projected change in the structural balance in2011 thus accounts for over 60% of theimprovement in the overall deficit in the euro area,and for somewhat less in the EU. Particularly largeimprovements in the structural balance areexpected in Portugal, Slovakia, Spain andRomania, which are set to see their structuraldeficit decline by more than 2 pps. in 2011.A significant decline in the expenditure ratio isdriving the consolidation in these countries.

Under the usual no-policy-change assumption, thestructural balance is projected to improve further –by another 0.4 pp. – in 2012 in the euro area andby 0.7 pp. in the EU.

… and some moderation in debt growth

In spite of the projected improvement in budgetbalances over the forecast period, the consolidationefforts are not sufficient to curb a further increasein general government debt levels in mostcountries and in the euro area and the EU as awhole. The debt-to-GDP ratio is projected tocontinue its upward path, albeit at a decreasingpace, largely thanks to improving primarybalances. In the EU, the gross debt ratio isprojected to rise to a level of 83% of GDP in 2012,and to over 88% in the euro area (see Table I.1.5).

forecast, inter alia due to statisticalreclassifications in 2010.(

The expected debt figures for 2011 and 2012 in theeuro area and in the EU are somewhat higher thanprojected in the Commission services 2010 autumn

stock-flow adjustment(SFA) in 2010 – adding more than 2 pps. to the

21)

These statistical reclassifications are also animportant driver of the large

debt ratio –, representing an increase in debt levelsbeyond the increase in general government netlending. The snowball effect, which captures theimpact of interest expenditure, GDP growth andinflation on public debt, and which wasparticularly high in 2009 due to the drop ineconomic growth, declined to below 1% of GDP in2010. This resulted from a debt-increasingcontribution from interest expenditure (2.8%),which was not offset by debt-reducingcontributions from nominal growth (-1.4%) andinflation (-0.6%). The combined effect of interestexpenditure and GDP growth is projected tofurther decline in 2011-2012, largely on the backof stronger price increases.

Table I.1.5:Euro-area debt dynamics

average 20(% of GDP) 2003-07 08 2009 2010 2011 2012

Gross debt ratio1 68.6 69.9 79.3 85.4 87.7 88.5Change in the ratio -0.3 3.6 9.5 6.0 2.4 0.8

Contributions2 :1. Primary balance -0.9 -1.0 3.5 3.2 1.3 0.42. “Snow-ball” effect 0.2 1.4 5.1 0.8 0.5 0.3

Of which:

Interest expenditure 3.0 3.0 2.8 2.8 3.0 3.2

Growth effect -1.4 -0.3 3.0 -1.4 -1.3 -1.5

Inflation effect -1.4 -1.3 -0.7 -0.6 -1.2 -1.4

3. Stock-flow adjustment 0.4 3.2 0.9 2.1 0.6 0.2

Notes:

2 The snow-ball effect captures the impact of interest expenditure on accumulateddebt, as well as the impact of real GDP growth and inflation on the debt ratio(through the denominator). The stock-flow adjustment includes differences in cashand accrual accounting, accumulation of financial assets and valuation and otherresidual effects.

1 End of period. Unconsolidated general government debt. For 2010, this implies adebt ratio, which is 0.3 pp. higher than the consolidated general government debtratio (i.e. corrected for intergovernmental loans) published by Eurostat on the 26April 2011. .

1.5. HEIGHTENED UNCERTAINTY

ainty ...

While some of the risks surrounding the forecastwd.

New risks point to heightened uncert

had already been in place in autumn, some nerisks, which heighten uncertainty, have surfaceThe risks that remain valid are on the upside(rebalancing of economic growth, spillover fromGermany, consolidation efforts boostingconfidence) and on the downside (externaldemand, fiscal consolidation weighing on domestic

(21) For instance, in Germany government debt increased bysome 10% of GDP due to the transfer of impaired assetsout of two banks into 'bad banks' which have beenclassified into the government sector.

36


lobal growth – beyond that allowed forin the baseline – would further support EU export

emberStates, which could materialise to a greater extent

et situation remainsa concern. Tensions in some segments of the

commodity prices, withsubstantially negative effects on real disposable

of Member States may weigh more thancurrently envisaged on domestic demand. And

y broadlybalanced risks to the growth outlook suggests that

2011 growth

demand, financial market fragility). Most of newrisks are downside risks, including the impact ofunrest and military conflict in the MENA region,commodity-price developments, and the disastersin Japan.

On the upside, as identified in the interim forecast,stronger g

growth. Also, the impetus from the export-ledindustrial rebound to domestic demand couldprove stronger than assumed. Moreover, the strongbusiness confidence could translate into strongerdomestic demand than currently projected.

A further upside risk relates to the spillover fromstronger activity in Germany to other M

than expected at present.

On the downside, the still relatively fragileEuropean financial-mark

financial markets are still high, particularly insovereign-bond markets, and spillovers to othermarket segments and to the real economy cannotbe ruled out. These concerns would be aggravatedin case of further increases in long-termgovernment-bond yields. Significant fiscalsustainability issues are yet to be tackled in keycountries outside the EU.

Additional downside risks relate to renewedincreases in oil and other

incomes and profit margins – and thereby privateconsumption and investment – in the EU. Theycould also have a negative impact on economicgrowth outside the EU, due inter alia to policymeasures then needed to curb inflationarypressures. In such a situation, abrupt exchange-ratechanges could raise protectionist pressures andthereby damage the prospects for the globaleconomy. The conflict in the MENA region and itsimpact on oil prices is a key determinant in thisrespect.

At the same time, the fiscal consolidation ina number

finally, the economic impact of the disasters inJapan may deteriorate and hamper economicgrowth more than currently envisaged.

... and shift the balance of risks

The addition of downside risks to formerl

the balance of risks to the springoutlook is slightly tilted to the downside. Theforecast presented in this chapter describes themost probable outcome given the chosen set ofassumptions. It is thus the central scenario. Otherpossible outcomes are related to the assessment ofthe aforementioned upside and downside risks.

-5

-4

-3

-2

-1

0

1

2

3

4

5 %

Graph I.1.40: Euro area GDP forecasts -Uncertainty linked to the balance of risks

upper 90%upper 70%upper 40%lower 40%lower 70%lower 90%actualcentral scenario

06 07 08 09 10 11 12

The uncertainty surrounding the growth outlook isvisualised in the fan chart (see Graph I.1.40) thatdisplays the probabilities associated with the

political tensions in the MENA region

forecast for real GDP growth in the EU in 2011and 2012. While the darkest area indicates themost likely development, the shaded areasrepresent the different probabilities of futureeconomic growth within the growth rangesdepicted on the y-axis. As the balance of risks toeconomic growth is assessed as tilted to thedownside, the fan chart is slightly skewed towardsthe x-axis.

Risks to the inflation outlook in 2011 seemsomewhat tilted to the upside, on account of theongoing geoand high inflationary pressure in world markets.While the slack remaining in the EU economy andwell-anchored inflation expectations should keepunderlying inflation in check, the upward pressureson non-core HICP components, stemming from thedevelopments in commodity prices, could come tomore to the fore than currently projected. Inparticular, should political tensions spread furtherin the MENA region, disruptions to oil suppliescould not be excluded, fuelling oil-price increasesbeyond what was assumed in this forecast.

37


Box I.1.6: Some technical elements behind the forecast

The cut-off date for taking new information intoaccount in this European Economic Forecast was2 May. The forecast incorporates validated publicfinance data from Eurostat's News Release60/2011, dated 26 April 2011.

External assumptions

This forecast is based on a set of externalassumptions, reflecting market expectations at thetime of the forecast. To shield the assumptionsfrom possible volatility during any given tradingday, averages from a 10-day reference period(between 14 and 28 April) were used for exchangeand interest rates, and for oil prices.

Exchange and interest rates

The technical assumption as regards exchange rateswas standardised using fixed nominal exchangerates for all currencies. This technical assumptionleads to implied average USD/EUR rates of 1.43 in2011 and 1.45 in 2012. The average JPY/EUR ratesare 118.08 in 2011 and 119.93 in 2012.

Interest-rate assumptions are market-based.Short-term interest rates for the euro area arederived from futures contracts. Long-term interestrates for the euro area, as well as short- andlong-term interest rates for other Member States arecalculated using implicit forward swap rates,corrected for the current spread between theinterest rate and swap rate. In cases where nomarket instrument is available, the fixed spreadvis-à-vis the euro-area interest rate is taken for bothshort- and long-term rates. As a result, short-terminterest rates are expected to be 1.6% on average in2011 and 2.5% in 2012 in the euro area. Long-termeuro-area interest rates are assumed to be 3.3% onaverage in 2011 and 3.6% in 2012.

Commodity prices

Commodity price assumptions are also, as far aspossible, based on market conditions. According tofutures markets, prices for Brent oil are projected tobe on average 117.4 USD/bl. in 2011 and117.2 USD/bl. in 2012. This would correspond toan oil price of 82.1 EUR/bl. in 2011 and80.8 EUR/bl. in 2012.

Budgetary data

Data up to 2010 are based on data notified byMember States to the European Commission on

1 April and validated by Eurostat on 26 April 2011.Eurostat has expressed a reservation on the qualityof the data reported by Romania, due touncertainties on the impact of some publiccorporations on the government deficit, on thereporting of ESA95 categories "other accountsreceivable and payable", on the nature and impactof some financial transactions and on theconsolidation of intra-governmental flows. Eurostatalso expressed a reservation on the quality of thedata reported by the United Kingdom, due touncertainties on the time of recording of militaryexpenditure. The United Kingdom does not recordmilitary expenditure on a delivery basis, as requiredby the relevant Eurostat Decision of 9 March 2006.

As usual, government deficit data notified by theUK for the years to 2010 have been slightlyamended for consistency with Eurostat's view onthe recording of UMTS licences proceeds.

For the forecast, measures in support of financialstability have been recorded in line with theEurostat Decision of 15 July 2009.(1) Unlessreported otherwise by the Member State concerned,capital injections known in sufficient detail havebeen included in the forecast as financialtransactions, i.e. increasing the debt, but not thedeficit. State guarantees on bank liabilities anddeposits are not included as governmentexpenditure, unless there is evidence that they havebeen called on at the time the forecast wasfinalised. Note, however, that loans granted tobanks by the government, or by other entitiesclassified in the government sector, usually add togovernment debt.

For 2011, budgets adopted or presented to nationalparliaments and all other measures known insufficient detail are taken into consideration. For2012, the 'no-policy-change' assumption used in theforecasts implies the extrapolation of revenue andexpenditure trends and the inclusion of measuresthat are known in sufficient detail.

The general government balances that are relevantfor the Excessive Deficit Procedure may be slightlydifferent from those published in the nationalaccounts. The difference concerns settlementsunder swaps and forward rate agreements (FRA).According to ESA95 (amended by regulation No.2558/2001), swap- and FRA-related flows arefinancial transactions and therefore excluded from

(1) Eurostat News Release N° 103/2009.


38


39

Box (continued)

the calculation of the government balance.However, for the purposes of the excessive deficitprocedure, such flows are recorded as net interestexpenditure.

For the purpose of proper consolidation of generalgovernment debt in European aggregates and toprovide users with information, Eurostat publishedin its News Release 60/2011, dated 26 April 2011,data on government loans to other EUgovernments. (For 2010 the intergovernmentallending figures relate mainly to lending to Greece.)However, the European aggregates for generalgovernment debt in the forecast years 2011 and2012 are published on a non-consolidated basis (i.e.not corrected for intergovernmental loans). Toensure consistency in the time series, historical dataare also published on the same basis. For 2010, thisimplies a debt ratio for the EU which is 0.2 pp.

higher than the consolidated general governmentdebt ratio published by Eurostat on 26 April 2011.For the euro area, the difference is 0.3 pp.

Calendar effects on GDP growth and outputgaps

The number of working days may differ from oneyear to another. The Commission's annual GDPforecasts are not adjusted for the number ofworking days, but quarterly forecasts are.

However, the working-day effect in the EU and theeuro area is estimated to be limited over theforecast horizon, implying that adjusted andunadjusted growth rates differ only marginally. Thecalculation of potential growth and the output gapdoes not adjust for working days. Since theworking-day effect is considered as temporary,it should not affect the cyclically-adjusted balances.

2.SOVEREIGN RISK

40

2.1. INTRODUCTION

The re-assessment of financial risks that wasinitiated by the US sub-prime crisis in summer2007, and spread over to wholesale bank-fundingmarkets in 2008, eventually reached sovereignbond markets in 2010. As a consequence of theeconomic downturn and the credit transfer fromthe private to the public sector, several MemberStates had to offer considerably higher returns toinvestors when issuing public debt, up to the pointat which the cost of debt financing was perceivedas unsustainable. Programmes were agreed forGreece and for Ireland in 2010 and a decision on aprogramme for Portugal is expected in May 2011,

as these Member States were effectively cut offfrom market-based funding.

The real interest rate has picked up, in line with theperception that proliferating public debt has mademarket participants’ assessment of sovereign riskless benign than in the past. Indeed, the timing,extent and variation of changes in yields acrossMember States imply that higher expectedinflation, or the anticipation of upward moves incentral bank rates, cannot fully explain theobserved hike in interest rates on bond markets.

The phenomenon of pricing in a higher riskpremium in the required return on sovereign bondsis not limited to EU Member States. Bond yields inthe USA and Japan also edged up, reacting in

This chapter examines the channels through which higher sovereign risk impacts on macroeconomicperformance and assesses their relevance within the context of the current business cycle. The increasein bonds spreads and CDS spreads as well as downgrades by major credit rating agencies suggest thatsovereign debt has become much riskier. However, the magnitude of the actual increase varies acrossMember States and some factors suggest that the increase in market spreads overstates the extent towhich sovereign risk has risen. Liquidity premia have also risen as some groups of investors havewithdrawn from some Member States' sovereign bond markets in response to higher sovereign risk. Ifthe withdrawal of certain investor groups is permanent and in consequence liquidity premia ofvulnerable Member States' bonds remain durably higher, spreads cannot be expected to quickly returnto the low levels seen in the past. The possibility of contagion across Member States has also led toa more widespread increase in spreads, though the analysis suggests that it has had a limited impact.

In macroeconomic models that use bond yields as benchmarks for interest rates, an increase in thesovereign-risk premium would give a similar result to a general rise in the real interest rate, whichwould apply equally to the whole economy and adversely affect GDP. However, this chapter finds thatthe increase in the sovereign-risk premium has not led to an equally strong rise in the risk premia forthe non-financial corporate sector since early 2010. Corporate issuers benefited from a re-orientationof investors' portfolios from sovereign to corporate bonds. The analysis suggests that the impact onfunding costs for non-financial corporations has been small at the aggregate level, though there aresigns that the rise in sovereign risk has had a more sizeable impact in peripheral euro-area MemberStates, especially on utility companies. Nevertheless, it remains to be established whether the rise incredit risk for corporates stems from the rising sovereign-risk premium (increasing capital costs) or thedrop in profitability due to the recession.

Due to the links between Member States’ budgets and banks’ balance sheets, the level of yields onsovereign debt is expected to be an important factor for the performance of the banking system. Indeed,there are abundant signs that the increase in sovereign risk has led to higher funding costs for banks. Tokeep net interest margins stable, banks are predicted to offset higher funding costs with higher lendingrates. Particularly in certain vulnerable euro-area peripheral economies, the cost of credit has risen bymore than in the euro area as a whole. However, higher credit costs have not led to systematically lowerlending growth in these Member States. The impact of higher funding costs on lending growth seems tobe more than offset by other factors, especially demand factors.

MACROECONOMIC IMPACT OF HIGHER


particular to announcements by credit ratingagencies that questioned their existing creditratings due to soaring debt levels.

Policymakers in the EU have recognised that

fiscal retren

Trad ined as

suggests thattraditional indicators of economic uncertainty,

ia, did not follow theThis supports

increased interest rates are closely related to theperception in financial markets that public debtdynamics have deteriorated markedly since thebeginning of the financial crisis. In general, theMember States have embarked on fiscalconsolidation to contain any rise in real interestrates by assuring long-term debt sustainability.

A chapter in the Commission's autumn 2010forecast analysed the impact of fiscal consolidationon economic growth. The analysis concluded that

chment may lead to short-term falls inGDP and employment.(22) In the long run,however, reducing government debt levels tends toproduce positive GDP and employment effects,largely because lower debt servicing costs willcreate fiscal space for reducing distortionary taxes.Building upon this analysis, this chapter exploresthe channels through which an increase in thesovereign-risk premium could impact onmacroeconomic performance and what thequantitative importance may be.

itionally, this question would be exama shock to the real interest rate. The realityhowever, is more complex. Although governmentbonds are used as proxy for the capital cost of theeconomy, it is not clear that a higher risk premiumon sovereign debt implies that the risk premium forthe total economy has increased. The observationthat sovereign risk increases at the same time asprivate economic activity continues to recover

this is not the case. Furthermore,

used as proxies for risk premincrease in sovereign bond yields.the notion of an imperfect pass-through ofsovereign risk to the total economy.

Another complication is that past episodes ofsovereign-debt crisis, or of rapidly rising interest

(22) See also Schaltegger, C. A. and M. Weder (2010), "FiscalAdjustment and the Costs of Public Debt Service: Evidencefrom OECD Countries", CESifo Working Paper No. 3297.This empirical analysis came to similar conclusions,finding that the impact of fiscal consolidation on interestrates depends on size and composition of the budgetaryadjustment. Since large adjustments and those based onexpenditure cuts can lead to lower long-term interest rates,they argue that "financial markets only seem to value strictand decisive measures – a clear sign that the government’spledge to cut the deficit is credible."

rates, are hardly applicable in the euro-areacontext. First, past crises and defaults occurred ineconomies with very different monetary systemsand financial-market environments. In most cases,sovereign-debt crises were associated with

.

shows, the observed increases in bond yields have

currency crises, implying that high inflation,currency devaluation and capital flight impactedon macroeconomic performance.(23) These factorsare not at play in the euro area today. Second, pastepisodes of rapidly rising interest rates aremisleading, as inflation or devaluationexpectations rather than sovereign risk was themain driver. Analysing changes in real interestrates does not help either. They occurred in timesof strong disinflation, which suggests that themonetary policy stance and business cycle factorswere main determinants, rather than sovereign risk

2.2. MEASURING THE INCREASE IN THESOVEREIGN-RISK PREMIUM

The macroeconomic model simulations presentedin the autumn 2010 forecast assumed that thesovereign-risk premium increased by 400 basispoints over a period of 10 years without policyreaction. The actual increase may be higher orlower, longer or more short-lived. As Graph I.2.1

been different across countries, implying that theincrease in the sovereign-risk premium is notuniform.

Graph I.2.1: Sovereign-bond yields

12%

6

10

2

4

Jan-07 Jan-08 Jan-09 Jan-10 Jan-11

8

Euro-area average DE IE EL PT

It is not straightforward to measure the increase insovereign risk premia from the observed marketyields, since factors such as inflation, exchangerate expectations and expected monetary policy

(23) See Reinhart, C. M. and K. S. Rogoff (2009), "This time isDifferent, Eight Centuries of Financial Folly", PrincetonUniversity Press: Princeton and Oxford.

41


Box I.2.1: Measurement

It is standard practice to analyse t

o

he spread of

ofsovereign issuers denominated in currencies other

rman Bund is notnecessarily equal to the risk-free interest rate. The

f the risk-free interest

a capital-market interest rate relative to a risk-freebenchmark rate rather than to the nominal rateitself. This is done in order to neutralise the effectof factors such as inflation expectation or exchangerate risk that are common to both interest rates.Spreads among the sovereign bonds denominatedin euro and issued by euro-area Member States areparticularly meaningful because the euro abolishedany exchange rate risks. Spreads to bonds

than the euro have remained much wider than thosewithin the euro area, reflecting in particularexchange rate risks. For this reason, the analysis inthis chapter focuses on spreads of euro-areaMember States.

The traditional benchmark for capital marketinterest rates in the euro area is the German Bund,i.e. the yield on the government bond with a10-year maturity issued by the Federal Germangovernment.(1) The German Bund has usually beenthe lowest in the euro area, benefitting from a AAArating, high volumes on a liquid spot market, andthe availability of exchange traded derivatives thatallow investors to hedge their exposure. Despite itsuse as a benchmark rate, the Ge

true risk-free rate may be higher or lower. It maybe higher because sovereign bonds, including theBund, are favoured by regulation as their use isstipulated for meeting liquidity and capitalrequirements. These requirements artificiallyincrease demand and may lead to returns below therisk-free rate. It may be higher because there areoperational risks associated with borrowing andlending, e.g. technical problems linked to thepayment system that may lead to incapability ofservicing the debt in time. Furthermore, the sheerexistence of a CDS market for German bondsimplies, though prices are low, that marketparticipants do consider German bonds to containsome risk.(2)

(1) In practice, the rate is not directly observed, butderived from bonds with a maturity close to 10 yearsand taking into account coupon payments and theprecise difference in maturity.

(2) Since CDS contracts are used for hedging purposes,there may be positive demand for CDS for a virtuallyrisk-free or not even existing debt if there are otherdebt securities of which the return is correlated withthe risk-free debt.

Graph 1: Risk-free interest rates (12-monthsmaturity, %)

0

0.2

0.40.6

0.8

1

1.21.4

1.6

1.8

Jan-10 Apr-10 Jul-10 Oct-10 Jan-11 Apr-11

Repo Swap German Treasury Bills

The difference between the benchmark rate and thetrue, but unknown, risk-free rate may become

are ofte flows that

k free. The second rate is the repo rate,s that credit is given against high-value

collateral. If the debtor is unable to repay, thedebtor has the collateral and since this usuallyenters with a haircut, i.e. below market price, thistransaction is also close to risk free.(3) Thesovereign rate has constantly been somewhat belowthese two alternative rates. At times of financialmarket tensions, the difference widened between10 and 20 basis points over the various maturitiesin May 2010 and again in December 2010. Dailypeaks increased by up to 40 basis points. Thesechanges are small compared to the changes inyields of other euro-area Member States.Nevertheless, they imply that short-term, dailymonitoring needs to take this factor into account.

meaningful in times when the market assessment ofrisks undergoes substantial changes. These events

n characterised by safe-havendepress benchmark yields. The chart shows themagnitude of this effect by comparing the yields onGerman government bills with two other quasi risk-free market rates. The first is the swap rate, whichis the rate charged when a fixed interest paymentfor a specified period is exchanged againsta floating one, with the daily overnight rate(EONIA) used for the floating leg. Since thistransaction does not involve the exchange of theprincipal, but of the interest payment only, it isclose to riswhich mean

(3) Most repo transactions are short-term, i.e. generallywithin a week though quotes are available for up to12 months. For swap transactions, there is also aliquid market for long-term maturities. Rates arequoted even for 50 year maturities.

42


BE DK DE IE EL ES FR IT NL AT PT FI SE UKend 2009 50.0 30.9 23.9 156.2 241.3 97.6 27.9 98.5 30.4 78.0 78.6 26.5 52.9 .0

May-10 94.5 42.1 45.7 211.8 708.1 196.1 67.5 169.4 44.7 69.6 306.3 28.8 36.3 82.9

end 2010 207.9 43.7 53.7 570.2 992.8 330.0 100.9 218.2 59.0 92.1 468.2 32.2 32.5 71.5

Apr-11 135.7 33.8 42.7 593.7 1206.5 229.3 71.8 143.5 35.2 60.2 607.0 27.2 24.7 54.5

CDS spreads of sovereign debtTable I.2.1:

79

43

rates also affect nominal bond prices. The analysisin this chapter focuses on spreads of euro-areaMember States because these factors have thesame impact on their bond yields. Standardpractice is moreover to use spreads to a benchmarkrate of a “risk-free” sovereign bond denominatedin the common currency. However, this implicitlyassumes that the riskiness of the benchmark rateand of the price of risk has remained constant,which is not obvious. For the reasons discussed inBox I.2.1, the analysis in this chapter is based ondifferences to swap rates. This has also theadvantage that developments in the benchmarkcountry, Germany, can be shown.

Factors inherent to the capital market: difficultto disentangle risk and liquidity premia

The rise in yield spreads can partly be accountedfor by increasing liquidity premia, which distortsthe use of yield spreads as a measure of risingcredit risk premia. There is some support for thisnotion. Market reports have noted that someinvestor groups withdrew from certain sovereignbond markets.(24) Other investors have decided tohold their bonds in order not to realise losses, andsurveys revealed that some countries' bonds wereno longer usable as collateral in repo transactions.As a consequence, markets have lost depth andliquidity. Thus, a rising liquidity premium isdriving a wedge between the credit risk premiumon government bonds and the observed yields andif the withdrawal of certain investor groups ispermanent and, in consequence, liquidity premiaremain durably higher, spreads cannot be expectedto quickly return to the low levels seen in the past.Disentangling the liquidity premium from thecredit risk premium is difficult because both areinterdependent: a higher liquidity premium mayincrease the credit risk premium and vice versa.

An alternative gauge of the increase in sovereignrisk is the price of credit default swaps (CDS),

(24) See Chapter 1D in IMF Global Financial Stability Report,April 2011 for an overview of investor types that may havewithdrawn from buying sovereign bonds in response tohigher perceived risks.

which is not subject to some of the liquidity issuesrelated to bond markets. CDS are financialderivatives originally created to provide protectionagainst the risk of default. Today, they are alsoused for speculation. CDS contracts have becomethe most widely traded credit derivative product,with most liquid contracts traded with a maturityover 5 years. They are similar to an insurancecontract, and pay out in the case of a credit event,i.e. if the creditor does not service his debt ascontractually agreed. A CDS spread of 1 basispoint implies an annual cost of EUR 1000 forinsuring against the default of EUR 10 million ofdebt; this is equivalent to a risk premium to bepaid.

Nevertheless, the difficulty of disentangling creditrisk and liquidity effects also applies to theinterpretation of CDS spreads. The price reflectsboth the preference for obtaining insurance and theliquidity of CDS markets, i.e. higher risk aversionleads to higher CDS spreads, but greater marketdepth reduces spreads. Furthermore, CDS aresometimes used by asset managers to hedgeagainst other correlated risks – so-called proxyhedging. Thus, it is possible that sovereign CDSreflect the risk premia of risks other than sovereignrisk.

Graph I.2.2: Changes in sovereign-bond andsovereign-CDS spreads, 5-year maturities,

12/2009 to 4/2011

PT

ITES

IE

DE

BE

-200

0

200

400

600

800

-100 200 500 800

Change in bond spread

Chan

gein

CDS

spre

ad

basispoints

basispoints

The SovX index, which tracks the increase in CDSof Western European sovereign debt, increased byabout 120 basis points since December 2009 to184 basis points in early May 2011. Both


agencies havedeveloped complex methodologies, which

lness

covering Greece, Ireland, Portugal and Spain.23 rating actions are attributed to Standard &

charatia negative credit watch on 16 March 2010 andFitch removed Ireland's sovereign rating from

development over time and the cross-countryvariation of CDS spreads closely – though notperfectly – followed the developments in bondspreads.

Credit ratings as a gauge of sovereign-riskpremia

Rather than trying to derive the increase insovereign-risk premia from market prices, onecould follow the assessments of credit ratingagencies. Their downgrades have been taken bymarket participants as an apparent sign of risingsovereign risks. Credit rating

combine qualitative and quantitative information,and issue ratings that express their opinion of theprobability of default. The quality and usefuof ratings have been subject to a broad discussionfollowing the role credit rating agencies played instructured credit markets in the wake of thesubprime mortgage crisis. Rating agencies haveagain come under scrutiny in the context of themore recent wave of sovereign debt downgrades.

Several issues were raised with regard to theaccuracy and timeliness of sovereign ratings. Thekey concern is that rating downgrades, especiallythose related to government debt, may destabilizefinancial markets, leading to pro-cyclicality andcliff-effects. Other concerns relate to themethodology of sovereign ratings. Here, a numberof specific factors are worth noting. First, theempirical backing for the rating methodologies isscarce.(25) Second, the rating reflects less theissuer's ability to pay, but more its willingness topay. A government can fail to meet its financialcommitments even if it has the capacity to serviceits debts, since investors' rights to legal redress arelimited.

Since 1 January 2009, the three main credit ratingagencies announced 61 sovereign rating changes,

Poor’s, 21 to Moody's and 17 to Fitch. All ratingnges were negative, except for two positiveng events: Standard & Poor’s took Greece off

a negative credit watch on 14 April 2011. Outsidethe euro area, rating changes have been moremixed, with, for example, China being upgradedby major rating agencies while the rating outlookfor the USA was lowered.

Graph I.2.3: Rating events and sovereign-yieldspreads

310

320

330340

350

360

370

380

Mea

nof

rela

tive

spre

ad

29029d- 22d- 15d- 8d- 1d- 6d+ 13d+ 20d+ 27d+

Trading days relative to announcement

300

Changes in ratings, and in particular downgrades,can have a strong effect on bond spreads. Ananalysis of spread developments around the timeof rating announcements shows that sovereigndowngrades are followed by rising sovereignspread changes (see Graph I.2.3).(26) However, theanalysis also shows that the spreads increasebefore the announcement of the sovereigndowngrade, shown by the vertical line in theGraph. While the pre-movement of yields is tosome extent due to credit rating agencies'signalling of future downgrades in advance, it alsosuggests at least partial endogeneity of ratingchanges.

For the sample used in Graph I.2.3, the impact ofdowngrades on spreads of euro-area MemberStates are considerably smaller than estimatesreported in empirical economic studies. As a resultof a one notch downgrade, the data used generateaverage changes in yield spreads that rangebetween 0 and 17 basis points. Other empiricalstudies, on the other hand, have come up withestimates of yields increasing between 25 and 200basis points.(27) The likely reason for the differenceis that the academic literature uses data panels thatcover more emerging markets.

(26) The announcements used are from the three major creditrating agencies, and concern euro-area Member Statesstarting from early 2009.

(27) For a recent empirical survey and new estimates, seeTejada, M. and L. Jaramillo, "Sovereign Credit Ratings andSpreads in Emerging Markets: Does Investment GradeMatter?" IMF Working paper 2011/44. Evidence ofcontagion of credit rating announcements in the euro areais found in Arezki, R., et al. (2011), "Sovereign RatingNews and Financial Markets Spillovers: Evidence from theEuropean Debt Crisis", IMF Working Paper 2011/68.

(25) The economic literature shows that sovereign ratings tendto lag market reactions. Contrary to ratings of companies,for which credit rating agencies have access to timelyinformation, sovereign ratings are typically based onpublicly available information, which often becomesoutdated before it is issued.

44


Box I.2.2: Contagion be

This box attempts to measure the degree ofcontag

tw

ion, or spill-over, of sovereign risk in oneMember State to the sovereign risk of other

hether a large increase in a Member State’s

s. The spillover is calculated as the averageof all abnormal changes and tested for significance.

pill-over effect ofabout 20 basis points in Greece, Portugal, Irelandand Spain’ CDS spreads. Ireland is the exception,for which the effect is not significant.

The spill-over from rising peripheral CDS spreadsto the EU as a whole and to non-peripheralcountries is less. Greece or Spain as sourcecountries does not create a significant spill-over.However, Ireland and Portugal seem to affect theCDS spreads of non-peripheral Member States,where CDS spreads would increase by about 5%,which translates into a spill-over of about 10 basispoints.

een Member States

In general, taking peripheral Member States assource countries, an average increase of about10.5% (the minimum threshold increase is about6%) in their CDS spreads led to increases in the

other peripheral Member States’ CDS spreads inthe order of 7%. This effect is significant at the10% level, and translates into a s

Member States or different aggregates of EUMember States. An event-study approach is used totest wsovereign risk affects the market price of sovereignrisk of other Member States. For this purpose, theevent is defined as a large relative increase in thespread of a ‘source’ country’s credit default swapwith a five-year maturity. Event dates are thosedays with the 15% highest daily increases in thespread from January 2009 to February 2011. Forexample, all daily increases in the Greek 5-yearCDS spread are ranked according to the size of thechange. The maximum daily change in the spreadwas 31.9% and the minimum change was 0%.Those days with the 15% largest changes areselected as events dates. For Greece as a sourcecountry there are 38 events where the minimumchange was 6%. The analysis covers 17 EUMember States, including Greece, Ireland,Portugal, and Spain.

Graph 1: Effect of an abnormal increase in CDS

The procedure employed tests for an ‘abnormal’change in the CDS spread of a ‘target’ economicregion. Individual countries are grouped into threeeconomic regions, namely the EU as a whole,peripheral countries and non-peripheral countries.In short, the procedure tests for significance oflarge changes in the CDS spread of a sourcecountry on above-average changes in the CDSspread of target regions. For example, on all theidentified Greek event days, the ‘abnormal’ changein the Portuguese CDS spread is calculated as thedaily relative change in the CDS spread minus the‘expected’ change. The expected change is taken tobe the average of the previous twenty days ofrelative changes. Thus, the procedure adjusts forany persistent trends in the changes of CDSspread

spreads

* ***

* ** **

012345678

EL ES IE PT Non-peripheralSource country

Effe

ctin

targ

etre

gion

(%)

Peripheral Non-peripheral EU

* significant at 10% level** significant at 5% level

Replicating the same analysis using non-peripheralMember States as source of contagion generallygenerates insignificant results. For those countriesfor which the spill-over effect is significant, theyprimarily affect other non-peripheral MemberStates.

In conclusion, the analysis illustrates that the riskof contagion primarily occurs between peripheralMember States. However, there is some spill overalso from peripheral Member States tonon-peripheral. The effects on peripheral MemberStates are relatively small, but economicallyrelevant at the margin. The spill-over tonon-peripheral Member States is small and noteconomically relevant.

Table 1:

EL ESMax increase (%) 31.9 29.7Average absolute change (%) 10.1 11.0

Descriptive statistics of eventsIE PT Peripheral Non-peripheral

24.2 23.3 27.3 22.79.0 11.7 10.5 8.65.6 7.6 6.4 5.338 38 38 39

Threshold increase (%) 6.0 6.3Number of events 38 39

45


Table I.2.2:OLS Regression: Relationship between the change in bond spreads and public debtDependent variable: change in spread betweeen 10-year sovereign bond and 10-year swap rate December 2009 to December 2010

(1) (2) (3) (4) (5)

panel Euro-area MS Euro-area MS as in (2) excl. IE, EL as in (2) plusDK,SE,UK,USA,NO as in (4) excl. IE, EL

change in debt 2009-10 change in debt 2009-12Constant -2.36 -2.28 -1.76 -2.09 -1.55Standard deviation 0.59 0.74 0.55 0.43 0.42Debt/GDP 2009 0.03 0.03 0.02 0.03 0.02Standard deviation 0.01 0.01 0.01 0.01 0.01Change in debt/GDP 0.13 0.09 0.12 0.13 0.10Standard deviation 0.01 0.01 0.03 0.03 0.03R2 0.70 0.79 0.65 0.75 0.57No. of observations 16 16 14 21 19

46

2.3. IMPACT OF SOVEREIGN RISK ON PUBLICSECTOR ACTIVITY

This chapter focuses on the channels throughwhich higher sovereign-risk impacts on economicactivity. It complements the analysis in the autumn2010 forecast document on the impact ofbudgetary consolidation, which is the principalpolicy response to sovereign risks, on economicgrowth. Apart from its impact via financialmarkets, which are discussed in the sectionsbelow, the increase of sovereign risk can havea direct effect on public sector activity.

Graph I.2.4: Changes in interest-rate spreadsand debt/GDP across euro-area Member States

BEDE

IE

EL

ES

FRIT

NL

PT

-1

0

1

2

3

4

5

6

7

0 10 20 30 40 50 60Increase in public debt 2009 to 2012, in % of GDP

Act

uali

ncre

ase

gove

rnm

entb

ond

spre

ads1

2/20

09to

12/2

010

The analysis of higher sovereign risk on publicsector activity is complicated by an endogeneityissue: increasing public debt contributes to highersovereign risk, with following higher interest rates.Ceteris paribus, the higher debt service burdenfurther increases the level of public debt. Indeed,even a naive regression analysis with the simplestspecification possible suggests that more than 70%of the variation in the increase in bond spreadsacross the sixteen euro-area Member States fromend-2009 to end-2010 can be explained by thelevel of public debt relative to GDP and its change.The share explained by public debt even increases

to 80% if the forecast change of the publicdebt-to GDP ratio between 2009 and 2012 is usedinstead.

The finding of a strong correlation between publicdebt and interest spreads contrasts with results ofearlier studies of this effect in EMU. Recentstudies suggest that this pattern has changed withthe financial crisis. Fundamental factors, and inparticular public debt, have become an importantdeterminant of sovereign spreads.(28)

Generally, the direct impact of higher sovereignrisk should be similar to the impact of higherpublic debt on savings and investment.(29) Themost immediate effect may be that the publicsector will provide fewer services to the economy.The higher the public debt, or the higher theaverage interest rate paid for the debt, the higherthe debt servicing costs, and the fewer means areavailable for productive public expenses.Budgetary room for manoeuvre would in particularbe curtailed in economic downturns. Thepossibilities to stabilise economic activity, forexample by letting automatic stabilisers play freelyor by cushioning solvent, but liquidity-constrainedfirms, are more inhibited if the public sector isfacing a high debt servicing burden. The need tocut down on public expenditures in an economicdownturn will reduce corporate earnings, therebydepressing aggregate demand. Private actors willalso expect that with a high public debt servicelevel, the likelihood of corrective action is

(28) See, for example, the literature reviewed and the empiricalanalysis in Gerlach, St. et al. (2010), "Banking andSovereign Risk in the Euro Area", CEPR Discussion PaperNo 7833 and Arghyrou, M. G.and A. Konstanikas (2011),The EMU sovereign-debt crisis: Fundamentals,expectations and contagion", European EconomyEconomic Paper No 463.

(29) Thus, the arguments against the neutrality proposition ofthe Barro-Ricardo theorem, presented and discussed in thespecial chapter in the autumn forecast, apply yet again.


subject ary taxes in the future.

GDP andassuming that Member States will over themedium term run a deficit below 3% of GDP, theyhave to refinance about 25% of GDP each year.Under these assumptions, a 100 basis pointincrease in the sovereign-risk premium absorbs0.25% of GDP of public resources in the first year.Latest projections for some euro-area MemberStates point to a somewhat lower effect,considering their lower debt level and morecomfortable maturity structure (see Graph I.2.5).

increasing and with it the probability of beingto higher distortion

The impact of a higher sovereign-risk premium onthe costs of debt servicing are in principlestraightforward to estimate, though it requiresdetailed information about the maturity structure ofexisting public debt and assumptions about futuredeficit developments and the maturity of futuredebt. Since the average maturity of public debt inthe EU is around 4 years, 25% of total debt wouldneed to be refinanced each year.(30) With a startingposition of an 80% ratio of public debt to

Graph I.2.5: Debt-servicing costs by generalgovernment in 2011

BE

DE

IE

ESFR

IT

LU

MT

NL

AT

PT

SISK FI

0

1

2

3

4

5

0 50 100 150 200Public debt in % of GDP 2011

Incr

ease

inde

bt-s

ervi

cin

2011

in%

ofG

DP

Whereas the increase in sovereign risk seems toreduce available resources by a small amount, theeconomic impact may be large because it occurs at

EL6

7

8

gco

sts

the margins and hits Member States in whichpublic budgets are already squeezed. In QUESTmodel simulations run for the autumn 2010forecast, a sovereign-risk shock of 400 basispoints, lasting for 10 years, had only a modestimpact on real GDP growth, if there was nospillover to risk premia in the financial sector. Theshock leads to a gradual increase in governmentinterest payments and an accumulation of debt.

(30) This assumption yields strictly speaking a broadapproximation because public debt offices are also engagedin swap transactions that change the maturity profile andthe impact of the term structure on public debt.

xes so that the government debt ratio isstabilised in the long run. The induced increase in

ere is noempirical evidence that higher debt adversely

The theoretical motivation for such a tipping pointeffect can be derived from the model analysis in

higrisefadgen

eful to note that recentrebei.e. governments would have scope to raise taxes

Since the Quest model applies a debt stabilisationrule, the increase in debt prompts an increase inlabour ta

distortionary labour taxes leads to lowerconsumption and employment. After 10 years,GDP falls 0.4% below the baseline.(31)

Economic studies found that the level of publicdebt is a crucial determinant of the impact of debton GDP. Below a certain threshold, th

affects GDP growth. Above some tipping pointthere is. In their analysis of 44 countries over twocenturies, Reinhard and Rogoff (2010) identifysuch a tipping point at 90% of GDP.(32) If publicdebt is above this tipping point, GDP growth is onaverage one percentage point lower. A second,comparable analysis by Caner et al. (2010), whichworks with data from 101 countries over the period1980 to 2008, set the threshold at 77% of the debt-to-GDP ratio.(33) According to their estimates,every additional point of public debt above thisthreshold reduces real GDP growth by 0.02 pps.This study found that the threshold lower, but thegrowth impact bigger in emerging than advancedeconomies; whereas the one by Reinhart andRogoff concluded that the threshold was similar inboth groups of economies. Interpolating the resultsof Caner et al (2010), would suggest that thethreshold for advanced economies could be wellabove 100% of GDP.

Davig and Leeper (2011).(34) They assume that theher the debt, the more agents expect tax rates to. Beyond a threshold, the tolerance for taxationes and any increase in tax rates will noterate further tax returns, i.e. the so-called

ffer effect. It is usLasearch on the Laffer effect found EU tax rates togenerally lower than the implied maximum rate,

(31) See European Commission DG ECFIN EuropeanEconomic Forecast, Autumn 2010.

(32) Reinhart, C. M. and K. S. Rogoff (2010), "Growth in aTime of Debt", American Economic Review, Vol. 100, pp.573-588.

(33) Caner, M., et al. (2010), "Finding the Tipping Point—When Sovereign Debt Turns Bad”, World Bank PolicyResearch Working Paper No. 5391.

(34) Davig, T. and E. M. Leeper (2011), "Temporarily UnstableGovernment Debt and Inflation" NBER Working PaperNo. 16799.

47


eroom for manoeuvre is highest in those Member

debt. In practice, it is likely that they re-orient theirportfolios towards private debt securities inresponse to higher sovereign risk.

Higher demand for capital by the public sectormay crowd out private investment, therebydepressing the growth prospects of the economy.The assumption behind crowding-out is that publicdemand for capital is inelastic to the interest rate.The government sector demands the amount itrequires independently of the response of theinterest rate, whereas private firms adjust theirinvestment plans if capital costs increase beyondexpected profitability. Currently, theseassumptions do not fully hold. Some MemberStates have found interest rates increasing toward

before the inflection point is reached.(35)

According to the authors’ model simulations, th

States in which bond spreads had increased themost over the last year, and is higher for taxes onlabour than on capital income.

2.4. EFFECTS OF HIGHER SOVEREIGN RISK ONTHE FINANCING OF THE CORPORATESECTOR

In macroeconomic models, an increase in thesovereign-risk premium would imply an impactcomparable to that of a correspondingly higher realinterest rate. The elasticity with respect to the costof capital in investments and other demandcomponents governs the effect on GDP. However,the risk premia for the rest of the economy, andthus the capital costs for firms, must notnecessarily increase by the same amount, or maynot increase at all, if savers perfectly discriminatebetween the risks attached to sovereign and private

slevels that were perceived as non-sustainable.Firms may afford a higher cost of capital if at thesame time the economic outlook and therewithexpected profitability improves. There is limitedscope for this type of “reverse crowding-out”, andit is mainly a theoretical possibility, but could beone explanation to why sovereign yields haveratcheted up so strongly.

A further complication arises in the euro-areacontext: If the yield on sovereign bonds has animpact on capital costs in the private sector in oneMember State, the source may be either the euro-

See Trabandt, M. and H. Uhlig (2009), "How Far Are WeFrom The Slippery Slope? The Laffer Curve Revisited",NBER Working Paper No. 15343.

(35)

rent for thebanking system and for the non-financial system.

corporate bonds may beinformative about the impact of the sovereign-risk

area benchmark, i.e. the German Bund, or thenational debt of the Member State. After a decadeof monetary union, the interest rate on nationalsovereign debt may have little guiding role for thecapital cost of domestic private debtors. Inaddition, the guiding role of the interest rate of thenational sovereign's debt may be diffe

This carries a potential for cross-countrydifferences in the transmission of sovereign riskvia the process of financial intermediation. That is,the costs of bank lending may be affecteddifferently depending on the domestic sovereign'srisk. The following two sections discuss theseissues.

2.4.1. SPILLOVER OF SOVEREIGN RISK ON THECOST OF CAPITAL

The EU financial system is mainly bank-based.The euro-area financial accounts reveal that arounda third of non-financial corporations' externalfinancing stems from bank loans. For households,bank lending is the only relevant source of externalfinance. Among the sources of market funding ofnon-financial firms, the issuance of debt securitiesor of quoted shares has a small role, accounting foraround 13% and 7% of financial transactions in2010. Much more important is financing throughunquoted shares and other equity or through tradecredit. Yet, changes in the observed returns onquoted shares and

premia on the cost of capital.

Graph I.2.6: Stock-price developments

70

80

90

100

110

120

60Jan-10 Apr-10 Jul-10 Oct-10 Jan-11

EURO Stoxx EURO STOXX financialsEURO STOXX utilit ies ELPT IEES

Jan. 2010 = 100

Developments of stock price indices clearlygests that stock prices in euro-area Membersug

unGra

States with increasing sovereign riskderperformed relative to the Eurostoxx (seeph I.2.6). This is not necessarily due to a higher

48


ng higher taxes, to depressfuture corporate earnings.

ssutilitieProfita ost utilities is strongly determinedby revenues on the domestic market. Sectors with

lders participatein the downside risks, but are less affected by the

changed. This lowercorrelation suggests that investors have begun to

In particular, spreads of AAA corporate bonds

sug

cost of capital, caused by higher sovereign risk. Itcould also be caused by lower profitability due tostructural weaknesses and weak prospects fordomestic demand. Investors may expect the higherpublic debt and the required budgetaryconsolidation, includi

Acro sectors covered by the Eurostoxx index,s and banks underperformed considerably.bility in m

a stronger reliance on exports were less affected,suggesting that the impact of higher sovereign riskon the cost of equity capital may be dominated byits effect on domestic demand and corporateearnings. The underperformance of banks providesfurther support to the notion that the relationshipbetween higher sovereign risk and theintermediation of credit through the bankingsystem deserves special attention in the subsequentsection.

Developments in corporate bond spreads may givea better indication of the impact on capital coststhan share prices because bond ho

upside risks. That is, the holder of a corporatebond does not directly benefit from highercorporate earnings, but would suffer a loss if thefirm defaulted. The spillover from highersovereign risk to higher corporate default riskcould therefore be expected to translate into higherrequired returns on corporate bonds.

Corporate bond rates tend to be highly correlatedwith the return on sovereign bonds and the more sothe higher the rating of the issuer. In the recentpast, however, the relationship between spreads onsovereign and corporate bond markets has beenweak, as demonstrated by Graph I.2.7. Between2007 and 2008, the pattern is consistent with safehaven flows driven by investors' rising concernsabout the depth of the economic downturn. In early2009, this trend partly reversed. Lately, however,sovereign spreads have increased, while corporatespreads have hardly

consider corporate bonds as an alternative togovernment bonds when trying to achieve a lessrisky position.

partly replaced sovereign bonds as the “risk free”investment choice. When these substitution effectsare present, they imply that the spillover ofsovereign risk into higher corporate risks islimited.

decoupled from rising sovereign spreads,gesting that highly rated corporate bonds have

Graph I.2.7: Sovereign- and corporate-bondspreads 2008-11

0

1

2

3

4

Corp

orat

esp

read

s

-1Sovereign spreads (Euro-area average over German

yields)

-0.5 0 0.5 1

AA corporates AAA corporatesA corporates BBB corporates

The picture is more ambiguous for lower-ratedcorporates. The correlation between corporate andsovereign spreads remained positive in 2010, albeitwith a much smaller coefficient than in the past.However, changes in sovereign spreads wereaccompanied by over-proportional changes in AAto BBB rated corporate spreads during the bankingcrisis 2007-09. The changes were in the range of1% to 1.5% for a 1% increase in sovereignspreads, this elasticity declined to below 1% in2010. Graph I.2.8 shows that the yield on bondsissued by Portuguese corporations followed theyield of the sovereign in

1/2011

3/2009

9/2008

12/2009

2010, but that therelationship broke in early 2011, when some

rporate bond yields moved sideward while thevereign yield continued to increase.

coso

Graph I.2.8: Yield on bonds issued byPortuguese corporate issuers

3

4

5

6

7

8

Nov-09 Mar-10 Jul-10 Nov-10 Mar-11

Portugal, sovereign/similar maturityEdp finance bvRefer-rede ferroviariaPortugal telecom int fin

49


h I.2.9). However, thegeographical breakdown in the sovereign and

Developments of CDS spreads show a similarpicture at the aggregate EU level. Benchmarkcorporate CDS indices have decoupled from thesovereign CDS index. Whereas the sovereignindex was on an upward trajectory, starting in late2009, corporate indices (Europe and Cross-over)fell over time (see Grap

corporate benchmark portfolios is likely to bedifferent. This may imply that sovereign andcorporate CDS spreads are different at countrylevel, and in particular in those countries in whichsovereign risk increased the most.

Graph I.2.9: CDS spread of sovereign andcorporate debt

100

150

200

250

600

800

1000

1200

0Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11

0

50 200

400

Sovereign CDS (SovX Western Europe)High rated corporates (Europe Index)Low rated corporates (Cross-over index, rhs)

Employing a cross-country perspective oncorporate bonds and corporate CDS is complicatedby the absence of country-specific indices.Contracts are available for few firms only; usuallythese are big and concentrated among a fewindustrial sectors, i.e. often utilities. Trade in both

in peripheral Member States andthe relevant sovereign CDS are high, although

mber States, or with firms in other sectorsin other Member States, yielded sometimesconsiderably smaller coefficients, with mostestimates ranging between 0 and 0.4. A spill-overcoefficient of 0.6 – the regression coefficient –seems therefore to be the maximum range ofimpact on the corporate risk premium andtherewith on firms' cost of capital.

individual CDS and corporate bonds is not veryliquid. Corporate bonds have the furthercomplication that they are difficult to compareacross firms as their maturity, coupon, and otherspecial features regularly differ. CDS contracts forindividual corporates are easier to compare,because contracts have a common maturity of5 years and do not pay a coupon.

Despite these caveats, it appears that the insight ofdiverging trends of corporate and sovereign CDSis not valid for Member States currently underelevated market stress, the so-called peripheral orvulnerable Member States (see Graph I.2.10). Ina regression analysis, the correlations betweencorporate CDS

corporate CDS increased proportionally less, as theregression coefficients were between 0.2 and

0.6.(36) However, the available corporate CDS invulnerable Member States are almost exclusivelyfrom telecommunication or energy firms.Estimates with firms in the same sector but fromother Me

Graph I.2.10: Spreads on CDS contracts onSpanish corporates, 5-years maturity

050

Jan-10 Apr-10 Jul-10 Oct-10 Jan-11 Apr-11

100150200250300350400

Iberdrola SAEndesa SASovereignSociedad General de Aguas deTelefonica

The spillover might be lower if CDS prices tend tooverstate the underlying risk of default, which isthe view of rating agencies.(37) For example, recentanalysis by Fitch Ratings (2011) sees little directtransfer of risks from the sovereign to thecorporate sector. They argue that the spill-overeffects from poor economic growth andgovernment interventions are more importantfactors. A more direct link is only postulated forcorporates in public ownership, mainly utilities,which is in line with the findings presented in thissection.

For vulnerable Member States, the so-far observedincrease in the cost of credit insurance underpinsthe validity of the assumptions used in the QUESTsimulations in the autumn 2010 forecast. Thesimulation assumed that the spillover from a shockto the sovereign-risk premium to the risk in thecorporate sector was less than proportionate,translating a 400 basis point shock to sovereign

(36) Estimates with daily observations since January 2010controlled for the industry-average and a constant. TheOLS estimates explain in most cases around 90% of thvariation in corporate CDSSee Fitch Ratings (2011), "Euro zone sovereign pressuresand corporates, periphery countries' refinance risk", EuropeSpecial Report, February 2011.

e

(37)

50


e non-financialcorporations that are able to fund themselves onfinancial markets. However, the situation may bedifferent for those firms that rely on financingthrough banks. There are abundant signs thatincreased sovereign risk hampered banks' access tofinance and worsened their liquidity positions.Although the impact of higher sovereign risk onbanks' balance sheets and funding costs aredifficult to quantify, some of these effects havealready been passed through to potential borrowerseither by tougher credit standards or higher lendingrates. These effects seem to be pronounced in thevulnerable Member States, though still of limitedmagnitude in the euro-area aggregate.

vernments usedtheir fiscal resources and balance sheets to support

of problems in the financial system in some

d counterpartyrisk. Markets doubt the solvency of banks that arenot able to demonstrate their financial health andconvincingly reveal their genuine exposure tosovereign risks. Finally, greater sovereign riskserode the potential for official support. Unresolvedissues in the banking system thus fed back into thepublic sector.

Despite the sizeable sums already provided by EUgovernments in the framework of banking rescuemeasures, which amounted to 10% of GDP for theEU as a whole (direct spending and contingentliabilities), the perception in financial markets isthat banking reforms will require considerablymore public resources.(39)

risk into a 100 basis point shock to corporate risk.Nevertheless, the simulations of this shock yieldeda sharp fall in consumption and investment.Overall, euro-area GDP was projected to declineby 0.8% in the first year and 1.4% lower after adecade.

2.4.2. Impact on financial intermediation andbank lending

The analysis in the previous section suggests thatthe increase in sovereign risk only led to a smallincrease of capital costs for thos

Spillover to banks' funding costs

Typically, domestic financial institutions cannot beless risky than the sovereigns, which are supposedto back them in case of need. Accordingly, ratingagencies downgraded various banks immediately,or soon after they downgraded the sovereign statein which the bank resided, often quoting the highersovereign risk as their motivation for thedowngrade.

Since the beginning of the banking crisis it becameevident that bank and sovereign balance sheets areinterwoven through various channels. Respondingto the global financial crisis, go

aggregate demand and strengthen private balancesheets, particularly for banks. However, thishappened at the cost of an expansion of publicbalance sheets, which not only took on many badassets from private institutions, but were also hitby slow economic growth, high unemploymentand impeded tax revenues. These states facedincreasing borrowing needs in following years.

Rising sovereign-risk premia, being a partial result

Member States, have begun to spill back to thefinancial system through various channels. First,on the asset side, falling mark-to-market values ofgovernment bonds generate losses for local andforeign banks. Second, lower values ofgovernment bonds impact negatively on banks'liquidity positions, as government bonds arewidely used as liquidity buffers, and as collateralin, for example, repo transactions.(38) Third, on theliability side, banks' funding costs increase due to aworsened access to funding. This is to a largeextent the consequence of renewe

Graph I.2.11: CDS spread on sovereign andbanks senior debt

0

50

100

150

200

250

Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11

SovX (Sovereign Western Europe Index)Banks senior debt (Europe)

As the link between banks' and sovereign’sbalance sheets have tightened since the beginningof 2010, banks’ CDS spreads have become highly

(38) The ICMA (2011), "European repo market survey No 20,conducted December 2010" shows that the use of Greek,Irish and Portuguese bonds as collateral in private repo

(39)

ity base of the Greek banking

sector.

transactions has notably declined in summer 2010.As examples of the potential sums involved, the HellenicFinancial Stability Fund has been endowed with EUR 10billion to strengthen the equsystem if needed. In the Irish programme, EUR 35 billionhas been made available as a contingency fund to financemeasures to overhaul the banking

51


s even become cheaper to insure againstthe default of senior bank debt than against

Moreove eographical composition

correlated with sovereign CDS. However, the highcorrelation is less visible at the aggregate level.The Markit index for senior bank debt hasincreased much less than the index for sovereigndebt since late summer 2010 (see Graph I.2.11),and it ha

sovereign debt. Despite the deviation in the trend,there is a strong correlation of short-term changes.

r, the different gin both indexes makes a direct comparisondifficult. The interdependence between sovereignand bank risk has risen particularly in countrieswhere sovereign risk increased the most, asevidenced by the rolling coefficients of correlationshown in Graph I.2.12.

Graph I.2.12: Correlation between sovereignand bank CDS

0.4

0.5

0.6

0.7

0.8

0.9

1.0

0.3Dec-10Jun-09 Dec-09 Jun-10

Average of DE, FR, IT , NL, ATAverage of EL, PT, IE, ES

In Member States currently under elevated marketscrutiny, higher risk premia had a visible effect onbanks' funding costs. Various banks located inthese Member States had difficulties obtainingfunding on wholesale financial markets and turnedto financing

12 months rolling window

from the ECB. In consequence, the

rces within the euro area exerted byhigher sovereign risk, have significantly reduced

priced. Because ofproblems with adverse selection and moral hazard,banks may choose not to adjust loan rates inresponse to a changing credit environment andration credit instead.

The instrument to monitor changes in non-pricecredit terms is the ECB's Bank Lending Survey(BLS). Conducted on a quarterly basis and with apanel of around 120 euro-area banks, the BLSshows that the previous tightening of creditstandards for non-financial institutions (NFIs) andhouseholds has slowly been reversed throughout2009 and 2010. However, banks moderatelyresumed constraining credit in the first threemonths of 2011. They quoted rising funding costs,worsened balance sheet standings, and highe

the tightening of credit standards to continue in the

hou

on

use of ECB facilities in these Member States hasbecome a widely observed gauge of funding stress.Banks' issuance of long-term debt securities wasrelatively stable in 2010 and rebounded strongly inthe first quarter of 2011. However, this has to beseen against rising funding needs, as banks had toroll over considerable amounts of funding fromredeemed bonds. Issuance of long-term debtsecurities by banks in Greece, Portugal, Irelandand Spain was not uniform. Portuguese and Irishbanks tapped capital markets considerably lessthan the euro-area banking system as a whole atthe end of 2010 and early 2011.

Banks have adjusted to changing fundingconditions in many ways. Covered bonds, i.e.collateralised with real estate, became an important

vehicle for tapping wholesale financial markets.Thus, banks began to issue higher quality bonds inresponse to the perception of higher risk beingattached to bank bonds. The virtual dying out ofthe use of state-guaranteed bonds is testimony thatpublic support is no longer regarded as a quality-enhancing component of bank debt. Thisinstrument was introduced during the financialcrisis, to help banks to tap wholesale financialmarkets. In 2010, the instrument was largely in useby banks located in peripheral Member States, andin early 2011 only one Spanish bank issued stateguaranteed bonds.(40) Banks have also adaptedtheir lending conditions.

Transmission to bank lending

The funding pressure on banks and thedeleveraging fo

the margins of credit intermediation. Banks canreact to changing market conditions in two ways:either by credit tightening or by adjusting interestrates charged on loans. Occasionally bank interestrates can be sticky and not respond immediately orfully to changes in corresponding reference ratesagainst which they are

rperception of risk as the main driving factorsbehind this change. Deteriorating banks' liquiditypositions have also contributed to this trend.According to the survey, euro-area banks expect

second quarter of the year, both for NFIs andseholds.

The main focus of the following analysis will beNFIs, given the importance of credit to these

The instrument was still used by entities that acted as badbanks on behalf of governments.

(40)

52


e noted that the indicatorsused in both surveys are qualitative in nature so itis difficult to draw concrete conclusions about themagnitude of the described developments.

institutions (26% of all outstanding loans grantedto euro-area residents) and for the performance ofthe economy.

Country data suggest that credit standards on loansgranted to NFIs develop differently across MemberStates. In the vulnerable euro-area Member States,NFIs credit conditions have remained considerablytighter than in the core euro-area Member States(see Graph I.2.13),(41) implying that the availabilityof bank loans in euro-area peripheral countriescontinued to deteriorate. Evidence from the recentECB survey on access to credit by SMEs confirmsthis finding, suggesting that access to finance bySMEs remains tight in the "stressed countries".Nevertheless, it should b

Graph I.2.13: Credit standards on loans to NFIs

-20

0

20

40

60

80

03 04 05 06 07 08 09 10 11

Average of IE, ES, PTAverage of DE, FR, IT , NL, AT

Without good quantitative measures of creditstandards in a cross-country perspective, interestrates are the main tool available to study the creditintermediation process. During the period fromJanuary 2006 until end 2008, NFI interest rateswere strongly correlated with each other.Furthermore, there was a low degree of dispersionof interest rates across Member States and signsthat they were converging towards a commonlevel. However, when the sovereign-debt problemsintensified, rates started to widen across countries,and correlations decreased.

Interest rates charged by banks lending to NFIshave been rising since the sovereign-debt crisisaggravated in January 2010. This observationsuggests that rising interest rates on public debtstarted to raise funding costs for banks (see

(41) Data on changes in credit standards for NFIs loans is notavailable for Greece.

Graph I.2.14). To keep net interest margins ata stable level, banks offset higher funding costswith higher lending rates. As a result, borrowingcosts for NFIs increased. Particularly in Greeceand Portugal, interest rates rose more than in theeuro area on average.

Graph I.2.14: NFI Credit Rate Spreads - versusEuribor rates

3

4

5

6

2

006 07 08 09 10 11

1

DE IE EL ES PT

Graph I.2.14 also shows that changes ininterest-rate spreads follow a common patternacross euro-area Member States and are rathermore time-dependent than country-dependent.There are still differences in the levels of retailinterest rates across euro-area Member States, butthe changes in these rates are strongly determinedby euro-area factors. For example, a panelregression incorporating random-effects of rates

by, e.g. increasing non-interest

the margins on riskier loans.

applied on loans for non-financial corporationsreveals that Euribor rates explain most of thevariation. Nevertheless, there is an additional, verysmall impact from national sovereign bond rateson credit spreads, which is statistically significant,but hardly economically relevant. Taking theavailable estimates at face value and controllingfor the impact of Euribor rates on credit spreads,an increase in the national sovereign bond yield by100 basis points drives up national credit spreadsby a mere 3 basis points.

Such a small effect of national sovereign bondrates on credit spreads can be explained by banksadjusting lending in many ways. Increasinglending rates is only one possible action a bank cantake. As stated above, banks may choose to rationcredit instead. Credit rationing can beaccomplishedcharges, reducing the loan size, adapting the loanmaturity, applying stricter collateral requirements,requiring a higher loan-to-value ratio, or increasing

53


wer lending volumes in theMember States most affected by the sovereign-

vereignrisks.

Heightened sovereign risk and higher credit costshave not been unambiguously translated intosystematically lo

debt crisis. The impact of banks' higher fundingcosts seems to be dominated by other factors,especially the strength of the economic rebound.

Having achieved a bottom level at the end of 2009,NFI credit growth slowly started to recover in theeuro area at large. It remained negative or close tozero, along with systematically rising sovereignbonds spreads. The credit-to-GDP ratio, which isa gauge to adjust for changes in business cycleconditions, continued to decline in the euro areaand was particularly pronounced in Ireland andSpain (see Graph I.2.15). However, this is morelikely due to the weakness of banks in these twocountries, which also caused higher so

Graph I.2.15: Loans to NFI relative to GDP

9092949698

100102104

Jan-10 Apr-10 Jul-10 Oct-10 Jan-11*

Euro area DE IEEL PT ES

* Based on forecast GDP for 2011Q1 and adjusted forstructural break in EL data.

Jan. 2010 = 100

It should be stressed that falling credit growth wasan implication of the financial crisis, the broad-based recession and the subsequent need for theNFC sector to reduce its debt position. Thenegative trend started well before the outburst ofthe sovereign-debt crisis in the euro area.Nevertheless, even if rising sovereign-risk premiaare not the only determinant of declining credit,they may be adding to the negative developmentand reinforcing it.

Model simulations of the impact of sovereignrisk on bank lending

Since the full impact of higher sovereign risk oneconomic activity via the banking system may notyet have fully materialised and therefore not be

various assumptions in an extended version of theQUEST model, which includes a financial sectorwith monopolistically competitive banks. Thismeans that banks set a loan interest rate asa mark-up over their funding costs; they also rationcredit to borrowers by im

visible in economic data, Table I.2.3 shows the

posing an upper bound onborrower indebtedness which is determined asa fixed ratio of the value of their collateral (i. e. themarket value of the capital stock of the borrower).They need to adjust both the mark-up and thesupply of loans in response to a shock to theirequity in order to avoid becoming insolvent.

The macro-econometric simulations assume thatbanks encounter losses to their equity of 1% ofGDP on their sovereign bond holdings. For thebenign scenario, it was furthermore assumed thatthere would not be a panic on financial marketsand the central bank would reduce interest ratesand thereby banks' funding costs by 40 basispoints. Banks partially pass on the expected lossesonto loan rates and reduce loan supply (partly as

0.2%.

effect of shocks to the banking system under

a demand response to higher interest rates andpartly due to loan rationing). All these responsestaken together contribute to stabilising the cashflow of banks and prevent a strong decline in thevalue of banks’ capital.

The model predicts that the loan spread (loan rateminus deposit rate) increases by slightly less than100 basis points. The spread over-predicts theactual increase in loan rates because the policy rateand therefore funding costs go down. Creditrationing increases the "shadow price" of banklending by another 30 basis points in the firstyear.(42) In consequence, banks reduce the stock ofloans to firms by about 0.3% in the first year. Theincrease of capital cost affects the real economymostly via a reduction of investment (around-0.4% in the first year). Because of the negativedemand shock, employment will be negativelyaffected, especially in the first year, resulting ina loss of GDP of close to

In the credit-crunch scenario, it is assumed banksrespond entirely with credit rationing but have nopossibility to increase the loan interest rate. Thecredit crunch reduces aggregate demand and thenegative aggregate demand shock is partlycompensated for by a reduction in the policy rate,

(42) The extent of loan rationing is given by the increase of theLagrange multiplier of the collateral constraint, which canbe translated into a shadow loan interest rate, i.e. theborrowing rate which would induce firms to adjust theirdebt to the level consistent with the collateral constraintimposed by the bank.

54


Benign scenarioGDP (1) -0.2

Investment (1) -0.4

Consumption (1)

Table I.2.3:Simulations of bank losses of 1% of GDP: Impact in first y

Cr g panic scenario

-0.2

Employment (1) -0.3

49

-24 158

terestratio1, b

edit crunch scenario Bankin

ear.

-0.3 -1.0

-0.4 -2.6

-0.3 -1.0

-0.4 -1.7

-74 102

-99 260

Funding rate (2) -38

Loan rate (2)

Credit spread (2, 3) 121

Total capital cost (2) 121

Loans (1) -0.3

(1) in % deviation from baseline, (2) in basis points, (3) shadow inScenario 1: Banks adjust 2/3 by raising credit spread and 1/3 bybut cannot increase the credit spread. Scenario 3: like Scenario

308 515

-1.2 -1.8

rate.ning credit. Scenario 2: Banks react by rationng credit,ut with additional 150 basis point shock to funding costs

55

the interbank market increases banks' funding

VIA WEALTH AND CONFIDENCE EFFECTS

In addition to the impact via financial markets,tensions on sovereign-debt markets may also havedirect effects on private spending, for example viatheir impact on financial wealth and economicconfidence. In the euro-area aggregate, thehouseholds' saving ratio is closely and inverselycorrelated to the governments' net borrowing (seealso the following chapter for an analysis of thedeterminants of savings and investments). In linewith the expectation that the households' savingrate would increase in anticipation of higher futuretax burdens and higher uncertainty, the saving rateis higher in 2010 than before the financial crisis. Ina cross-country perspective, however, there is nosign yet that the saving rate increased more in

eclinein the market value of outstanding debt.

which increases expected inflation, thus leading toa stronger reduction in the real rate in the firstyear. Even though the loan interest rate declines,credit rationing increases the capital costs (shadowinterest rate) for non financial firms.

In the severe scenario, it is assumed that a panic in

costs by 150 basis points. This accentuates banklosses, and leads banks to increase spreads moreand reduce loan rates more strongly than in thebenign scenario, in order to ensure viability. Thecredit spread would increase by 160 basis points,while credit rationing adds 350 basis points to thecost of capital. Loans would decline by 1.8% andGDP by 1% in the first year.

2.5. SPILLOVER TO PRIVATE CONSUMPTION

those Member States most affected by sovereignrisks. The evidence presented in this sectionsuggests that the direct effect of lower market

values of sovereign bonds on households' financialwealth has been modest, whereas the severetensions on sovereign markets can be associatedwith negative confidence shocks in the countriesconcerned, with potentially significant cross-border spillovers.

Low direct impact on households' financialwealth

Rising risk premia imply a higher required returnon new purchases of debt securities and a d

Graph I.2.16 documents how the value of bondsissued by various euro-area Member States havedeveloped since the beginning of the sovereign-debt crisis.(43) To the extent that investors havea strong bias towards holding domestic assets, theyare exposed to the loss in values of their sovereignbonds.

Graph I.2.16: Value of sovereign bonds

95

100

105

110

75

80

85

90

Jan-10 May-10 Sep-10 Jan-11

EA DE EL IE PT ES

Iboxx total return index,Dec. 2009 = 100

(43) The Greek benchmark portfolio was discontinued in June2020 because the country lost its investment grade status.


side thefinancial sector, the effect is likely to be negligible.

e government bondsaccount for only a modest share of about 3% inhouseholds' financial assets and less than 0.5% of

corpordebt securities and the contribution of interest

purchasing power if a large share of public debt isfinanced by foreign investors. The simulationswith the QUEST model shown in Graph I.2.17with different assumptions on foreign indebtednessdemonstrate that private consumption and privateinvestment (not shown) would be considerablylower if – as for example in Ireland – a large share

For creditors that use market prices to value theirwealth and that base their spending decisions onthe market value of their financial assets, theincrease in sovereign risk could have a sizeableimpact on spending or investment. Out

Even if households perceive to have encountereda loss in financial wealth, recent Commissionestimates suggest that a decrease in financial worthof 1% is associated with a small decrease inconsumption of 0.03%.(44) Comparable research,reported for the USA, yielded a slightly higherpropensity to consume out of financial wealth.(45)

The direct effect on households' consumption isalso likely to be limited becaus

their disposable income.(46) For non-financialations, the share of financial assets held as

income to gross value added is somewhat smaller.Whereas the direct impact of even a large declinein sovereign bond values on households'disposable income should be small, there may bemuch higher second round effects. Households arethe ultimate holders of all debt. If the lower valueof government bonds impact on the yields ofbanks, life insurance companies or pension funds,households should expect lower income streams inthe future, beyond those from their direct exposureto sovereign bond holdings. This indirect effectshould be higher than the direct effect, but alsospread over households' life-time income. As aresult, the impact on short-term consumption isexpected to remain limited.

A sizeable impact on private consumption andinvestment emerges, however, from the transfer of

(44) See article "The interrelations between household savings,wealth and mortgage debt" in Quarterly Report on the EuroArea Volume 8 No 3 (2009).

(45) See Carroll, C. C. et al. (2010), "How large are housing andfinancial wealth effects", ECB Working Paper No 1283and the literature quoted therein.

(46) According to the financial accounts, more than 80% of thehouseholds' interest-bearing financial assets are depositsand less than 20% debt securities. Of the latterapproximately 40% are estimated to consists ofgovernment bonds.

sumed to stabilise public debt.Because lower domestic demand goes hand in

oreign indebtedness.

of interest is paid to foreign creditors. In case ofdomestic indebtedness, the sovereign-risk shockimplies a reallocation between public and privatesector. The negative GDP effect occurs becausehigher taxes reduce GDP in the model and higherlabour taxes are as

hand with lower demand for imports, the overallimpact on GDP is similar in the scenarios with andwithout f

Graph I.2.17: Impact of a 10-year lasting 400-basis-point sovereign-risk shock

-2.5-2.0-1.5-1.0-0.50.00.5 %

-3.011 13 15 17 19

Consumption with no foreign holdingConsumption with 70% foreign holdingReal GDP with no foreign holdingReal GDP with 70% foreign holding

Spillover to confidence

Although there is no generally agreed definition ofconfidence shocks, it is likely that economicsentiment of households and investors was affectedby the reporting of tensions on sovereign-debtmarkets. Both the downgrades by rating agenciesand the policy measures enacted by governmentsto restore sound public finances should are likelyto have an impact on business and consumerconfidence.

It i land in the aggregate figures of the Commission'sconsumer and industry confidence indicators, but itseems possible to identify the impact of thesovereign-debt shock in the detailed survey repliesfor individual survey questions. This is especiallytrue for those questions that are formulated both inbackward looking terms (e.g. "how has yourproduction developed over the past threemonths?") and in forward looking terms (e.g."How do you expect your production to developover the next three months"). Responses to thesequestions are in most case closely correlated, butare also occasionally subject to phases ofdecoupling. The latter may be interpreted asindications of expectation shocks, i.e. periodsduring which households' and managers'

s difficult to track a confidence shock in genera

56


expectations on a specific variable are not formedexclusively on the basis of past developments inthat variable, but also integrate information aboutmajor new political or economic events which willaffect the variable in the future.

-3.5-3.0-2.5-2.0-1.5

Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11

-1.0

-0.50.0

0.51.0 pps.

Over last 12 months Over next 12 months

Graph I.2.18: Euro area - Consumers' assessmentof the general economic situation

Graph I.2.18 displays euro-area consumers'assessment of the general economic situation over,respectively, the past 12 months and the next 12months. Consumers' expectations dropped sharplyin May-June 2010, a period which was marked bysharp rises in spreads on government bonds inGreece (and to a lesser degree Portugal andIreland). The drop was temporary and followed bya rapid recovery in July-August. Another – thoughmuch smaller – dip also took place in December2010 and January 2011, following theintensification of the debt crisis in Ireland. Thesefluctuations are essentially visible for consumers'expectations, whereas their backward assessmentwas only subject to a mild inflection. A similar

and business expectations in spring 2010. The

for

pattern of temporary deteriorations in expectations,although less marked, can be inferred fromconsumers' assessment of their past and futurefinancial position (not reported in the chart).

These observations suggest that major tensions onsovereign markets may have a significant thoughtemporary effect on euro-area consumers'expectations.(47) Box I.2.3 presents an econometricframework to test for possible shocks to consumer

estimated models compare backward- andward-looking indicators of sentiment to extract

changes in expectations that cannot be explained

be the most likely explanation.

− In December 2010 and January 2011, Greece,Portugal and Spain registered aftershocks toexpectations. The magnitude of theseaftershocks was smaller than those estimated inspring 2010 for Spain and Greece, while it wasstronger for Portugal.

− Confidence shocks are also visible forconsumers and manufacturers at the euro-arealevel, pointing to significant cross-borderspillovers of major tensions on sovereignmarkets. In the euro area, the size of thesespillovers seems, however, to diminishsubstantially over time, possibly reflectingeconomic agents' increasing familiarity withsovereign tensions, or increasing confidencethat contagion effects will remain contained.

annot be used to derive estimates of

(47) It is obviously impossible to conclude with certainty thatthe sentiment indicator decreased in May-June 2010because of tensions on sovereign markets. But in theabsence of major other macroeconomic events during thisperiod, this seems to

by past values of the indicator considered, andtherefore reflect information about new political oreconomic events. This work suggests thefollowing:

− For both consumers and manufacturers, spring2010 was associated with sizeable negativeshocks to expectations in Greece, Portugal andSpain.(48)

Overall, the analysis points to potentiallysignificant effects of major sovereign-markettensions on confidence. Two limitations should,however, be stressed. First, the econometric workpresented here focuses on expectations shocks andtherefore neglects possible effects on backward-looking sentiment indicators. It may thereforeunderestimate the true size of confidence effects.Second, because it focuses on sentiment indicators,the analysis cthe growth implications of confidence shocks.

(48) Survey data is not available for Ireland in the recent period.

57


Box I.2.3: Econometric model to

This box presents an econometric framework toidentify possible shocks to consumers' andbusinesses' expectations using su

i

rvey data.

The impact of a confidence shock can be studiedindirectly by analysing saving and investmentbehaviours and ascribing developments that cannotbe explained by macroeconomic fundamentals toshifts in confidence. The advantage of such amethod is that it allows a straightforwardassessment of the growth implications of theshocks. Its main drawback is that the interpretationof unusual saving or investment behaviours interms of confidence shocks must be made withcaution: they may reflect a genuine change inconfidence, but also inappropriate modelling.

To avoid this pitfall, the analysis presentedhereafter relies on a more direct approach based onmeasures of sentiment as reported in business andconsumer surveys (BCS). BCS data are interesting

litical or economic events, which willaffect the variable in the future. As these economic

assessments eventually close.

is explained by B isone way to identify these expectation shocks.(1)

but the remainder of this box focuses on the VAR

dentify expectations shocks

that variable, but also integrate information aboutmajor new po

to analyse in relation to tensions on financialmarkets for two reasons. First, the consumer surveyincludes questions to households on theirassessment of the broad economic situation and oftheir own financial situation. Answers to thesequestions should help track respondents' perceptionof major macro-financial shocks. Second, somesurvey questions are formulated both in backwardlooking terms (e.g. "how has your productiondeveloped over the past three months?") and inforward looking terms (e.g. "How do you expectyour production to develop over the next threemonths"). Responses to these questions are in mostcase closely correlated, but are also occasionallysubject to phases of decoupling. The latter may beinterpreted as indications of expectation shocks, i.e.

periods during which households' and managers'expectations on a specific variable are not formedexclusively on the basis of past developments in

events feed into the economy they becomereflected in economic agents' backward lookingassessments and gaps between backward- andforward-looking

Expectation shocks can be viewed as changes in theforward looking assessment (hereafter F) thatcannot be explained by changes in the backwardlooking assessment (hereafter B), or in other words,by the history of the underlying variable asmeasured in the surveys. Estimating aneconometric model where F

Large positive (resp. negative) residuals in themodel are then interpreted as positive (resp.negative) expectation shocks. Several models weretested, including a linear model, an autoregressivemodel (to correct for autocorrelation) and astructural VAR model. These models were testedon two survey questions: consumers' assessment ofthe general economic situation and manufacturers'assessment of production.

The three models produce broadly similar results,

specification, which is econometrically sounder.

(1) An alternative could be to use hard data instead of soft datafor the underlying variable (e.g. industrial production insteadof manufacturers' assessment of production in the survey).However, this raises a problem difficult to take into account:the non-linearity of the relationship between soft and harddata during the crisis. Moreover, the hard data for consumers'assessment of general economic situation is not available.

Graph 1a: Expectations shocks, euro area

-0.8

-0.6

-0.4

-0.2

0

0.2

0.4

Jan-10 Apr-10 Jul-10 Oct-10 Jan-11

Graph 1b: Expectations shocks - Consumer

-1.2

-0.9

-0.6

-0.3

0.0

0.3

0.6

Jan-10 Apr-10 Jul-10 Oct-10 Jan-11

Consumer Industry EL ES PT


58


59

Box (continued)

The VAR treats F and B symmetrically, eachvariable being explained by its own lags and lags ofthe other variable (see equation 1).

(1)

With this specification it is possible to identify"structural" shocks (hereafter ω2) using a Cholelskydecomposition of the variance covariance matrix ofthe residuals u. The structural shocks can be usedas measures of expectation shocks. Byconstruction, expectation shocks ω2 are thenassumed to have only an impact on the residuals ofF and no impact on the residuals of B (seeequation 2).

(2)

Thus, strong and negative ω2 in spring 2010 can beinterpreted as expectation shocks that could belinked to an effect of the sovereign debt tensions onconfidence. For the euro area (see Graph 1a) andthe peripheral countries (see Graph 1b), most of thesizeable drop in the consumers' assessment of thegeneral economic outlook over the next 12monthsregistered in May 2010 can be explained by asizeable negative expectations shocks, while themagnitude of the aftershock in January 2011 islimited.

⎟⎟⎠

⎞⎜⎜⎝

⎛+⎟⎟⎠

⎞⎜⎜⎝

⎛=⎟⎟

⎠

⎞⎜⎜⎝

⎛

−

−

Ft

Bt

t

t

t

t

uu

FB

LAFB

1

1)(

ttFt

tBt

PPuPu

222121

111

ωωω+=

=

3.AND INVESTMENT TRENDS ACROSS THE EUROPEANUNION AND THE EURO AREA

60

3.1. INTRODUCTION

Much attention has been devoted in recent years tothe sustainability and adjustment of globalimbalances. This has put the spotlight onsaving-investment balances across the world.While neither the EU nor the euro area ischaracterised by any apparent major imbalance atthe aggregate level, this masks a considerablediversity across countries. Divergences acrossMember States have come under particularscrutiny in the course of the financial andeconomic crises. Gaps between gross nationalsaving and investment are not problematic per se.Indeed, such gaps may be interpreted asreconciling the independent decisions of saversand investors and promoting the efficientallocation of savings towards productiveinvestment across countries, which has in turnbeen facilitated by financial market liberalisationand financial deepening among EU countries. Inthe initial stages of transition of Eastern andCentral European countries, it appears that capitalflows were channelled towards investment inproductive capital stock. However, againsta background of robust growth and contained

inflationary pressures, the search for higher returnsdirected capital towards a wider range ofopportunities, including less productive uses inboth the emerging countries of the EU and thecatching-up countries of the euro area.

This chapter investigates the factors behinddevelopments in private saving and investmentacross Member States with a view to explainingtrends and projecting the adjustment ofsaving-investment balances in the near term.Section 3.2. contains a description of aggregatesaving and investment trends across MemberStates and the sectoral (i.e. households, corporateand public) behaviour underlying these balances.Section 3.3. assesses the potential factorsunderlying developments in saving and investmentand continues with an empirical analysis ofprivate-sector saving and investment acrossMember States. The final section considers thenear-term adjustment prospects for saving andinvestment.

This chapter investigates the factors behind saving and investment developments across the EU and theeuro area, both ahead of and during the economic and financial crises, and considers likely adjustmentover the forecast horizon. While the aggregate pattern of strong co-movement in saving and investmentratios predominated among Member States in the run-up to the crisis, quite striking divergences werealso apparent in some Member States (mainly euro-area countries) at both aggregate and sectorallevels. The crisis witnessed a reaffirmation of co-movement, with both savings and investment ratiosfalling in a majority of Member States.

The empirical analysis reveals that the main factors driving private saving include the rate of growth ofreal income and the level of disposable income, dependency ratios, the government saving rate, real(short-term) interest rates and uncertainty. On the investment side, the main explanatory variables ethe standard ones of real growth, real interest rates, the cost of capital and profitability. There are,however, considerable differences across Member States in the relative importance of these explanatoryvariables and country-specific factors play a significant role in some countries.

Looking forward, the Commission's spring forecast points to a very gradual recovery in overall savingand investment ratios and a marginal fall in the dispersion of saving-investment gaps in the EU and theeuro area over the forecast horizon. While the saving-investment gap is projected to diminish in someeuro-area countries with large external imbalances, there is still scope for further adjustment beyondthe forecast horizon.

DEVELOPMENTS IN AND PROSPECTS FOR SAVING

ar


3.2. AGGREGATE AND SECTORAL PATTERNSIN SAVING AND INVESTMENT

Over the long run, there was a strong downwardtrend in both investment and saving ratios in theEU(49)between the early 1970s and the mid-1980s.From a cyclical perspective, the sharp drops

up to thefinancial crisis, both ratios recorded significant,

incurred in the course of the recessions of the earlyand late 1970s were never recouped, leading to anoverall contraction in savings and investment ofabout 5 pps. of GDP. This was followed bya relatively more stable period (1995-2000),characterised by average saving and investmentratios of around 21-23%. In the run-

albeit temporary, increases, while remaining belowthe previous peaks of the early 1990s. The crisissaw concurrent sharp drops in both ratios, whichfell to all-time lows in 2009-10.

Graph I.3.1: EU - Investment and saving

1761 65 69 73 77 81 85 89 93 97 01 05 09

19

21

23

25

27

29

Investment Saving

Overall, the saving-investment gap has remainedvery small over the past two decades for both theEU and the euro area.(50) This section describessome stylised facts on saving and investmentacross Member States and sectors over the periodfrom the mid-nineties to date.

% of GDP

(49) In the absence of sufficiently long comparable series for allEU countries, the long-term series in Graph I.3.1 are basedon fourteen EU Member States, comprising the followingeuro-area countries: Belgium, Germany, Ireland, Greece,Spain, France, Italy, Cyprus, Luxembourg, Malta, theNetherlands, Austria, Portugal and Finland. Note: Unlessotherwise specified, the source of the data used in thegraphs and the empirical analysis is Ameco or Eurostat.

(50) Looking at data from 1990 to date, it is apparent that thesaving and investment ratios for the euro area were onaverage 1 pp. of GDP higher than for the EU as a whole.Although investment ratios have been generally higher forthe catching-up countries of the recently-acceded MemberStates, this is counterbalanced by generally lowerinvestment and saving ratios in both Sweden and the UK.

Aggregate saving and investment patternsacross the Member States prior to the crisis:stylised facts

The strong co-movement in saving and investmentobserved at the aggregate EU and euro-area levelswas also the predominant pattern across countriesin the period from the second half of the nineties tothe mid 2000s (Graph I.3.2, upper right and lowerleft quadrants). However, important divergences inmovements of savings and investment were visibleacross the Member States in the period precedingthe crisis (Graph I.3.2, upper left and lower rightquadrants).

Graph I.3.2: Changes in saving and investmentratios: pre-crisis period

(2005-07 vs. 1996-98)

EE

IE

ES

RO

4

6

8

10(p

ps.o

fGD

P)

SEBE

CZ

DK

DELU

NL

AT

EL

ITCY

HUMT

P L

P T

UK

-4

-2

0

2

inin

vestm

entr

a

LTFI

FRSI

SK

-8

-6

Chan

getio

-10 -8 -6 -4 -2 0 2 4 6Change in savings ratio (pps. of GDP)

Note: Latvia and Bulgaria were significant outliers over theperiod under observation, recording a particularly high changein the investment ratio of 17.0 and 19.6 pps of GDP respectively

On the other hand, declines in investment-to-GDPratios were recorded by several euro-area countries– Germany, Netherlands, Austria, Portugal andSlovakia – and some non-euro-area Member States– the Czech Republic, Hungary and Poland. In the

Typically, many countries experiencing strongergrowth in investment were catching-up economies,with lower per capita income levels compared withthe EU average, which benefited from largeinflows of foreign direct investment. Nonetheless,even for catching-up and post-transformationcountries of Central and Eastern Europe – whichhave typically enjoyed relatively high investmentratios – investment growth was unusually strongcompared with non-European emerging marketeconomies with similar per capita income levels:e.g., the almost 20-pps. rise in the share ofinvestment in GDP in Bulgaria and Latvia. Inseveral countries, the investment boom was alsolinked to a strong expansion in house-buildingactivity (e.g. the Baltics, Ireland and Spain).

61


residen re mutedin comparison with their regional peers.

n of saving ratiosbroadly stabilised for the euro-area Member States.As a general pattern, both saving and investmentratios decreased noticeably as a direct consequenceof the crisis (Graph I.3.3, lower left quadrant). TheBaltic countries (together with Ireland andLuxembourg) experienced the most significantdownward adjustments.

latter group of countries, the increases intial housing investment we

On the saving side, strong upswings were evidentin the run-up to the crisis in a number of countries,namely Denmark, Germany, Ireland, Latvia,Lithuania, Austria, Slovenia, Finland andSweden.(51) Conversely, some Member States sawa noticeable deterioration in their saving ratios –particularly those suffering from long-lasting fiscalimbalances (Greece, Portugal and Hungary).

Adjustment during the crisis

Measures of dispersion broadly point toa reduction of cross-country divergences ininvestment and saving behaviour in the course ofthe crisis, although the dispersio

Graph I.3.3: Changes in saving andinvestment ratios: crisis period

(2008-10 vs. 2005-07)

BG

EE

IELT

LU LV-16

-12

-8

-12 -8 -4 0 4 8Change in saving ratio (

HU

ROBE

CZDK

DE

FI

SENLAT

ELES

FRIT

CY

MT

P L

P TSI

SK

UK

-4

0

4

pps. of GDP)

Chan

gein

inve

stmen

trat

io(p

ps.o

fGD

P)

The reversal in investment activity, in particular,

incouboodowIrel

was sizeable in countries with buoyant investmentthe pre-crisis period. These mostly catching-upntries – typically Member States with housingms before the crisis – saw a significantnward correction in investment ratios (Estonia,

and, Latvia, Lithuania and Luxembourg).

Some Member States with a significant increase in theirsaving ratio saw also a marked decline in investment ratioin the pre-crisis period (e.g. Germany and Austria).

(51)

rose in Bulgaria, Estonia, Latvia,

atterns underlying saving andinvestment across Member States ahead of thecrisis: stylised facts

The various patterns in aggregate saving-investment dynamics across countries hide an evengreater variation in sectoral trends (Graph I.3.4).Nevertheless, some common features may beidentified. The private sector accounts for themajor share (around 90%) of both gross nationalsaving and investment. Within the private sector,the corporate sector predominates in mostcountries in terms of both source of saving andinstrument of investment.

In the pre-crisis period, gross national saving wasdriven up largely by higher general governmentsaving across the Member States.(52) This reflected– to varying degrees – successful fiscalconsolidation efforts and boom-related windfallfiscal revenues. The corporate sector also

Saving ratios also fell sharply in most MemberStates. However, despite the economic slump,saving ratiosHungary and Romania. All Member States witha marked increase in the saving ratio in thepre-crisis period experienced a drop during thecrisis (Finland, the Netherlands and Denmark).Conversely, saving ratios continued to fall in mostcountries that had already witnessed noticeablereductions ahead of the crisis (Greece andPortugal).

Sectoral p

contributed to higher savings. In particular, highercorporate saving was recorded in the non-euro-areacountries and in some euro-area Member States(Germany, Estonia, Ireland and the Netherlands).In most Member States, the saving ratio wasdepressed primarily by lower saving in thehousehold sector (Estonia, Greece, Italy, Romaniaand the United Kingdom). Nonetheless, thehousehold sector made a neutral or slightlypositive contribution to the change in overallsaving in some Member States (Germany, Austriaand Sweden).

(52) Except for Greece, Portugal and Hungary, wheregovernment saving went down, and except for Slovakiaand the UK, where the general government balance inremained broadly flat in the period under observation.

62


Graph I.3.4a: Changes in the saving ratio:

15

pre-crisis period (2005-07 vs. 1996-98)

SI SK FI-15

-10

-5

0

5

BE DE EE IE EL ES FR IT CY NL AT PT

10

CZ DK LV LT HU PL RO SE UK

Corporations Households General government Total economy

Note: for IE 2005-07 vs. 2002

Graph I.3.4b: Changes in the saving ratio: crisis period (2008-10 vs. 2005-07)

-15

-10

-5

0

5

10

15

BE DE EE IE EL ES FR IT CY NL AT PT SI SK FI CZ DK LV LT HU PL RO SE UK


Note: for RO 2008 vs. 2005-07, for CY, LV, LT and HU 2008-09 vs. 2005-07

Graph I.3.4c: Changes in the investment rati

-10

-5

0

5

10

15

20

BE DE EE IE EL ES FR IT CY NL AT PT

o: pre-crisis period (2005-07 vs. 1996-98)

SI SK FI CZ DK LV LT HU PL RO SE UK


Note: for IE 2005-07 vs. 2002

Graph I.3.4d: Changes in the investme t ra

-20BE DE EE IE EL ES FR IT CY NL AT PT SI SK FI CZ DK LV LT HU PL RO SE UK

n tio: crisis period (2008-10 vs. 2005-07)

-15

-10

-5

0

5

10

15

20


Note: for RO 2008 vs. 2005-07, for CY, LV, LT and HU 2008-09 vs. 2005-07

63


Aggregate investment was driven up in manyMember States by high investment ratios in thehousehold sector. Rising investment by thehousehold sector was typical in countriesexperiencing a housing boom (Denmark, Estonia,Ireland, Spain, Latvia, Lithuania and the UK) andwas partly driven by considerable foreign capitalinflows in some countries. The corporate sectoralso contributed to higher investment (Estonia,Latvia, Romania and Slovenia) – linked in mostcases to large inflows of foreign direct investment.At the same time, among the older Member States,Spain, France and Italy also recorded a markedincrease in corporate investment rates. On theother hand, lower corporate-sector investmentweighed on aggregate investment ratios in someMember States (Germany, the Netherlands,Slovakia and the Czech Republic). The generalgovernment sector had a mostly neutral or positiveimpact on the overall investment ratio (generally inthe non-euro-area Member States), although somecountries recorded a deterioration in thegovernment investment ratio ahead of the crisis(Germany, Austria, Portugal and Slovakia).

In aggregate EU terms, the household sector hasusually been a net lender and the corporate sectora net borrower. However, in the pre-crisis period,the household sector overshadowed the corporatesector in the share of investment in GDP in Irelandand Cyprus and in the share of gross saving inGDP in Germany, France, Italy and Cyprus. Thehousehold sector became a net borrower in manycountries, including Bulgaria, the Czech Republic,Denmark, Estonia, Ireland, Greece, Spain, Cyprus,Latvia, Lithuania, Slovakia and the UK. Thecorporate sector, on the other hand, sustained a netlender position in Denmark and the Netherlandsand moved from a net borrower position to a netlender position in Germany, Poland and the UK.

Sectoral developments during the crisis

The decline in saving ratio was largely driven bya sharp drop in general-government saving duringthe crisis. This reflected, inter alia, the impact ofthe crisis on general-government revenues andexpenditures via automatic stabilisers and stimulusmeasures. Only Hungary recorded an increase ingeneral-government saving – the result of limitedfiscal room for manoeuvre against the backgroundof a balance-of-payments crisis. Moreover, in mosteuro-area Member States, where corporate savinghad increased before the crisis, corporate savingalso came under pressure (Estonia, Ireland, Greece

and the Netherlands). Nonetheless, an increase inhousehold saving in most Member States – alongwith a continuous rise in saving in the non-euro-area corporate sector(53) – acted to partly offset thisgeneral trend.

The pre-crisis investment boom was abruptlyreversed during the 2008-10 period. Most MemberStates experienced falling investment ratios largelydue to a sharp drop in investment activity in thecorporate sector (particularly in Ireland, Latvia,Lithuania and Estonia). The household sector alsocontributed significantly to a decline in theinvestment-to-GDP ratio – in particular in MemberStates with unwinding housing booms (Spain,Ireland, Estonia and Greece). However, in someMember States, higher public investment partlycontained the drop in investment ratios in theprivate sector (Poland, the United Kingdom).

Patterns in equipment and constructioninvestment: stylised facts

Besides the sectoral variations described above, itis also instructive to consider cross-countrydevelopments in construction and equipmentinvestment. Differences across Member States arevisible in Graphs I.3.5 and I.3.6, where the samescale is used to plot the changes in the equipmentand construction ratio to GDP before and duringthe crisis.

Graph I.3.5: Equipment: Investment-to-GDPratios in EU countries, before and during the

crisis

FRHU

NLAT DEITFI

BEEUSE

DKUKCY P T SIP L

ESSKIE

LU ELRO

CZLT EE

-6

-5

-4

-3

-2

-1

0

1

2

-4 -2 0 2 4 6 8 10Change (in pps.) 1996 - 2007

Chan

ge(in

pps.)

2007

-11

Estonia, Latvia and Romania exhibited the largestswings in equipment investment, both before andduring the financial crisis. The Czech Republic,Spain and Luxembourg are also characterised bya boom-bust cycle in equipment spending, but thescale of the adjustment is comparatively smaller.

(53) Except for Romania and Sweden.

64


In Greece and Slovenia, there is evidence ofoverheating of equipment investment during thepre-crisis period, which has not yet been fullycorrected. Within the euro area, Austria andFinland experienced a protracted weakness inequipment expenditure, while Slovakia appears tobe the only country where equipment investmentas a share of GDP continued to decline both beforeand during the crisis. By contrast, a strengtheningof equipment spending is observed in Germany.

Graph I.3.6: Construction: Investment-to-GDPratios in EU countries, before and during the

crisis

EE

RO

LTES

IE

FI

CY

P L

SI

FR

LUUK

DKIT

P T

SE

EL

EU

BE

SK

NL

HUAT

DE

CZ

-12

-10

-8

-6

-4

-2

0

2

-6 -4 -2 0 2 4 6 8

Chan

ge(in

pps.)

2007

-11

10Change (in pps.) 1996 - 2007

IVING

Where construction investment is concerned,Estonia, Lithuania and Romania witnessed largervariations in the share of construction investmentbefore the financial crisis. Booming constructionactivity was a key feature of the Irish and Spanisheconomies during most of the past decade.A necessary adjustment in construction activity istaking place in most of these countries and is set tobe particularly painful for Ireland. By contrast,construction investment remained subdued bothbefore and during the crisis in some core euro-areaeconomies (primarily Germany, the Netherlandsand Austria) as well as in the Czech Republic.

3.3. AN ASSESMENT OF POTENTIAL DRFORCES BEHIND DEVELOPMENTS INSAVING AND INVESTMENT(54)

3.3.1. Drivers of national saving

National saving is important from both the microand the macro perspectives. At the micro level,households save to fund retirement, purchasehouses or protect themselves against unexpected

(54) Although saving and investment are treated separatelybelow, it is recognised that the decisions are notindependent and there are many factors that appear to drive

expenditures. Corporations save to fund their owninvestments or to strengthen their balance sheets.At the macro level, depending on thecurrent-account position of the country, saving canfund domestic

both variables.

investment either partially orcompletely and accumulate net claims against

andmuch-studied.(55) The most important time-series

fiscal balance during

foreigners. Movements in the saving ratio (bothpublic and private) have an important influence ondomestic demand, helping to determine bothdomestic capacity utilisation and, through thesaving-investment balance, the country'scurrent-account position. This sub-sectionexamines the factors which drive saving ratios inthe government and private sector.

Drivers of government saving

The factors which lead governments to run deficitsor surpluses are numerous, complex

determinant is usually the cyclical position of theeconomy, as higher transfer payments and lowertax receipts worsen thecyclical downturns. At the EU and euro-arealevels, this relationship appears to hold remarkablywell, as shown in Graph I.3.7.

Graph I.3.7: EU and EA: O utput gap andgeneral government deficit (1997-2009)

23 2

-5-4-3-2-101

97 98 99 00 01 02 03 04 05 06 07 08 09-8

-6

-4

-2

0

Euro-area output gap (lhs)EU output gap (lhs)Euro-area general government deficit (rhs)EU general government deficit (rhs)

DP % of GDP

However, at the individual country level, thepicture is more varied. For the ten years up to2007, the correlation between the deficit and theoutput gap is significant at the 5% level in only tenMember States. This increases to 21 Member

% of G

States when the end-date is moved to 2009 toinclude two years of the financial crisis which

(55) A number of authors have assessed empirically thedeterminants of government saving. See for example Bayerand Smeets (2009), available athttp://www.ifo.de/portal/page/portal/DocBase_Content/WP/WP-CESifo_Working_Papers/wp-cesifo-2009/wp-cesifo-2009-04/cesifo1_wp2611.pdf

65


.Another common feature of this group is that fourare relatively new democracies. Political budgetcycles, where deficit spending is increased inpre-election periods, have been found by somestudies(56) to be more prominent in newerdemocracies as voters have had feweropportunities to learn about such strategies. It ispossible that political cycles could be obscuringthe effect of the economic cycle on the fiscalbalance.

In all, these data suggest that, while an overallimprovement in the EU fiscal balances can beexpected as the economy recovers, the fiscalrecovery may well not be uniform.

Interesmore c e ments fromborrowing more but, at least in the short-term,

ely to increase

brought a relatively uniform worsening of fiscalbalances and widening of output gaps across theEU. The remaining six Member States areBulgaria, Greece, Hungary, Malta, Poland andRomania. Of these Member States, four hadaverage deficits over the period of at least doublethe EU average. Persistent deficits could be linkedto a weak cyclical response of the fiscal balance,for example if a less-than-reliable tax base causedrevenues to respond to factors other than the cycle

Longer-term factors may also play a role. Inparticular, there is at least a theoretical argumentthat expected increases in the old-age dependencyratio should make governments save more inpreparation for higher spending in the future.Equally, if governments make no policy responseto population ageing, a positive correlation couldbe expected between observed changes in thedependency ratio and the government deficit.However, empirical evidence of either effect isweak. Graph I.3.8 shows a slight but positivecorrelation between changes in the deficit andchanges in the old-age dependency ratio in thedecade to 2007.

A final set of determinants includes interest rates,the debt stock and access to domestic finance.

t rates can work both ways, making debtostly should discourage gov rn

a rise in interest expenditure is likthe deficit. Connected to this are the debt stock andaccess to domestic finance. International investors

. 1271-1295

(56) See for example "Political budget cycles in new versusestablished democracies", Adi Brender and Allan Drazen,Journal of Monetary Economics, Volume 52, Issue 7,October 2005, pp

Graph I.3.8: Dependency ratio and generalgovernment deficits

LU

NL

BE

BG

CZ

DK

DE

EE

IE

EL

ESFR

IT

CY

LVLT

HU

MTAT P L

P TRO

SI

SK

FI

SE

UK

-1

0

1

2

3

4

5

-4 -2 0 2 4 6 8 10 12Change in deficit , 1997 - 2007

Chan

gein

depe

nden

cyra

tio(p

ps),

1997

-200

7

(pps of GDP)

hings being equal,

currency, thusreducing the substitutability of foreign bonds fordomestic investors.

Drivers of private saving

The drivers of private saving are more complex.An important issue is the distinction between thehousehold and corporate sectors. However, data onthe sectoral breakdown are not always reliableenough to draw strong inferences on the distinctbehaviour of the two sectors. For households, thetheoretical starting point for this section isa life-cycle consumption model although there arewidely-acknowledged deviations from this modelin practice, particularly due to considerations ofuncertainty and constrained liquidity.

and above that needed for the operation of thebusiness paid to them as dividends and thatcoandoptwit

will be more reluctant, all other tto buy debt from a country with a high debt stockand they are likely to demand a higher interest rate.And governments with already-high debt stocksshould be more hesitant in adding to them withhigh deficits. However, access to domestic financemay well lessen such effects. With a highprivate-sector saving ratio and a strong domesticasset bias among local investors, market disciplinemay be less stringent, particularly if the countryconcerned has its own national

The corporate sector is fundamentally anintermediate one, owned finally by the householdsector and foreigners. The preferences and rightsof shareholders therefore play a role indetermining saving. If it can be assumed thatshareholders generally prefer to have cash over

mpany management has incentives to hoard cashtherefore maximise their range of strategic

ions, it would be reasonable to expect countriesh more developed shareholder rights to have

66


g that the drivers of saving behaviour ineach sector are different.

lower rates of corporate savings. Moreconcentrated ownership of firms should have thesame effect, because larger shareholders havegreater incentives and opportunities to influencecompany managers. Because of such factors,interest rates may not have the same impact oncorporate saving as in other sectors, since highinterest rates could just as well be expected toincrease shareholder demands for dividends,reflecting the higher opportunity cost toshareholders of leaving the money within thecompany. It is also possible that some householdsvary their saving behaviour according to thebehaviour of the firms which they own, saving lesswhen the firms they own save more, in anticipationof bigger dividends in the future. As shown inGraph I.3.9, household and corporate savings inthe EU are not strongly correlated and trended inopposite directions during the pre-crisis decade,suggestin

Graph I.3.9: Sectoral saving, EU

1314

7

8

910

1112

97 98 99 00 01 02 03 04 05 06 07 08 09

Corporate savings Household savings

Note: BG, IE, LU, MT & RO were excluded due to lack ofcomplete data. The remaining 22 Member States account forabout 97% of EU GDP.

The role of interest rates in influencing savingbehaviour is complex. It is clear that higherinterest rates incre

% of GDP

ase the incentive to save but they

and savings followed a markedly similar

may also reduce disposable income, and thereforethe opportunity for saving by net-debtorhouseholds and firms, meaning that the overalleffect varies with the relative marginal propensitiesto save of net creditors and net debtors. Themarket-clearing interest rate also responds todevelopments in demand for financing and, in anopen economy, foreign capital supply and demand.As shown in Graph I.3.10, EU real interest rates(57)

ttached to long-term rates.

downward path in the mid- and late nineties. Buttheir paths have diverged in the more recent past.

(57) Both short- and long-term real interest rates are included tocover the spectrum of interest rates facing the saver. It maybe that the short-term rate is more relevant for the savingdecision given the uncertainty a

Graph I.3.10: Real interest rates and savings,EU15

01234567

95 96 97 98 99 00 01 02 03 04 05 06 07 08 0917181920212223

Long-term real interest rate (lhs)Short-term real interest rate (lhs)Private sector savings (rhs)

% of GDP%

Note:This chart includes data only for the 15 Member Stateswhich belonged to the EU before May 2004, due tounavailability of historical interest rate data for other MemberStates.

A common influence on private-sector saving, ofparticular current importance, is public-sectorsaving. Both households and corporations maysave more in anticipation of future tax rises if thegovernment has a large deficit. The causality couldalso run the other way, with governmentsincreasing their borrowing at times of highprivate-sector saving in order to make up forshortfalls in aggregate demand which such highersaving could create in the absence of strong export

tment. It is also likelyct in opposite directions

demand or domestic investhat common factors will aon the private sector and government balances. Forexample, higher cyclical unemployment increasesthe government deficit and is also likely toincrease household precautionary savings. Therelationship between government and privatesaving is therefore also connected to the economiccycle and the output gap. Graph I.3.7 has alreadyshowed the correlation between government

Graph I.3.11: Gross government and privatesector saving, EU

-4

-3

-2

-1

0

1

2

3

98 99 00 01 02 03 04 05 06 07 08 09 10

18

18.5

19

19.5

20

20.5

21

21.5

Gross government saving (lhs)Gross private sector saving (rhs)

% of GDP % of GDP

67


elopment, are partlya function of total debt, these two effects are likelyto counterbalance each other to some extent. GraphI.3.12 compares these variables, suggesting noclear link between saving and either of thefinancial-sector variables.

deficits and the output gap. As shown in GraphI.3.11, this negative correlation betweengovernment and private-sector saving does appearto hold for the EU as a whole. This implies thatprivate-sector saving should moderate asgovernments consolidate their finances, helping tooffset the contractionary effect of publicconsolidation.

A further set of factors with the potential toinfluence saving is related to the financial sectorand the debt stock. Households and firms may bemore inclined to save when they are highlyindebted compared with historical norms. Equally,if the financial sector becomes more developed,making debt finance more readily available, theprivate sector may save less because agents knowthey can easily finance investment or emergencyspending by borrowing from banks. Because totalbank assets, which are a good proxy for the degreeof financial-sector dev

Graph I.3.12: Loans, financial assets andprivate saving

0

100

200

300

400

98 99 00 01 02 03 04 05 06 07 08 0919.0

19.5

20.0

20.5

21.0

21.5

Loans to households and NFCs (lhs)Financial sector assets (lhs)Private sector saving (rhs)

A final potential influence is that of demographics.The greater the proportion of life a worker plans tospend in retirement, the more he should saveduring his working life. With a constant retirementage, this would translate into a positiverelationship between saving and longevity.However, it would not be surprising if suchphenomena did not show through in the data. In

vary more widely than any variation induced bymarginal movements in longevity. Graph I.3.13

% of GDP % of GDP

reality, few individuals make specific calculationsabout the exact level of saving needed to retire

thefor

does not suggest any strong link betweenmovements in the old-age dependency ratio andprivate saving ratios in the pre-crisis decade.

comfortably at a given age. It seems possible thatdegree to which households make serious plansthe financing of their retirement at all might

Graph I.3.13: Private saving and demographics

BEDK

SE

BG CZ

DE

EE

IE

EL

ESFR

IT

CY

LVLT

LU

HU

MT

NLATP L

P T RO

SI

SK

FI

UK

-1

0

1

2

3

4

5

-15 -10 -5 0 5 10Change in household savings rate (pps), 1998-2008

3.3.2. Determinants of investment

Investment is a crucial element of economicperformance. It determines the size and structureof the capital stock and enables the penetration ofnew technologies, thereby influencing employmentand growth prospects in the medium- and longer-term. Moreover, as one of the most volatilecomponents of aggregate demand, investment is akey driving force of the business cycle. Thissection begins with a description of cyclicalfluctuations in investment before turning to thedrivers of investment.

Over the period 1996-2010,(58) real investment inthe EU grew on average at about the same rate asreal GDP, i.e. slightly below 2% per year. Asa result, the share of investment to GDP (in

Chan

gein

depe

nden

cyra

te(p

ps),

1998

-200

8

constant prices) remained broadly unchanged forthe period as a whole, at around 20%. This is inline with the standard growth literature whichsuggests a constant investment-to-GDP ratio overthe long run.

In spite of this long-run stability, the investment-to-GDP ratio has fluctuated over the businesscycle. This is because investment displays a clearpro-cyclical pattern, accelerating more than overalleconomic activity at the beginning of recoveriesand decelerating more during slowdowns. Over theperiod 1996-2010, two cycles can be identified: the

(58) The analysis does not start before 1966 due to limited dataavailability at the country level for some potential driversof investment.

68


kdown between equipment andconstruction investment, the former has

first in the late 1990s and the second towards theend of the last decade. During the second cycle,the investment-to-GDP ratio experienced a widerfluctuation: 2½ pps. in terms of annual figuresbetween peak (2007) and trough (2010) against 1½pps. in the previous cycle.

In terms of the brea

contributed most to boosting investment in thelatest cycle, despite representing less than half oftotal investment. Between 2004 and 2007, about60% of the increase in overall gross fixed capitalformation was due to equipment investment. Alsoin the previous cycle, most of the variability intotal investment was explained by equipment.

Graph I.3.14: Investment and economicactivity, EU

-8

-4

0

4

8

-1297 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12

Construction Equipment Other

Total Real GDP

pps. contrib.; y-o-y%forecast

This is partly due to the fact that the traditionallink between equipment investment and worldtrade has strengthened, reflecting the rapidly risingimportance of emerging markets, which generategrowing demand for investment goods As worldtrade collapsed because of the drying up ofliquidity and the ensuing collapse in confidence inthe aftermath of the Lehman crisis, equipmentinvestment in the EU contracted by a cumulative20% in 2008-09. But the stronger link betweenequipment investment and world trade also meantthat investment acted as a powerful transmissionbelt, transforming the impulse from a revival ofglobal trade into strong growth dynamics duringthe upswing.

Drivers of private investment(59)

The most straightforward model of investment –the "accelerator model" – in its simplest form,

(59) The focus is on private investment, which accounts for90% of total investment.

postulates a linear relationship between investmentand changes in output. As the microeconomicfoundations of this relationship are rather poor,other models have been developed whichemphasise the role of costs. Modern economictheory focuses on three main macroeconomicdeterminants of investment: aggregate demand,cost of capital and profitability.(60) In turn, the keycomponents of the user cost of capital arefinancing costs, the purchase price of new capitalrelative to the output price, and the depreciationrate of the capital stock.(61)

The remainder of this section explores thepotential explanatory power of these investmentdrivers(62) for the various investment trajectories ofcapital formation in the EU countries over the last15 years.

Where aggregate demand is concerned, severalMember States fared much better than the EUaverage in the years preceding the financial crisis.

growth rate

s in the ten years preceding

Between 1996 and 2007, the averageof GDP exceeded 5% in Estonia, Ireland, Latvia,Lithuania and Slovakia compared to 2½% in theEU as a whole. Although demand growth mayaccount for part of the difference in investmentgrowth rates, it cannot provide an explanation forthe diverging trends in the share of investment-to-GDP compared to the EU.

For the user cost of capital, long-term real interestrates are commonly used as indicators ofborrowing costs. The latter decreased significantlyin several EU countriethe financial crisis. On average, their level in theEU in 2007 was about 2½ pps. lower than in 1996.However, Graph I.3.15 does not suggest any clearnegative link between the change in theinvestment-to-GDP share and the change in long-term real interest rates. Focusing only on long-termreal interest rates as a measure of the user cost ofcapital may be too restrictive. A better measure of

R. (1993), “Business Fixed Investment

even though expected developments in future profits are

(62)

to a lack of comparable country data.

(60) See Chirinko,Spending: Modeling Strategies, Empirical Results, andPolicy Implications”, Journal of Economic Literature, vol.31(4), pp. 1875-1911.

(61) The standard model of investment has been extended toincorporate market imperfections such has taxation,imperfect capital markets, liquidity constraints, adjustmentcosts, planning and time-to-build lags, irreversibility anduncertainty. These market imperfections usually implymore sluggish investment growth, for instance, because allfirms may not have the same access to external financing

similar.The depreciation rate of the capital stock is excluded fromthe analysis due

69


volatilities in the shortrun, the underlying trends tend to co-move in the

the overall cost of financing could be a compositeindicator, which would take into account thecomposition of the source of financing, e.g. loans,debt securities and equities. However, while thevarious measures of the cost of capital may exhibitdifferent developments and

long run.

Graph I.3.15: Investment-to-GDP ratios andprice deflator of capital goods, 1996-2007

SEFI

MT IT FR

ES

IE

10

20

30

ofin

vestm

ent:

.)19

96-2

007

EU-27

UKSK

SI

RO

P TP L

AT

NL

HULU

LT

LV

CY

EL

EE

DEDK

CZ BG

BE

-30

-20

-10

0

-4 0 4 8 12 16 20 24

Investment: change (in pps.) 1996 - 2007

Rela

tive

pric

esch

ange

(inpp

s

As regards the second component of the cost ofcapital, the price deflator of investment, there isevidence of a mild (negative) link to the overallinvestment-to-GDP ratio for most countries (GraphI.3.16) The equipment-construction breakdown ofinvestment shows that this negative correlationbetween the investment price deflator and theinvestment to GDP ratio holds and largely stem

plus. However, this co-movementmost often reflects a correlation between common

an causality. It

sfrom equipment rather than constructioninvestment. This is hardly surprising. As thereal-estate booms of the past decade in several EUcountries have shown, it is the expected rather thenthe actual relative, price of output which spurscapital spending in the construction sector.Observed patterns of construction investment inIreland and Spain seem to confirm this. In bothcountries, expectations of rising real estate pricesboosted construction investment well abovenormal levels.

Where profitability is concerned, macroeconomicdata typically show a strong co-movement betweeninvestment and profit indicators, like the grossoperating sur

determinants (e.g. GDP) rather thmay therefore be difficult to attribute superiorinvestment performance in some countries toobserved profitability developments.

Moreover, what matters for investment plans isexpected, rather than observed, profitability.Differences in FDI flows between EU countries or

Graph I.3.16: Equipment investment-to-GDPratios and price deflator of capital goods,

1996-2007

SKAT IT

BE

0

nves

tmen

t:20

07

y-o-y%

FI FRES

LT

-60

-15

ati

ti

IE

CY

NLP T

EU-22

UK

DK

SEP L

LU

DE

CZ

EL

SI

EERO

-45

-30

vepr

ices

ofeq

uipm

ench

ange

(inpp

s.)19

96-

-4 -2 0 2 4 6 8 10 12Rel

in the wage share may, to some extent, reflectdifferences in long-run profit expectations acrosseconomies. Preliminary empirical evidence doespoint to more optimistic profit expectations,especially in some EU Member States.

Graph I.3.17: Investment-to-GDP ratios andwage share, 1996-2007

Stasha

catexpparof tthe

BE

BG

CZ

DK

DE

EEIE

EL

ESFR

ITCY

LVLTLU

HUMT

NL AT

P L

P T

RO SI

SK

FI

SE

UK

40

44

48

52

56

60

64

16 18 20 22 24 26 28 30 32I/Y ratio: average 1996 - 2007

Wag

esh

are:

aver

age

1996

-200

7

For instance, the recently-acceded EU Membertes have traditionally enjoyed a lower wagere (higher profit share) than core euro-area

countries (Graph I.3.17). The evidence is notegorical, however. Germany and Spainerienced very different investment patterns,ticularly in the construction sector during mosthe past decade, despite similar developments inwage share.

70


d product markets, have also probablyplayed a role. But there is reason to believe thatfinancial conditions play a role in corporateinvestment decisions. Modern finance theorysuggests that corporate investment is a function ofliquidity and the strength of the company's balancesheet. In particular, the financial accelerator theoryindicates that asymmetries in information canexplain how a company's balance sheet positioncan influence capital formation.(63) Over the pastdecade non-financial corporations increasinglyrelied on funding from banks in the euro area(Graph I.3.18), suggesting that financial factorssuch as high cash flows, high leverage ratios anddebt burdens, may have persistently underpinnedinvestment.

All in all, the examination of traditionalmacroeconomic variables suggests that they areunlikely to be able to fully explain the differentinvestment patterns observed in several EUcountries since 1996. Divergent expectations aboutfuture profitability across countries, possiblyrelated to underlying structural differences inlabour an

0

50

100

150

200

250

00 01 02 03 04 05 06 07 08 09 10

% of GDP (3-month moving average)

2000-07Period average

2008-10Period average

* Outstanding amounts at end-periodSource:ECB, Commission services

Graph I.3.18: Loans* of non-financialcorporations, euro area (Jan. 2000- Aug. 2010)

3.3.3. Empirical estimates of saving andinvestment

This section investigates the empirical importanceof the potential drivers of saving and investmentdiscussed in the preceding section. In order toreach tentative conclusions on the possible impactof individual drivers, reduced-form equations forsaving and investment are estimated separately.The focus is on private saving and investment, as

(63) The EU Commission 2010 Forecasts provides anelaboration on the financial accelerator. Seehttp://ec.europa.eu/economy_finance/publications/european_economy/2010/pdf/ee-2010-2_en.pdf.

investment decisions of households andorporations are driven by a multitude of factors

and their interaction, and impacts are sometimestheoretically uncertain, as already illustrated insections I.3.1 and I.3.2. The empirical analysispresented below seeks to identify factors that havedriven movements in private saving andinvestment ratios and the relative importance oftheir impact. The equations are estimated usingdata from 1965 to 2008 for the older MemberStates and data from 1995 to 2008 for therecently-acceded Member States. The magnitudesof the estimated coefficients should be treated withcaution as explained below.

The empirical approach employs panelco-integration techniques in order to take intoaccount dynamic relationship between private

ent. Thestimated equations take the following form:(64)

where is the private saving or investment ratioin cou ry i,

the decisions on public saving and investment are,to a large extent, a function of politicalconsiderations and cyclical conditions. Saving and

c

saving or private investment and their likelydeterminants. The equations which link saving andinvestment ratios to the explanatory variables areestimated in an error-correction form, whichallows the long-run relationships to bedisentangled from short-run adjustme

iti

J

jijtij

J

jijtiitiit uxxyy ++Δ+−=Δ ∑∑

==− μδθφ

111 )(

yi

nt xij is a set of J explanatory variablesfor co try is the country-specific constant,

is th term and t represents the timedimension.

The empirical analysis is based on the pooledmean-group (PMG) estimator developed byPesaran et al. (1999), which assumes that thelong-run relationship is the same for th

un i, µi

e errorui

einvestigated group of countries, while allowing forcountry-specific dynamics in the short run.(65) Thisapproach appears plausible and efficient. ThePMG estimator is in fact more flexible than the

(64) One lag for both dependent and explanatory variables isusually considered in the ARDL specification of the model,implying that the dynamic part of the error-correctionmodel contains a first difference of the explanatoryvariables.

(65) Pesaran, M.H., Y. Shin, and R. Smith, (1999), “PooledMean Group Estimation of Dynamic HeterogeneousPanels”, Journal of the American Statistical Association,Vol. 94, pp. 621-634.

71


PMG MG Staticpanel PMG Dynamic

FEStaticpanel

GDP per capita growth 0.806*** 0.759*Old dependency ratio 0.151* -0.288

Govern te -0.609*** -0.528***Government consumption (%GDP) -0.467*** -0.742*

520 498 139 139 119

Note: * EU15 excludes Luxembourg due to lack of data. The table shows tMean Group (PMG) estimator, the Mean Group (MG) estimator and the d

pres ratnot ableto c d the ex

1965-20

Table I.3.1:

EU1Main long-run determinants of the private sector gross saving

Dynamic FE

08 1995-20085* Recently addeded MS

ratio

** 1.693*** 0.247** 0.473*** 0.279 0.514***-0.0185 -0.0358 0.967*** 0.549 0.0257-0.169 -0.0978***

-1.014*** -0.861*** -0.831*** -1.031* -0.592**-1.262* -0.833***-0.282 -0.299*** 0.386*** 0.207** 0.362***0.274 0.137*** 0.181*** 0.00622 -0.0263

0.534** 0.162***-0.123** -0.462** -0.437***

Young dependency ratio -0.0965*** -0.111ment saving ra

Real interest rate (short-term) -0.143*** -0.0471Inflation rate 0.123*** 0.165Terms of trade (growth) 0.110*** 0.304**Error correction coefficient -0.379*** -0.725***No. of observations 520 520*** p<0.01, ** p<0.05, * p<0.1

he results of the dynamic panel specification for the Pooledynamic fixed-effects panel (DFE) estimator. For comparison,

results from a static panel specification, using a dynamic OLS approaented. The table shows the coefficients from the long-run cointegpresented. All the models contain one lag of the dependent variapture a possible regime shift after the launch of the euro an

ch to account for the cointegration between variables, are alsoing relationship, while the short-run dynamic coefficients are

as well as a measure of the output gap and time dummiestraordinary depth of the recent recession.

72

dynamic-fixed-effects (DFE) estimator, whichassumes full homogeneity at country level of all(short- and long-term) slope coefficients; however,it is more parsimonious than the mean-groupestimator (MG), which estimates differentregressions for each country. A similar approachwas also used in previous studies exploringsavings and/or investment (e.g. Hague et al., 2000;de Serres and Pelegrin, 2002; and Ferrucci andMiralles, 2007).(66)

The empirical determinants of private saving

Table I.3.1 presents the results of the estimatedlong-run relationship between private grosssavings as a share of GDP and its potential drivers.While further analysis is based on the PMGestimator, the table shows results based on thedifferent estimators in order to assess therobustness of the estimated coefficients. Due todistinct structural features, as well as some data

Haque, N.U., M.H. Pesaran, and S. Sharma, (2000),“Neglected Heterogeneity and Dynamics in Cross-CountrySavings Regressions”, in J. Krishnakumar and E. Ronchetti(eds.): Panel Data Econometrics - Future Directions:Papers in Honour of Professor Balestra, Elsevier Science;de Serres, A. and F. Pelgrin (2002), "The Decline in PrivateSaving Rates in the 1990s in OECD Countries: How MuchCan be Explained by Non-Wealth Determinants?," OECDEconomics Department Working Papers 344, OECDPublishing; G. Ferrucci and C. Miralles (2007), "Savingbehaviour and global imbalances - the role of emergingmarket economies," Working Paper Series 842, EuropeanCentral Bank.

e theory. The sign ofthe estimated coefficient is positive as expected

tiohas the expected negative sign, the sign on theold-age dependency ratio changes overdifferent model specifications and is al ounstable across different time periods. Clearly,

(66)

availability issues, the Member States whichjoined the EU in 2004 and later, are treatedseparately from the older Member States andspecific models are estimated for each of thesegroups. It appears plausible, though, to assume thatthe long-run relationship between the saving ratiosand its possible drivers are the same within thesetwo groups of countries.

The results of the econometric analysis are broadlyin line with the theoretical reasoning described inthe previous two sections:

− Higher growth of real GDP per capita tends toraise saving in the long run. This is consistentwith the consumption smoothing patternpredicted by the life-cycl

in both older and recently-acceded MemberStates, although the relationship might besomewhat weaker in the latter, (possibly due totheir still relatively low levels of GDP percapita). The size of the coefficient also variesconsiderably depending on modelspecifications or time periods covered.

− The long-term impact of demographic factorsis unclear: while the youth dependency ra

s


− Lower government saving ratios lead to higherprivate-sector savings ratios, as postulated bythe theory. The relationship is strong and thesize of the estimated coefficient is typically lessthan 1 in absolute terms, which implies lessthan perfect Ricardian equivalence.

− The impact of (short-term) real interest rates onprivate saving ratios differs between older andrecently-acceded Member States. Whileincreases in real interest rates tend to lowersaving ratios in the former, probably because ofeasier access to credit, the effect on savingratios tends to be positive in recently-accededMember States.

− Higher inflation, which may also be interpretedas an indicator of higher uncertainty, tends toincrease saving in line with the precautionarysaving motive, as well as the need to restore thedesired level of real net financial assets.

−

effects of an increase/decrease in disposableincome (the Haberger-Laursen-Meltzler effect).

The error-correction coefficients imply that anydeviations from the long-run “equilibrium” leveltend to close in around 2 to 3 years.(67)

The use of the error-correction representation alsoallows us to assess whether the actual saving ratiosare in line with the long-run values predicted bythe model on the basis of the observedfundamentals (Graph I.3.19a). The results showthat, while the actual saving ratios were broadly inline with what the model would predict if therewere no deviations from the long-run“equilibrium”, there were important exceptions tothis trend in a number of Member States in 2008.

there are substantial differences across EUcountries, which may reflect different stages ofdevelopment.

The estimated positive influence of the terms-of-trade on the private saving ratio in the longrun in older Member States is linked to the

Graph I.3.19a: Private saving: actual and pr

5

10

15

20

25

30

edicted long-run equilibrium ratio, 2008

0EL L PL PT SK SI SEAT BE BG CZ DE DK ES EE FI FR UK HU IE IT LT LV MT N

Private saving rate Predicted long-run equilibrium

Graph I.3.19b: EU15: contribution t

0.0

0.5

1.0

1.5o change in private gross saving ratio

99 00 01 02 03 04 05 06-1

-1.0

-0.5

07.5

90 91 92 93 94 95 96 97 98GDP per capita growth Old dependency ratio Young dependency ratio

(67) The fact that the coefficients on the error-correction termare negative and less than 1 in absolute terms confirms theexistence of a cointegrating relationship between theprivate saving ratio and (at least some of) the explanatoryvariables.

Government saving rate Terms of trade (g hrowt ) Real interest rateGovernment consumption (% of GDP) Inflation rate Output gapTotal Actual change in private saving ratio

73


For Greece and Portugal and partially also Italy,Malta and Hungary, the actual private saving ratioswere clearly lower than those predicted by thePMG model. On the other hand, private savingratios in other countries, e.g. Denmark, Ireland andSweden, largely exceeded the benchmarkdetermined by the model for 2008. Accordingly,factors other than those included in the model musthave played an important role in the determinationof the private saving ratio.

A decomposition of past developments in privatesaving ratios shows the relative importance playedby the various drivers (Graph I.3.19b). For theaggregate of the older Member States, it is thechange in public savings that has been thedeterminant of movements in private saving ratesover the past two decades. Changes in governmentcurrent expenditures and per capita GDP growthwere also important, particularly weighing onprivate savings in downswings. Other factors seemto have had a relatively more limited impact.

The picture is more diverse at the level ofindividual countries. While government decisionsin terms of net public savings and the level ofexpenditures were the main drivers of changes inprivate savings, other factors played a significantrole in some countries.(68) For example, populationageing seems to have been important in Germany,Italdepinc ion share of young dependehas contributed to a rise in private savings i

y or the Netherlands, where increasing old-ageendency has boosted saving ratios, while thereasing populat nts

nGreece, Ireland or Spain over the past decade. Inaddition, progress in catching-up in the latter groupof countries and the related worse prospects for percapita growth have tended to weigh on savingratios.

The empirical determinants of privateinvestment

Due to data constraints, the analysis of privateinvestment ratios in this section is confined to theolder Member States. While the investmentequations have lower explanatory power than thesaving equations, the main results are broadly in

portantimpact on private savings.

line with what one would expect on the basis oftheoretical considerations:

− Even after controlling for cyclicaldevelopments, the private investment ratioresponds positively to GDP growth.

− The private investment ratio reacts negativelyto real short-term interest rates. Thisrelationship appears to be consistentlysignificant and relatively stable across differentspecifications.

− The other main element with a significanteffect on the private investment ratio is therelative cost of capital (defined here as thedifference between the equipment investmentdeflator and the GDP deflator). While thecoefficient on this variable is negative in linewith expectations, this result is, however, notsystematically robust to changes in the modelspecification and inclusion of other variables inthe model.

− Higher profits (roughly proxied by the inverseof the wage share) appear to have a positiveeffect on the private investment ratio.Nevertheless, in this case also, the link is notsystematically significant in the face of minor

the

While, in the case of Belgium, this reflects thefact that actual investment proved to be

(68) The decomposition of movements in private saving rates atcountry level should be interpreted carefully. While themodel appears to explain changes in the private savingratio relatively well at the aggregate level, its performancevaries considerably across countries. Moreover, it seemslikely that there are specific factors at the country level thatare not captured by the model but which have an im

alterations to the model specification.

− Progress in financial integration andimprovements in financial intermediation seem,in line with expectations, to have a positiveeffect on the private investment ratio. Theproxy for financial integration used here is thecredit to the private sector as share of GDP.(69)

However, a thorough examination of theimportance of such links is hampered bylack of long time series on credit and the non-availability of other possible proxies forfinancial intermediation.

− Also where investment is concerned, thereappear to be gaps between actual investmentratios and the "equilibrium" ratios predicted bythe model in some Member States. In the casesof Spain, Ireland and to some extent alsoBelgium, the model predicts lower investmentrates than those actually observed in 2008.

For the data-related reasons, the proxy for financialintermediation/integration was not included in the baselinespecificatio

(69)

n.

74


Graph I.3.21:1.0

EU15: contributi atio

-1-1

-0.6-0.4

99 00 01 02 03 04 05 06 07 08

on to change in private gross investment r

.2

.0-0.8

90 91 92 93 94 95 96 97 98

-0.20.00.20.40.60.8

GDP growth Real interest rateRelative cost of capital Wage shareOutput gap Actual change in (real) investment ratioTotal

75

to be below whatwould expect on the basis of the underly

relatively resistant at the onset of the economiccrisis compared to the changes infundamentals, actual investment levels in Spainand Ireland systematically outstripped thebenchmarks determined by the fundamentals inyears preceding the crisis. This appears to bea manifestation of the real-estate bubblesexperienced by these countries. On the otherhand, in a number of other Member States,investment rates appear one

ingfactors. This includes countries in which theprivate sector is in net surplus (e.g. Germany)and in net deficit (e.g. Greece or Portugal).

Table I.3.2:Main long-run determinants of the priv. investment ratio

PMG Dynamic FE Static panel

GDP growth 0.419** 0.486* 0.325***Real interest rate -0.395*** -0.396*** -0.190***Relative cost of capital -12.72*** -14.546*** -8.743***Wage share -0.240*** -0.107** 0.05

1965-2008EU15

9*Error correction coef. -0.238*** -0.195***No. of observations 520 520 520

*** p<0.01, ** p<0.05, * p<0.1Note: The results present the Pooled Mean Group (PMG) estimator and, forcomparison, dynamic fixed-effects panel (DFE) estimator and static panelestimator (based on the dynamic OLS approach). The table shows thecoefficients from the long-run cointegrating relationship. All the modelscontain one lag of the dependent variable, a measure of output gap and atime dummy to capture a possible regime shift after the launch of the euro.EU15 includes Member States that joined the EU before 2004 (apart fromLuxembourg).

The decomposition of past developments in the(real) investment ratio in the EU15 (Graph I.3.21)indicates that changes in cyclical conditions havean important and immediate effect on investmentactivity. This was also the case at the onset of therecent economic crisis, when the increasinglynegative output gap weighed on investment. Inaddition, growth prospects significantly influenceinvestment, although there appears to be a l

e decade preceding thecrisis, falling real interest rates, rising profits and

previoussections. As in the case of saving, there is evidence

s such as Greece, Italy andSpain benefited significantly from declines in real

ag

before higher growth translates into higherinvestment. Moreover, in th

the diminishing average relative price of capitalseem to have been behind the increasing trend in

vate investment described in thepri

of heterogeneity in the response to variousexplanatory variables at the country level. Forexample, the results show that, over the pastdecade, the investment ratios in the moreperipheral countrie

interest rates although the contribution was alsosubstantial in Ireland, Belgium or Denmark.Improvements in profitability, proxied by falls inthe wage share, contributed importantly toinvestment, for example, in Ireland, Austria,Finland, Italy and Spain. On the other hand, thelower relative price of capital supportedinvestment activity in Germany and theNetherlands.

Graph I.3.20: Private investment: actual andpredicted long-run equilibrium ratios, 2008

20

25

30

0

5

10

AT BE DE DK ES FI FR UK EL IE IT NL PT SE

15

Investment rate (real) Predicted long-run equilibrium


Graph I.3.22b: Changes in the investment ratio: forecast period (2012 vs. 2010)

-6

-4

-2

0

2

4

6

BE DE EE IE EL ES FR IT CY LU MT NL AT PT SI SK FI EA17

BG CZ DK LV LT HU PL RO SE UK EU27

Private sector General government Total economy

Graph I.3.22a: Changes in the saving ratio nd the current account balance: forecast period(2012 vs. 2010)

SI SK FI EA17

BG CZ DK LV LT HU PL RO SE UK EU27

a

-6

-4

-2

0

2

4

6

BE DE EE IE EL ES FR IT CY LU MT NL AT PT

Private sector General government Total economy Current account balance

76

t toimprove government savings by around 1¾ pps.and 1½ pps. of GDP, respectively, in the EU andthe euro area. On the other hand, saving ratios inthe private sector are set to decline as, in line withthe empirical results reported in section 3.3, theyreact negatively to the increase in governmentsavings and possibly the worsened terms of traderelated to higher prices of imported commodities.As a result, over 2011-12, the overall increase inthe saving ratios of the economy as a whole isexpected to be relatively limited in both the EUand the euro area – in the order of 1 pp. of GDP.These developments at aggregate level reflect

saving position of the governmentsector, while, within the private sector, the ongoingadjustment in household balance sheets is expectedto largely compensate for the reduction in thesaving ratio of the corporate sector. In contrast, theanticipated increase in government gross saving in

3.4. NEAR-TERM ADJUSTMENT PROSPECTS FORSAVING AND INVESTMENT

Following the sharp contraction experiencedduring the 2008-09 financial and economic crisesand initial marginal increases recorded in 2010, theCommission's spring 2011 forecast points to agradual recovery of overall saving and investmentratios in the EU and the euro area over the forecasthorizon and a marginal fall in the dispersion ofsaving-investment gaps.

Regarding saving, Graph I.3.22a shows that, onone hand, the ongoing fiscal consolidation is se

similar patterns projected for most Member States.However, the size and sectoral composition of theadjustment vary widely.

Some euro-area Member States, which arecharacterised by large imbalances and relativelylow savings ratios, are expected to increase theirsaving by more than the average. This isparticularly evident for Greece, where both thegovernment and the household sectors are engagedin balance-sheet adjustments, while the largeadjustments anticipated in the government sectorin Ireland and Portugal are set to be only partlyoffset by lower savings in the private sector.

Outside the euro area, saving ratios are set to risesignificantly in Lithuania and the UK between2010 and 2012. In the former, private saving isexpected to increase marginally in parallel with alarge improvement in government saving. In thelatter, it is envisaged that fiscal consolidation willimprove the


77

dprivate

sis. Corporate investmentis set to benefit from improving demand prospects,

over the forecast horizon (Graph I.3.22a). Whereimbalances within the euro area are concerned,sizeable improvements in the current-accountbalance over the forecast horizon are anticipated,in particular in Greece and Portugal, due to highersaving but also lower investment ratios. Thestill-sizeable external imbalances in these countrieswould suggest that further adjustment in sectoralbalance sheets and improvements incompetitiveness are to be expected beyond 2012.Some further adjustment also seems likely in thoseeuro-area Member States where the anticipatedincrease in domestic demand is not sufficient toshrink the large current-account surpluses by 2012.

The remainder of this section uses the econometricresults in the previous section to consider thepossible evolution of saving and investment ratiosbeyond the forecast horizon.

As regards private sector saving-investmentbalances, further convergence may be expected inthe coming years. The econometric analysisindicates that the gaps between "equilibrium"ratios of private saving and investment havenarrowed in a number of EU15 countries as thefundamentals have changed, while the actual levelsoften show larger differences. Assuming that the

ratios apart, someconvergence might therefore take place. The speed

fiscalrestraint, reductions in the private saving ratio

the differential risk premia applied by financialmarkets. The contribution to private savings fromthis side is likely to be positive, though relativelylimited, in a majority of Member States in view oftheir relatively subdued growth in potential output.

As regards private investment, an important boostis likely to come from the closing of the output gapand gradual improvements in GDP growth. Therestoration of profits in the corporate sector couldalso support investment. The impact of otherdeterminants are likely to vary considerably acrossMember States: differences in real interest rates aswell as relative cost of capital (partially reflectingfalling prices in the construction sector of manyEU countries), should have a differentiated effecton investment levels across Member States.

Polan is set to be largely offset by a falling(household) saving ratio.

Forecasts of how the investment ratio will changein the EU and the euro area between 2010 and2012 are presented in Graph I.3.22b. The expectedoverall moderate increase is driven by the rise inthe private (especially corporate) investment ratio,while some decline is anticipated in governmentinvestment ratios, in line with the results of theprevious empirical analy

still low real interest rates and moderate wageincreases. At the country level, the decline in theinvestment ratio is set to continue over the forecasthorizon in those euro-area Member States wherelarge balance-sheet adjustments in both private(particularly household) and government sectorsare still warranted, namely Ireland, Greece, Spain,Cyprus and Portugal. On the other hand,investment ratios in Estonia, Malta, Latvia andLithuania are expected to benefit from renewedinflows of FDI.

The above projections for changes in saving andinvestment ratios imply broadly stable current-account balances in both the EU and the euro area

pre-crisis structural relations still hold and, in theabsence of large shocks that would drive thelong-run equilibrium

and extent of such convergence would clearly varyacross countries and would depend on thedevelopments in the main determinants of savingand investment.

On the saving side, progress on consolidation ofpublic finances is likely to have a crucial impacton private saving ratios, which will differdepending on the fiscal space available. InMember States with the greatest need for

might partially compensate for this. On the otherhand, inflationary pressures and precautionarysavings could act in the opposite direction. Also,the effect of population ageing could induce highersavings, especially over short- to medium-termtime horizons, although the impact would bedifferentiated across Member States.(70) The likelyincreases in real interest rates should also influencesaving ratios, although the effect is likely to bemore limited than in the case of privateinvestment. The size of this effect should alsodiffer across Member States, in particular due to

(70) While there appears to be some uncertainty about the long-run relationship between old-age dependency and savingrate, the short-run dynamic coefficients appear to benegative.

PART IIProspects by individual economy

Member States

1. BELGIUMRecovery continues as labour market improves

82

After the export-led recovery in 2010, GDPgrowth in 2011-12 will be mainly supported bydomestic demand

Economic activity in 2010 benefitted from a strongincrease in net exports, driven by the impressiveeconomic recovery in Germany, Belgium’s maintrading partner. Real GDP grew by 2.2%, largelythanks to the strong growth in the second quarter(1.1% q-o-q). Economic growth in 2011-12 willmainly be supported by domestic demand due toa pick-up in private consumption and businessinvestment, especially in 2012, while the positiveeffect of net exports will gradually diminish.Exports can be expected to slow down in thecontext of a deceleration of imports of Belgium'sneighbouring countries after the strong reboundrecorded in 2010. Two important issues are worthhighlighting. On the positive side, the outlook onthe labour market is better than previouslyforeseen (especially in 2011), as the recovery tookplace faster than one could normally expect aftera serious crisis. On the negative side, inflation in2011 is expected to be much higher than expected,due to peaking energy and food prices.

Boost in private consumption and investmentfrom 2012 onwards

Due to the strong rebound in 2010 and very goodgrowth prospects for the first quarter of this year(1% q-o-q), real GDP growth in 2011 and 2012 isexpected to reach 2.4% and 2.2% respectively –higher than the euro-area average. In both yearsgrowth is driven by domestic demand witha shifting composition. While in 2011 the focuslies on accelerating private and public investment(the latter due to the upcoming local elections in2012 as observed on previous occasions), domesticdemand in 2012 is mainly driven by higher privateconsumption.

After a dip in 2010, real disposable income willstart increasing again in 2011. Also, consumerconfidence remains at relatively high levels,influenced by better prospects on the labourmarket. While these factors have a positive impacton private consumption in 2011, the rise in HICPinflation – to 3.6% – will play a dampening role.Despite the collective wage agreement to have noreal wage growth in 2011 and to limit it toa maximum of 0.3% in 2012, the automatic wage

indexation mechanism compensates for the higherinflation, albeit with a lag. A higher pick-up inprivate consumption is therefore expected for2012; as gross disposable income further increases,inflation will be lower, while the situation on thelabour market is expected to remain positive. Afterthe large drop seen in 2010 (from 18.3% to17.1%), the savings rate is expected to declinefurther in 2011 and to stabilise in 2012 due toa substantial improvement of consumer confidencetogether with an increase in real disposableincome, slightly below its long-run average.

Graph II.1.1: Belgium - GDP growth andcontributions

-4-3-2-101234

04 05 06 07 08 09 10 11 12

pps.

Dom. demand, excl. invent.InventoriesNet exportsGDP growth (y-o-y%)

forecast

Private investment will start increasing again in2011 and is forecast to accelerate in 2012.Capacity utilisation rates reached their averagehistorical levels (79%) in the third quarter of 2010and kept on increasing thereafter (reaching 81% inApril 2011). After having absorbed the existingexcess capacity, companies are embarking on newinvestments. The high growth in total investmentexpected for 2011 is mainly due to a projectedacceleration in government investment ahead ofthe local elections in 2012, as observed previously.This explains in particular the high increase ininvestment in construction in 2011, while housinginvestment also starts to be positive again from2011 onwards after the relatively limitedcontraction in 2009 and 2010.

Inflation in Belgium reached an annual average of2.3% in 2010, compared to 1.6% in the euro area.Inflation (3.6%) is expected to be well above theeuro-area average in 2011 as well, due to the sharpincrease in energy and – to a lesser extent – foodprices since mid-2010. The higher sensitivity in

Member States, Belgium

Belgium to changes in oil prices can be attributedto: (i) higher energy consumption by households;(ii) relatively low excise duties on energyproducts; and (iii) the price-setting mechanism forelectricity and gas. Moreover, Belgium is one ofthe few countries in Europe that makes use of anautomatic indexation system whereby not onlywages but also rent prices, insurance policies andseveral public services are adjusted to changes inthe "health index".(71) As energy and food pricesare expected to decline again in the course of 2011,inflation is projected to decrease to 2.2% in 2012.

Belgium's competitive position weakened inrecent years and little improvement isexpected…

For 2011 and 2012 high export and import growthis still foreseen, but the contribution of net trade toGDP growth in these years will decrease.

At the same time, Belgium is losing market shares,especially for goods. The weak performance ofgoods exports also contributes to a deterioration ofthe current account balance in 2011, whichhowever remains positive over the forecast horizonthanks to the better-than-expected performance ofthe services balance.

Belgium's disappointing export performance overrecent years is partly related to its high unit labourcosts (ULC). After a small decline in 2010, ULCare expected to rise again in 2011 and 2012. Therise in the next two years is related to the merelymoderate increase in productivity together withhigher wages, reacting with a lag to higherinflation in 2010 and 2011.

Weak export performance is not only due to costcompetitiveness. The main reason for the loss inexport market share is the overspecialisation ingoods with relatively low technology content.Labour- and capital-intensive products arerelatively overrepresented in Belgian exports (23%and 26%, respectively), while knowledge-intensiveproducts are relatively underrepresented (35%compared to 46% in Germany and France).Looking forward, demand for those products maycontinue to underperform while price competitionis likely to become even stronger, which poses

(71) The "health index" excludes products which could bedetrimental to health (alcohol, cigarettes, petrol and diesel)from the basket used for the CPI. However, the prices ofheating oil, electricity and gas (together counting for about60% of all energy carriers) are included in the health index.

challenges regarding the sustainability of exportgrowth and firms' profitability.

…although post-crisis developments on thelabour market turn out to be positive…

The impact of the economic recession on domesticemployment was relatively contained. A temporarydecline in hours worked – thanks to the temporaryunemployment schemes – and labour productivityper hour acted as buffer. Hours worked andproductivity are expected to increase again overthe forecast period. Employment started to riseagain from 2010 onwards, faster than expectedgiven the time it usually takes for the labourmarket to adjust after a crisis. Employment isexpected to increase further in 2011 and 2012, by0.8% and 0.7%, respectively. As a consequence,the unemployment rate in 2010 rose less thanexpected (from 7.9% in 2009 to 8.3% in 2010),and will start decreasing again from 2011 onwards(to 7.9% in 2011 and 7.8% in 2012). Althoughthis short-run evolution is positive, the structure ofthe Belgian labour market increases the risk that inthe longer term part of the cyclical rise inunemployment becomes structural (hysteresiseffect).

…and the short-term outlook for publicfinances is relatively positive despite thepolitical deadlock

The 2010 general government deficit turned out tobe substantially lower than expected (4.1% of GDPcompared to 4.8% of GDP foreseen in the 2009/10Stability Programme). The difference mainlycomes from a revision of the 2010 data, which alsopositively affects the 2011 outcome, but also froma decrease in interest rates, extra revenues frombanks of about 0.1% of GDP (dividends, interestspaid on loans, contributions to the depositguarantee fund) and higher VAT receipts due tostronger than expected private consumption.

Since the June 2010 general election, after whichno fully-fledged federal government had beenestablished, Belgium has lived under the"provisional twelfths" regime, which limitsmonthly expenditure to one twelfth of the levelallowed by the 2010 budget. However, in view ofthe risks involved by this exceptionally longstalemate, King Albert II asked the caretakergovernment on 2 February to prepare a budget for2011, which would foresee measures aiming atfurther reducing the deficit in 2011. The budget

83


was submitted to Parliament mid-April. It targetsa deficit of 3.6% of GDP.

Graph II.1.2: Belgium - Public finances

-8

-6

-4

-2

0

2

4

6

8

04 05 06 07 08 09 10 11 12

% of GDP

75

80

85

90

95

100% of GDP

General government balance (lhs)Primary balance (lhs)General government debt (rhs)

forecast

The Commission services forecast that the deficitwill decline to about 3.7% of GDP in 2011,somewhat better than planned in the 2009/10Stability Programme but slightly higher than thebudget target. This would in part be achievedthanks to higher VAT receipts (due in particular tostronger nominal private consumption), higherthan expected dividends from banks, the NationalBank and Belgacom, extra revenues from theabrogation of banking secrecy and adjustments inthe system of "notional interests" deduction.

Moreover, the system of the "provisional twelfths",which will remain in force as long as the budget isnot approved, leads to a kind of "automaticconsolidation" as it limits the possibility toincrease expenditure. Under an unchanged policyassumption, the 2012 deficit is projected toincrease by ½% of GDP to about 4.2% of GDP(compared to a target of 2.8% of GDP in the2010/11 Stability Programme): revenues areexpected to increase slightly more slowly than in2011 as some revenues planned for this year (likethe extra dividends) are not expected to berepeated. Moreover, expenditure is projected torise somewhat faster in 2012 than this year due,among other factors, to the underlying upwardtrend e.g. in healthcare spending. The structuralbalance would even deteriorate by 0.9% of GDPdue to the improved cyclical conditions.

Thanks to the lower deficit and higher nominalGDP growth, the public debt ratio turned out lowerthan projected in 2010 (96.8% of GDP comparedto 100.6% in the 2009/10 Stability Programme).As the deficit will be close to its debt-stabilisinglevel, both in 2011 and 2012, the debt ratio isprojected to increase only marginally (to 97% and97.5% respectively) and will thus most probablyremain below 100% of GDP.

Table II.1.1:Main features of country forecast - BELGIUM

2009 Annual percentage changebn EUR Curr. prices % GDP 92-06 2007 2008 2009 2010 2011 2012

GDP 339.2 100.0 2.1 2.9 1.0 -2.8 2.2 2.4 2.2Private consumption 177.8 52.4 1.6 1.8 1.5 -0.3 1.6 1.5 1.9Public consumption 83.7 24.7 1.6 2.1 2.3 0.6 1.1 1.2 1.6Gross fixed capital formation 72.3 21.3 2.3 6.2 2.6 -5.4 -1.6 3.5 3.4of which : equipment 30.0 8.8 2.4 9.4 3.1 -9.8 -1.0 4.1 4.6Exports (goods and services) 247.5 73.0 4.8 4.4 1.7 -11.6 10.5 5.9 5.5Imports (goods and services) 238.2 70.2 4.5 4.7 3.0 -11.1 8.4 5.4 5.5GNI (GDP deflator) 342.3 100.9 2.1 3.0 1.5 -3.3 2.1 2.4 2.2Contribution to GDP growth : Domestic demand 1.7 2.7 1.8 -1.2 0.8 1.8 2.0

Inventories 0.1 0.3 0.1 -1.0 -0.4 0.0 0.0Net exports 0.4 0.0 -1.0 -0.5 1.8 0.6 0.2

Employment 0.7 1.6 1.7 -0.4 0.7 0.8 0.7Unemployment rate (a) 8.4 7.5 7.0 7.9 8.3 7.9 7.8Compensation of employees/head 2.9 3.4 3.6 1.8 1.1 3.1 3.6Unit labour costs whole economy 1.5 2.1 4.4 4.3 -0.4 1.5 2.0Real unit labour costs -0.4 -0.2 2.4 3.2 -2.2 -0.4 0.0Savings rate of households (b) 17.8 16.4 17.0 18.3 17.1 16.5 16.5GDP deflator 1.9 2.3 1.9 1.1 1.8 1.9 2.1Harmonised index of consumer prices 1.9 1.8 4.5 0.0 2.3 3.6 2.2Terms of trade of goods -0.4 0.3 -2.9 3.5 -2.1 -1.2 -0.1Trade balance (c) 3.1 1.6 -1.6 0.1 1.0 0.7 0.5Current-account balance (c) 4.5 3.9 1.1 2.0 2.4 2.0 2.0Net lending(+) or borrowing(-) vis-à-vis ROW (c) 4.3 3.6 0.6 1.6 2.1 1.8 1.8General government balance (c) -2.2 -0.3 -1.3 -5.9 -4.1 -3.7 -4.2Cyclically-adjusted budget balance (c) -2.5 -1.4 -1.8 -4.2 -2.8 -2.9 -3.7Structural budget balance (c) - -1.4 -1.9 -3.6 -2.9 -2.8 -3.7General government gross debt (c) 113.2 84.2 89.6 96.2 96.8 97.0 97.5

(a) Eurostat definition. (b) gross saving divided by gross disposable income. (c) as a percentage of GDP.

84

2. BULGARIAModerate recovery alongside ongoing fiscal consolidation

85

Uneven recovery led to unwinding of externalimbalances in 2010

Following five consecutive quarters of declinewhich left real GDP around 7.1% below the peakreached at the end of 2008, the Bulgarian economyturned to positive quarterly growth by mid-2010.The main driving forces behind the economicturnaround include a continued strong exportpick-up underpinned by favourable developmentsin world trade, and a replenishment of inventories.In contrast, domestic demand has remainedpredictably negative, as lagged effects of thefinancial and economic crisis continued to depressboth private consumption and investment.Although average wages continued to outpaceinflation and consumer confidence graduallyrecovered from the record lows of the beginning of2010, consumer demand was constrained bya continued decline in employment and increasedprecautionary savings.

Gross fixed capital formation was the largestcontributor to negative growth, as bothconstruction and investment in equipment droppedin a context of high private-sector indebtedness,restrained bank lending and lingering uncertaintiesregarding demand expectations. However, steadyexport gains pushed up consumption andinvestment in the fourth quarter of last year. Bysectors, industry, largely pulled by exports, and toa lesser extent agriculture, was leading the way torecovery, while services appeared to bottom out in2010.

Growth was particularly strong in the last quarterof 2010, when it reached 2.1% q-o-q (seasonallyand working day adjusted), the fastest pace sinceend-2007. Exports posted their sixth consecutivequarter-on-quarter gains and surpassed theirpre-crisis level; investment climbed by 6.5% q-o-qon the back of strong public capital spending,though it still remained 30.9% below its pre-criseslevel. Similarly, despite the continuing adjustmentof household balance sheets, private consumptioninched up by 1.4% following ten consecutivenegative quarterly readings. Domestic demandturned out to be less weak with the fiscal impulsebecoming the key driver in the last quarter, whilenet exports' performance was less robust comparedto previous quarters. The growth rebound in thefourth quarter brought annual growth to 0.2%

against a contraction of 5.5% in 2009. Theadjustment in external imbalances continued at afast pace throughout 2010 and the current-accountdeficit declined to 1% of GDP, reflecting thecombined effect of limited external financing andstrong demand for Bulgarian exports.

Overall, the drag on growth from domestic demandpersisted in 2010 and the economy has not yetembarked on a robust recovery path. Employmentdata do not point to a vigorous rebound either andelevated inflation is further eroding an already lowpurchasing power. Considering the severity of theoutput shock, nominal wage growth has provenrather resilient during the recession, posting 6.3%growth y-o-y in 2010. This has forced a large partof the adjustment on the employment side, withjob destruction continuing throughout 2010, albeitat a declining pace in the second part. Thedownturn, reflected in falling labour demand fromthe retail, wholesale and construction sectors,weighed heavily on employment, which fell bycumulated 8% over 2009-10.

Graph II.2.1: Bulgaria - O utput gap, inflationand contributions to GDP growth

-16-12

-8-4048

121620

04 05 06 07 08 09 10 11 12

pps

-6

-4

-2

0

2

4

6

% ofpotential

GDP

Output gap (rhs)Inventories (lhs)Net exports (lhs)Dom. demand, excl. invent. (lhs)Inflation (lhs)

forecast

The fiscal consolidation resulted in a narrowing ofthe budget deficit from 4.7% of GDP in 2009 to3.2% in 2010, below the 3.8% of GDP target asrevised in July 2010. The government hasimplemented measures to restrain primaryexpenditure growth, mainly by freezing publicsector wages and pensions and by cuts indiscretionary spending, confirming its intention topursue an expenditure-based fiscal consolidation.Total expenditure declined by 4.6%, while budgetreceipts declined by 1.2%, despite the efforts toadvance tax collection and the hikes in some


excises rates. The improved fiscal position and theabsorption of earlier macroeconomic imbalancesset the stage for a stronger economic rebound in2011 and beyond by creating favourablemacroeconomic conditions and restoring marketconfidence.

Moderate growth ahead, but employmentlagging behind

Whereas the recovery in 2010 relied heavily onexternal demand, Bulgaria is expected to graduallyshift to a more balanced growth composition.Overall, real GDP is projected to expand by 2.8%in 2011 and to gather pace in 2012, with growthreaching 3.7%. Both domestic and externaldemand are expected to contribute positively togrowth, reflecting a gradual stabilisation in thelabour market, an expansion in FDI, and acontinued recovery in the world economy.Bulgaria's exports are geographically diversifiedwith about a third of its exports directed tofast-growing non-EU economies. The strongexport performance is set to gradually feed throughto domestic demand, create new job opportunitiesand reinforce the ongoing structural shift towardsthe tradable sector.

Private consumption is expected to benefit fromhigher precautionary saving created during thedownturn. As consumer sentiment will improveinto 2011, pointing towards a gradual expansion inhousehold spending, the strength of the spendingrecovery is expected to be limited by lowerearnings growth, weak credit activity and rathersoft employment over the forecast horizon. Asomewhat tighter policy stance resulting from theongoing fiscal consolidation and higher euro-areainterest rates will weigh on growth prospects. Theoutput rebound witnessed over the last threequarters in 2010 has not yet resulted in asignificant increase in lending to the private sector.Looking ahead, credit expansion is expected to belargely tied to deposit growth in 2011. Against thisbackground, private consumption is expected toexpand less than GDP in 2011 and pick up to 3.6%in 2012 as job creation improves. Nonetheless, forboth 2011 and 2012, it is assumed that afrontloading of EU co-financed projects in linewith a revival of highway and energy projects,progress with the government’s privatisationprogramme as well as improved businessconfidence will turn investment into a key growthdriver.

The recovery in imports started with a certain lagshowing more moderate dynamics compared toexports, as a result of weak domestic demand.While the pickup of imports is expected to gainmomentum, growing at 7% y-o-y in 2011, this isnot projected to lead to significant externalimbalances in the near future, as export growth isprojected to continue to outpace import growth.

Graph II.2.2: Bulgaria - Total employment,unemployment rate , unit labour cost

-4

0

4

8

12

16

20

00 01 02 03 04 05 06 07 08 09 10 11 12

y-o-y%

2.8

3.0

3.2

3.4

3.6

3.8

4.0millions

Totalemployment (rhs ) Unemployment rate (lhs )ULC (lhs )

forecast

The labour market is expected to improvesomewhat, especially during the second half of2011, leading to a gradual decrease in theunemployment rate from 10.2% in 2010 to 9.4% in2011 and 8.5% in 2012. The recovery so farremains jobless, particularly in the non-tradablesectors such as services, while the real-estatemarket does not yet seem to have bottomed out.The poor functioning of the labour-market inBulgaria leads to low participation rates at bothends of the age spectrum (young and olderworkers) and the re-integration of the low-skilledand the young into the workforce will be a majorchallenge. Wages are expected to develop broadlyin line with productivity growth, with thecontinued freeze in public sector wages in 2011providing an anchor for the private sector.

Mounting inflationary pressures

In view of labour market rigidities and high energyintensity of the economy, prices and wages arehighly sensitive to both external factors andchanges to domestic demand. Keeping inflation incheck will thus be a key challenge in maintainingexternal competitiveness. Since inflationarypressures have built up in Bulgaria in line with thewider global trend, HICP accelerated to 4.6% y-o-y in February 2011 from 1.7% a year earlier,reflecting rising food and energy prices. Thus,inflation is set to stay elevated during most of

86

Member States, Bulgaria

Table II.2.1:Main features of country forecast - BULGARIA

2009 Annual percentage changebn BGN Curr. prices % GDP 92-06 2007 2008 2009 2010 2011 2012

GDP 68.3 100.0 1.8 6.4 6.2 -5.5 0.2 2.8 3.7Private consumption 43.2 63.2 2.6 9.0 3.4 -7.6 -1.2 2.1 3.6Public consumption 11.1 16.3 -2.1 0.3 -1.0 -6.5 -1.0 -0.3 -0.1Gross fixed capital formation 19.7 28.9 - 11.8 21.9 -17.6 -16.5 4.9 5.8of which : equipment - - - 28.8 2.9 -45.1 - - -Exports (goods and services) 32.5 47.5 - 6.1 3.0 -11.2 16.2 7.7 7.1Imports (goods and services) 38.5 56.3 - 9.6 4.2 -21.0 4.5 7.0 6.8GNI (GDP deflator) 66.0 96.6 - 1.2 9.3 -3.1 -0.3 2.8 3.7Contribution to GDP growth : Domestic demand - 9.4 8.5 -12.0 -5.7 2.4 3.6

Inventories - 0.9 -0.7 -3.4 0.6 0.1 0.0Net exports - -3.8 -1.5 10.0 5.2 0.3 0.0

Employment - 3.2 2.6 -2.6 -5.9 0.5 1.0Unemployment rate (a) - 6.9 5.6 6.8 10.2 9.4 8.5Compensation of employees/head - 12.7 16.3 9.4 7.2 7.1 6.8Unit labour costs whole economy - 9.3 12.5 12.7 0.8 4.6 4.0Real unit labour costs - 0.1 3.7 8.1 -2.1 1.5 1.5Savings rate of households (b) - -27.4 - - - - -GDP deflator 46.0 9.2 8.4 4.3 3.0 3.1 2.5Harmonised index of consumer prices - 7.6 12.0 2.5 3.0 4.3 3.4Terms of trade of goods - -1.3 -2.5 0.6 4.7 -1.5 -1.3Trade balance (c) -8.2 -23.6 -24.3 -12.0 -6.7 -7.5 -8.2Current-account balance (c) -5.1 -25.2 -23.2 -9.0 -1.5 -2.0 -2.6Net lending(+) or borrowing(-) vis-à-vis ROW (c) -5.0 -27.2 -22.4 -7.6 -0.8 -1.3 -1.8General government balance (c) - 1.1 1.7 -4.7 -3.2 -2.7 -1.6Cyclically-adjusted budget balance (c) - -0.4 -0.2 -3.4 -1.4 -1.2 -0.6Structural budget balance (c) - 2.7 -0.2 -3.4 -1.3 -1.2 -0.6General government gross debt (c) - 17.2 13.7 14.6 16.2 18.0 18.6

(a) Eurostat definition. (b) gross saving divided by gross disposable income. (c) as a percentage of GDP.Note : Contributions to GDP growth may not add up due to statistical discrepancies.

87

2011, as the recovery gathers pace and commodityprices are projected to remain on the up.

Broadly balanced risks

Risks related to this baseline scenario seembroadly balanced. Foreign capital inflows may turnout to be larger than expected, either through apartial recovery in FDI, or through higher EUfunds absorption, which would support therebound in investment. Uncertainty regarding theconsumption behaviour of households is one of themajor risks to the outlook, both on the upside andon the downside. Moreover, the performance ofthe labour market will strongly affect the pace andsustainability of the recovery. Persistent structuralproblems, such as professional-skill mismatches,which led to significant labour shortages at the endof the previous boom, could slow down therebound in employment. While balance-sheetcorrections are likely to continue to weigh ondomestic demand, the extent to which investmentrecovers, following the massive contraction over2009-10, depends largely on an improving growthoutlook as well as an increase in credit expansion.

Gradual budgetary adjustment in 2011-12

The changing growth composition is expected toaffect the tax base favourably, thereby relieving

the pressure on government revenue. Expenditure,however, will be kept up due to the functioning ofthe automatic stabilisers. The gradual fiscaladjustment in 2011-12 is expected to be achievedby a cyclical improvement in revenue as well as acontainment of public expenditure. Spending itemssuch as public sector wages and pensions wouldremain frozen, while some other current non-interest expenditures are expected to be cut. Undera no-policy-change assumption, the budget deficitwill gradually decline to around 2¾% and 1½% ofGDP in 2011 and 2012, respectively. Generalgovernment gross debt is expected to increase onlymarginally from around 16% of GDP in 2010 to18½% of GDP in 2012.

The risks to the budgetary projections are broadlybalanced. On the revenue side, the 2011 budgetexecution could surprise positively if some recentimprovements in revenue collection are sustainedthroughout 2011. A continuation of the rise incommodities prices could increase indirect taxrevenue, partly compensating lower receipts fromsocial security contributions. On the expenditureside, however, spending pressures could rise,whereby social spending could increase furthergiven the delayed recovery in employment.

3. THE CZECH REPUBLICA moderate recovery driven by external demand

88

Strong export growth in 2010…

In 2010, real GDP expanded by 2.3%, largelybecause of the swift rebound of exports associatedwith improving economic conditions in the CzechRepublic's main trading partners (in particular inGermany) and the associated robust restocking. Onthe other hand, domestic demand (excludinginventories) subtracted 0.7 pp. from GDP growth.This was due to sluggish private and publicconsumption and a continued decline ininvestment, despite the significant increase in theconstruction of subsidised photovoltaic power-plants in the second half of the year.

…is expected to drive the recovery in theyears ahead

The pace of the economic recovery in the CzechRepublic is expected to remain moderate andlargely driven by foreign trade over the forecasthorizon. GDP growth is projected to reach 2% in2011, followed by a rebound to 2.9% in 2012,which would represent a slower pace than beforethe crisis.

Households' consumption expenditure is foreseento remain subdued, due to the consolidationmeasures in place in 2011 (a substantial reductionin the public wage bill and cuts in socialexpenditure). Confidence effects together withsluggish credit growth are also assumed to keepthe households' savings rate at a relatively highlevel, though on a slightly downward trendcompared to 2010. Growth in private consumptionis expected to remain restrained, reaching 0.4% in2011. On the other hand, in 2012, consumptionshould be supported by expected increases in thedisposable income of households stemming fromhigher wages in the private sector, as strong exportgrowth progressively leads to tighter labour marketconditions in the export sector. Growth in privateconsumption is expected to accelerate to 2% in2012.

After three consecutive years of decline,investment growth is expected to pick up in 2011to 2.4% through activity originating mostly in thecorporate sector as a result of buoyant growth inexports and increasing capacity utilisation. Agradually rising volume of credit to businesseswould also play a supportive role. On the other

hand, the one-off increase in investment due tosubsidies for photovoltaic power plants in 2010has come abruptly to an end and will have animpact on the annual investment growth rate in2011 compared to 2010. In addition, investmentconditions in the construction sector are likely toremain fragile, reflecting a sizeable stock of unsolddwellings. Finally, the consolidation measuresadopted for 2011 suggest only modest growth inpublic investment in 2011, levelling up slightly in2012.

As reflected also in the rising number of neworders in the Czech manufacturing industry, therecovery is assumed to continue to be driven byexternal demand, in particular from Germany.Limited consumption growth is consistent withmore moderate import growth in 2011. Thesetrends are expected to result in a contribution ofnet external trade to GDP growth of 1.4 pps. in2011, up from 1 pp. in 2010. However, the stillnegative terms of trade, mostly due to high growthof import commodity prices, will allow for only amarginal increase in the trade balance surplus thisyear.

For 2012, with import price growth more in linewith export price growth, the trade surplus isexpected to increase to 4.4% of GDP. In terms ofthe current-account balance, the positivecontribution of the trade balance would be offsetby continuing profit remittances abroad (mostlyFDI-originated) that weigh on the balance ofincome.

Graph II.3.1: The Czech Republic - GDP growthand contributions

-6

-4

-2

0

2

4

6

8

04 05 06 07 08 09 10 11 12

pps.

InventoriesNet exportsDom. demand, excl. invent.GDP (y-o-y%)

forecast

Member States, The Czech Republic

The forecast is subject to several risks. Inparticular, the full extent of the impact ofconsolidation measures in 2011 on the behaviourof households is still subject to uncertainty.Furthermore, if the authorities proceed to increasein the reduced VAT rate by 4 pps. in 2012 as isbeing currently discussed, this would dampenhousehold consumption growth and createadditional inflationary pressure in 2012. Finally,given the importance of the external side for theCzech economy, future developments in the euroarea, to which around 70% of Czech exports aredirected, impinge crucially on the current outlook.

Labour market conditions remain fragile

The unemployment rate peaked at 7.3% in 2010and, on account of the slow recovery, is expectedto decrease only modestly over the forecasthorizon.

The planned cut in the public wage bill for 2011(at the central government level) is being graduallyimplemented; it appears to have already producedsome reduction in the number of public sectoremployees in the ministries at the end of 2010.Overall, the negative employment growth in thepublic sector on an annual basis is expected to beoffset by moderately positive developments in theprivate sector due to rapid export growth.However, the recovery in the labour market shouldbe muted as there is evidence of significant labourhoarding in 2010. From 2011 onwards,demographic developments will start to kick in,resulting in virtually zero employment growth.Accelerating economic activity is expected to pushthe unemployment rate further down to 6.4% in2012.

Moderate inflation in the years ahead

In 2010, the HICP inflation averaged 1.2% y-o-y,up from 0.6% in 2009, and was mostly driven byexternal factors, in particular energy and food priceincreases in the latter part of the year. Reflectingthe sluggish economic recovery and the fiscalconsolidation measures which began to beimplemented at the end of the year, demand factorsexercised pressure in the opposite direction.

For 2011, with substantial increases in world foodand commodity prices, inflation is forecast to reach2.3%. Nevertheless, inflationary pressures areprojected to be partly offset by the appreciatingCzech currency (up by 4.1% against the euro in

2011). Regulated prices are assumed to play only arelatively minor role, adding an additional 0.8 pp.to inflation in both 2011 and 2012. Domesticdemand pressures as well as wage inflation shouldremain very low in 2011.

For 2012, HICP inflation would increasemarginally to 2.5%, reflecting, among other, theacceleration in private consumption growth. If theauthorities were to implement the increase in thereduced VAT rate from 10% to 14% in January2012, as currently discussed, this would entail anincrease in inflation; including second-roundeffects, the overall year-on-year additional impulsecould reach 0.8 pp.

Further reduction in government deficits

The headline deficit is projected to decrease overthe forecast horizon from 4.7% of GDP in 2010 to4.4% in 2011 as a result of consolidation effortsand to fall further to 4.1% of GDP in 2012 on a no-policy-change basis due to gradually improvingcyclical conditions.

Graph II.3.2: The Czech Republic -Public finances

25

30

35

40

45

04 05 06 07 08 09 10 11 12-7

-5

-3

-1

1

3

5

7

General government balance (rhs)General government debt (lhs)

forecast

% of GDP % of GDP

After a marked deterioration in the headline deficitin 2009 on account of the financial crisis coupledwith a sizeable fiscal expansion, most stimulusmeasures expired at the end of that year and theCzech government had already begun toconsolidate its public finances in 2010. Theconsolidation measures were focused mainly onthe revenue side and included an increase in bothVAT rates by 1 pp. and increases in excise dutiesand social contributions.

During 2010, having recognised that severalrevenue items were underperforming against thebudgeted figures, notably income taxes and socialcontributions, the government took additional

89


Table II.3.1:Main features of country forecast - THE CZECH REPUBLIC

2009 Annual percentage changebn CZK Curr. prices % GDP 92-06 2007 2008 2009 2010 2011 2012

GDP 3625.9 100.0 2.7 6.1 2.5 -4.1 2.3 2.0 2.9Private consumption 1836.9 50.7 3.8 5.0 3.6 -0.2 0.4 0.4 2.0Public consumption 799.0 22.0 1.0 0.5 1.1 2.6 0.3 -2.3 0.5Gross fixed capital formation 814.0 22.5 4.8 10.8 -1.5 -7.9 -4.6 2.4 3.8of which : equipment 311.8 8.6 8.5 16.9 -0.6 -19.0 -10.5 3.7 5.1Exports (goods and services) 2507.0 69.1 10.4 15.0 6.0 -10.8 18.0 9.8 10.3Imports (goods and services) 2305.5 63.6 13.2 14.3 4.7 -10.6 18.0 8.4 9.7GNI (GDP deflator) 3411.3 94.1 - 3.9 5.2 -5.6 1.6 1.8 2.7Contribution to GDP growth : Domestic demand 3.4 5.2 1.6 -1.5 -0.7 0.2 1.9

Inventories 0.3 -0.1 -0.4 -2.1 2.0 0.3 0.0Net exports -1.0 1.1 1.3 -0.6 1.0 1.4 0.9

Employment - 2.7 1.2 -1.2 -0.8 0.0 0.0Unemployment rate (a) - 5.3 4.4 6.7 7.3 6.8 6.4Compensation of employees/head - 6.3 6.3 0.4 2.9 2.5 4.1Unit labour costs whole economy - 2.9 5.1 3.5 -0.2 0.5 1.2Real unit labour costs - -0.5 3.2 1.0 0.9 0.3 -0.7Savings rate of households (b) - 10.7 10.1 8.9 9.1 8.8 8.3GDP deflator 6.9 3.4 1.8 2.5 -1.1 0.2 1.9Harmonised index of consumer prices - 3.0 6.3 0.6 1.2 2.3 2.5Terms of trade of goods - 1.2 -2.3 3.0 -2.5 -1.6 0.0Trade balance (c) -3.6 3.4 2.7 4.5 3.7 3.8 4.4Current-account balance (c) -3.5 -2.6 -0.8 -1.2 -2.3 -2.5 -1.9Net lending(+) or borrowing(-) vis-à-vis ROW (c) -3.7 -2.0 0.3 0.6 -0.2 -0.4 -0.2General government balance (c) - -0.7 -2.7 -5.9 -4.7 -4.4 -4.1Cyclically-adjusted budget balance (c) - -2.9 -4.5 -5.1 -4.0 -3.8 -3.8Structural budget balance (c) - -2.9 -4.5 -5.5 -4.1 -3.5 -3.6General government gross debt (c) - 29.0 30.0 35.3 38.5 41.3 42.9


90

measures aimed at cutting ministries' operationalexpenditure. Overall, the 2010 headline deficitreached 4.7% of GDP and more than 1 pp. lowerthan in 2009. The bulk of the improvement camefrom a dramatic decrease in public investment (by0.5% of GDP y-o-y) resulting largely from theexpenditure freezes.

The reduction in the deficit is set to continue in2011 also, with most consolidation measuresimpacting on the expenditure side of the budget.These include a reduction in the wage bill in thepublic sector (excluding teachers) and in socialexpenditure, together with further cuts inoperational expenditure. As the measures alsotarget ministries' capital expenditure, the currentdeficit forecast assumes only a modest increase inpublic investment in 2011.

On the revenue side, the projected sluggish growthin household expenditure is expected to restrainthe growth of receipts from taxes on production.Income taxes and social contributions will also beaffected by the restraint in wages in the publicsector. However, additional revenue will begenerated by a temporary hike in direct taxes (the"flood tax"). The 50% one-off tax on subsidisedreturns from the building savings scheme, includedin the already implemented consolidation packagebut repealed in April 2011 following a ruling of

the Constitutional Court, will have significantimpact on revenue from direct taxes compared tothe projections underlying the budget. Overall, theheadline deficit is expected to decrease to 4.4% ofGDP.

For 2012, additional consolidation measures (thelargest of which would be the increase in thereduced VAT rate by 4 pps.) are in the pipeline,but given currently high implementation risks, theyhave not been considered in this forecast.Therefore, under the no-policy-change assumption,the deficit in 2012 is projected to decrease to 4.1%of GDP, mostly as a result of the improvement incyclical conditions.

The consolidation effort so far has not alloweda stabilisation of the debt-to-GDP ratio within thehorizon of the forecast. Government debt reached38.5% of GDP in 2010 and is expected to increasefurther to 42.9% in 2012, also as a result of onlymoderate nominal GDP growth (averaging 3.5%over 2011-12).

4. DENMARKA gradual and moderate recovery

91

Gradual recovery…

As a small open economy, Denmark was hit hardby the financial and economic crisis, the impact ofwhich was amplified by an ongoing domestichousing market correction, tensions in the financialsector and the necessary adjustment followinga period of overheating in 2004-07. Consequently,output plunged by more than 8% from peak totrough and has not yet recovered fully. Therebound of the Danish economy in 2010 wasdriven predominantly by fiscal stimulus measures,export growth and the turnaround in the inventorycycle. With fiscal support measures being phasedout, GDP growth is expected to rely increasinglyon the private sector, although the latter continuesto face challenges stemming from the real estatesector and rising borrowing costs. Economicgrowth is thus projected to be moderate, at slightlybelow 1¾% in 2011 and around 1½% in 2012.

…relying on the private sector

Household finances improved in 2010 as thereduction in top income tax rates and a rise in taxbrackets (based on the 2009 tax reform) tookeffect. The surprisingly robust upturn in financialmarkets in 2010 also contributed positively tohousehold wealth with possible spill-over effectscontinuing in 2011. A gradually strengtheninglabour market should further underpin consumerconfidence and contribute to a moderate increasein private sector wages. The situation is expectedto remain supportive over the coming years eventhough the financing elements of the tax reformwill start to kick-in this year and higher energyprices are set to weigh on real disposable income.The household saving rate, which increased duringthe crisis, remains relatively high compared tolong-term averages and should thus provide forsome financial buffer.

Higher interest rates over the forecast horizon areexpected to dampen activity on the housingmarket. Following the sharp price correctionbetween 2007 and 2009, house prices havestabilised recently but the situation remains fragile.Future housing market developments and theimpact of rising borrowing costs on real disposableincomes of households that rely on adjustableinterest rate mortgages therefore remain the mainrisks to the outlook.

Graph II.4.1: Denmark - GDP growth andcontributions

-6

-4

-2

0

2

4

6

04 05 06 07 08 09 10 11 12

pps.

Net exportsDomestic demand excluding inventoriesGDP (y-o-y%)

forecast

In spite of low interest rates, private investment asa share of GDP has fallen to its lowest level in 30years as Denmark continues to cope with theconsequences of a correction in real-estate pricesand the sharp contraction in capacity utilisation.With the gradual recovery expected to continuethis year and next, strong external demand and thefilling of order books by companies are projectedto lift capacity utilisation and activate investmentintentions in the manufacturing sector. Overall,gross fixed capital formation is forecast to expandby 3¾% and 3% in 2011 and 2012, respectively,with major infrastructure projects – for examplethe extension of the Copenhagen metro –contributing to investment growth, in particular in2011.

Public consumption is not expected to contributesignificantly to GDP growth over the comingyears. As part of its consolidation strategy, thegovernment has announced a consumptionexpenditure freeze in real terms from 2011 until2013.

…and a robust global economy

The external sector is projected to remainsupportive this year although import demandshould overtake export growth. Denmark's costcompetitiveness improved in 2010 as a strongcrisis-induced rebound in productivity exceededwage increases. However, the effect is expected tobe only temporary as unit labour costs areprojected to start growing in 2011 and 2012.


Recent gains in cost-competitiveness are thusunlikely to be sufficient to break the trend ofexport market share losses, which were amplifiedby a surge in Denmark's unit labour costs duringthe boom years. In addition, a majority of Danishcompanies face challenges when trying to take fulladvantage of rapidly growing emerging marketsdue to the traditional business structure andaverage company size. Although specific sectors,e.g. in the field of renewable energy orpharmaceuticals, are likely to benefit fromincreasing demand outside Europe, more than twothirds of Danish exports are still directed towardsthe EU.

Denmark's merchandise trade surplus widened in2009 mainly on the back of a sharp contraction inimports. In 2011 and 2012, the merchandise tradebalance is expected to stabilise at around 3% ofGDP. The current-account surplus as a percentageof GDP is expected to remain sizeable, partly dueto strong services exports, especially maritimetransport, which is linked to the expansion inworld trade.

Improving labour-market conditions

The rapid rise in employment before the crisis wasassociated with a decrease in productivity which –due to the usual lag between output andemployment fluctuations – continued during thecrisis until 2009 (see Graph II.4.2). Given a hugefall in employment during 2009 and a stabilisationof the labour market in 2010, productivityincreased discernibly but remained below the long-term trend. Hence, the projected rise in corporateinvestment in the coming years will allow for anonly gradual increase in employment as companiesare expected to boost productivity first. With theimprovement in the labour market, students andothers, who left the labour force in recent years,are expected to re-enter, thereby keeping the sizeof the labour force unchanged in spite of thecontinuously stronger downward pressure comingfrom demographic changes. The fall inunemployment is therefore expected to continue ata slow pace.

In light of the improved labour-market conditionsand the union wage agreements reached lastspring, private sector wages are expected to rise;albeit more moderately than during the boomyears.

Graph II.4.2: Denmark - employment andproductivity

1.8

1.9

2.0

2.1

2.2

95 97 99 01 03 05 07 09 11100

105

110

115

120

125

130

Total private employment (lhs)Productivity, on basis of private sector GVA (rhs)Productivity trend, 1995-2007 (rhs)

forecast

thousand DKKpersons (mio)

Accelerating inflation

While the impact of the hike in indirect taxes on"unhealthy" products, which was introduced at thebeginning of 2010, is expected to fade, base effectsrelated to energy prices should push headlineinflation higher. Inflation is expected to acceleratefrom 2.2% in 2010 to a yearly average of 2.5% thisyear, before falling to below 2% in 2012. Inaddition to the energy component, servicesinflation will remain the main driver behindheadline inflation. Core inflation, which excludesenergy and unprocessed food, is expected toincrease marginally over the forecast horizon,broadly in line with the gradual closure of theoutput gap and moderate wage growth.

Budgetary performance better in 2010 …

Sizeable budget surpluses prior to the crisisprovided leeway for the adoption of a major fiscalstimulus programme to fight the adverse impact ofthe financial and economic crises on consumersentiment and the financial sector. The pre-crisissurplus therefore turned into a deficit of 2.7% ofGDP in 2009, which was forecast in theCommission's spring 2010 forecast and the Danishauthorities' 2010 Convergence Programme towiden to above 5% of GDP in 2010. However asthe budgetary performance in 2010 turned outbetter than expected, the deficit was contained at2.7% of GDP. In particular unexpected andtemporary windfall gains linked to the pensionyield tax(72) accounted for additional revenue ofaround 2.5% of GDP. Furthermore, a better thanexpected labour market performance helped tolimit government expenditure.

(72) The pension yield tax is a flat-rate tax levied on the annualgains of pension portfolios.

92

Member States, Denmark

Table II.4.1:Main features of country forecast - DENMARK

2009 Annual percentage changebn DKK Curr. prices % GDP 92-06 2007 2008 2009 2010 2011 2012

GDP 1656.1 100.0 2.3 1.6 -1.1 -5.2 2.1 1.7 1.5Private consumption 813.6 49.1 2.1 3.0 -0.6 -4.5 2.2 2.0 1.9Public consumption 496.3 30.0 2.2 1.3 1.6 3.1 1.0 -0.2 0.4Gross fixed capital formation 300.8 18.2 4.5 0.4 -3.3 -14.3 -4.0 3.7 3.0of which : equipment 109.7 6.6 4.5 4.9 -3.5 -13.2 2.3 4.6 4.7Exports (goods and services) 792.8 47.9 5.0 2.8 2.8 -9.7 3.6 4.7 4.3Imports (goods and services) 729.6 44.1 6.3 4.3 2.7 -12.5 2.9 5.0 4.9GNI (GDP deflator) 1686.2 101.8 2.6 0.8 -0.9 -4.7 2.2 1.7 1.5Contribution to GDP growth : Domestic demand 2.5 1.9 -0.6 -4.3 0.7 1.5 1.5

Inventories 0.1 0.3 -0.6 -2.0 0.9 0.1 0.0Net exports -0.3 -0.7 0.1 1.1 0.5 0.1 -0.1

Employment 0.5 2.8 1.9 -3.1 -2.1 0.2 0.4Unemployment rate (a) 5.8 3.8 3.3 6.0 7.4 7.1 6.7Compensation of employees/head 3.5 3.6 3.6 2.4 2.7 1.7 2.4Unit labour costs whole economy 1.7 4.8 6.8 4.7 -1.5 0.1 1.3Real unit labour costs -0.2 2.4 2.8 4.3 -4.6 -1.6 -0.7Savings rate of households (b) 6.6 4.2 5.0 7.7 5.1 8.0 7.1GDP deflator 1.9 2.3 3.9 0.4 3.3 1.7 2.0Harmonised index of consumer prices 1.9 1.7 3.6 1.1 2.2 2.5 1.8Terms of trade of goods 0.9 0.5 1.0 3.8 2.7 -0.1 0.3Trade balance (c) 3.8 0.1 0.2 2.6 2.9 3.1 3.1Current-account balance (c) 2.1 1.4 2.7 3.6 5.3 5.2 5.1Net lending(+) or borrowing(-) vis-à-vis ROW (c) 2.2 1.4 2.7 3.5 5.0 4.9 4.8General government balance (c) 0.3 4.8 3.2 -2.7 -2.7 -4.1 -3.2Cyclically-adjusted budget balance (c) 0.3 2.8 3.0 0.9 0.0 -2.2 -1.8Structural budget balance (c) - 2.8 3.0 0.9 0.2 -2.2 -1.8General government gross debt (c) 57.7 27.5 34.5 41.8 43.6 45.3 47.1


93

…but need for consolidation remains

As the better than expected outcome in 2010 isattributable first and foremost to temporary factors,the budget deficit is projected to widen to around4% of GDP this year, before declining towards3¼% of GDP in 2012.

With an ongoing recovery, the expenditure ratio isexpected to decline further. At the same time,government revenues are set to increase asfinancing elements of the 2009 tax reform,including increased green taxes and business taxes,become operational. In addition, growth in privateconsumption should lead to higher revenue fromindirect taxes. Rising energy prices will also havefavourable effects on Denmark's public financesdue to the country's oil and gas extraction in theNorth Sea.

Moreover, the effects of additional consolidationmeasures adopted by Parliament in Spring 2010 –including the reduction in the duration of theunemployment benefit period from four to twoyears, the suspension of automatic adjustments ofthe thresholds for income taxes, the postponementof income tax cuts and a real-term freeze in publicconsumption – continue to unfold. However, tightcontrol of recurrent spending overruns at local andregional government levels will be important toachieve budgetary targets.

In structural terms, the deficit is projected toincrease between 2010 and 2011. Yet, thestructural balance is also influenced by veryvolatile pension yield revenues. Net of pensionyield taxation, the structural balance is projected togradually improve over the forecast horizon, inline with the consolidation measures adopted.

5. GERMANYSteady, broad-based growth supported by sound fundamentals

94

Broad-based recovery to continue after strongrebound in 2010

With real GDP expanding by 3.6% in 2010, theGerman economy saw a strong rebound after therecession. Having collapsed in the previous year,exports grew buoyantly in 2010, benefitting fromthe recovery in world trade and strong demand forinvestment goods. With imports picking up moreslowly, net exports made an important contributionto GDP growth. Nevertheless, domestic demandwas the strongest driver of growth last year,confirming the gradual broadening of the recoveryof the German economy. In particular, catching-upeffects as projects postponed during the crisis wereinitiated, rapidly increasing capacity utilisation andsustained public spending on infrastructure led toa rebound in investment. Meanwhile, privateconsumption was supported by the robustperformance of the labour market.

Graph II.5.1: Germany - GDP growth andcontributions

-6

-3

0

3

6

04 05 06 07 08 09 10 11 12InventoriesConsumptionNet exportsInvestmentGDP growth (y-o-y%)

pps.forecast

Healthy GDP growth is expected to have beenrecorded in the first quarter of 2011, with a markedtechnical rebound estimated to have offset theexceptionally harsh weather conditions that hitconstruction investment in particular in the lastquarter of 2010. In subsequent quarters, economicactivity should continue to expand steadily.Overall, real GDP is projected to increase by 2.6%in 2011 and by 1.9% in 2012, exceeding theestimated rate of potential growth in both years.Convergence towards the longer-term growth trendin 2012 reflects a further shift towards domesticdemand with a smaller contribution from netexports. Indeed, while export growth shouldremain dynamic over the forecast horizon, current

survey indicators and economic fundamentals bodewell for the strength of domestic demand. Germangrowth continues to benefit from improvedlabour-market conditions following past majorreforms and from the absence of majormacroeconomic imbalances. The expectedrebalancing of growth should lead to a gradualdecline in the current-account surplus.

Private consumption outlook supported byvibrant labour market

Having been a stabilising factor during the crisisdue to the resilience of the labour market and thesupport from fiscal stimulus measures, householdconsumption continued to contribute steadily toeconomic growth throughout 2010. Lookingforward, despite the current rise in inflation, realdisposable income should increase noticeably,supported especially by buoyant labour marketdevelopments. Given a prospective further drop inunemployment, a slight decline in the savings ratemay be expected. Overall, private consumptiongrowth should see a slight acceleration from 1.2%in 2011 to 1.5% in 2012.

Investment to remain dynamic

Following a somewhat slower start in 2011 afterthe phasing out of degressive depreciation rules,investment in machinery and equipment isexpected to remain dynamic over the forecasthorizon, albeit with a slight deceleration in 2012.Order books are full, capacity utilisation exceedsits long-term average and real interest rates areprojected to remain at unusually low levels, evenin the face of the commonly expectednormalisation of nominal policy rates. The strongfinancial position of the corporate sector shouldsupport investment plans in the medium term, aswould a shift to more capital-intensive productionin reaction to possible labour market shortages. Atthe same time, construction investment is likely tohave been boosted by a strong technical rebound inthe first quarter. Still-low mortgage interest rates,as well as favourable labour market and disposableincome developments, should support housinginvestment. More generally, domestic investmentis likely to benefit further from lower exports ofcapital after the end of foreign asset booms, witha possibly more cautious risk assessment

Member States, Germany

promoting greater home bias on the part ofdomestic investors.

Net export contribution to diminish on the backof strengthening domestic demand

While a certain normalisation is expected after lastyear's exceptional 14% expansion, growth inexports of goods and services should remaindynamic over the forecast period. Germany'scompetitive position is still strong and thespecialisation in investment goods should allowexporters to benefit from lively demand inemerging markets. However, strengtheningdomestic demand, in conjunction with the risingimport content of German exports, should lead toeven stronger import growth, implyinga diminishing contribution of net exports to GDPgrowth.

Buoyant labour market

Thanks to increased working-time flexibility at thecompany level, resulting from past labour marketreforms and the use of short-time workingarrangements, the labour market provedremarkably resilient during the crisis. Havingincreased only slightly in 2009, the unemploymentrate fell to an average of 7.1% in 2010. Whilegrowing labour demand translated into a morepronounced increase in hours worked than inheadcount employment (as the importance ofshort-time work diminished), the shrinking labourforce also contributed to the drop inunemployment. With survey data reflecting firms'positive intentions on additional hiring and giventhe strong growth outlook, a more sizeableincrease in employment numbers is expected in2011 (0.9%), followed by a moderate expansion(0.5%) next year.

Graph II.5.2: Germany - Labour market

0

2

4

6

8

10

12

04 05 06 07 08 09 10 11 1238500

39500

40500

41500

42500

Employment level (rhs)Unemployment rate (lhs)

forecast

in thousands%

The unemployment rate should fall to 6% by theend of the forecast horizon. Shortages in certainhigh-skill segments of the labour market appear tobe emerging. Should such shortages become morepronounced in the medium term, given the trenddecrease in the working-age population, this couldturn into a major bottleneck for Germany's growthpotential. Over the forecast horizon, the tighteninglabour market is expected to translate into strongerwage increases, especially next year.

Pick-up in wage growth; core inflation toremain contained while energy prices soar

Indeed, a pick-up in wage growth in 2011 andespecially in 2012 is forecast against thebackground of healthy economic expansion. Inview of the projected return to positiveproductivity growth following the crisis, thiswould only entail moderate increases in unit labourcosts.

Inflationary developments surprised on the upsidein the first quarter of 2011, essentially due tohigher-than-expected energy prices mainlyreflecting geo-political uncertainties. Energy pricesare likely to continue to exert upward pressure wellinto this year, resulting in an acceleration of theHICP inflation rate to 2.6% for the year asa whole. The rate is then set to decelerate to 2% in2012. While the impact of the increase in oil pricesis limited by the fact that Germany is among themore energy-efficient economies in the euro area,the country is relatively dependent on energyimports. The ongoing discussion about the futureenergy policy could raise this dependency in theshort term and could have an impact on thecountry's energy prices beyond the forecasthorizon. Core inflation is forecast to remaincontained at around 1¼% in 2011 and 1¾% in2012. In particular, no significant second-roundeffects are expected, also in view of developmentsduring the previous spike in commodity prices(2008).

Downside risks to the forecast mainly on theexternal side

Persistent inflationary pressures from commodityprices are among the key downside risks to theforecast and could affect the economy through anadverse effect on consumer confidence or througha deterioration of the economy's trade prospects.Further risks to the external outlook relate to theimpact of current developments in Japan. While

95


Germany's direct exposure to the Japaneseeconomy is limited, given the worldwideintegration of production processes, supply-chaindisruptions in key industries, such as theautomotive sector, cannot be excluded. A stronger-than-expected effect of developments in Japan onits Asian trade partners could in turn affect demandfor German exports. On the upside, substitutioneffects in reaction to a possible temporaryreduction of Japanese automobile production, forexample, might generate additional demand forGerman products. Moreover, while the centralscenario is for an orderly resolution of theinternational debt crisis, further tensions infinancial markets could affect consumerconfidence as well as bank lending conditions,although the increased profitability of companieshas provided greater scope for internal financing ofinvestment.

Potential bottlenecks ahead

Despite the absence of major domestic imbalancesand balance-sheet problems, some importantchallenges remain to be addressed. Tackling thenear-term challenge of completing therestructuring of the Landesbanken would reducethe risk of future additional burdens on the publicfinances while supporting medium-term creditsupply and productivity developments, throughpositive effects on the efficiency of financialintermediation and capital allocation. Theeconomy's medium term growth prospects couldalso be affected by possible labour supplyshortages. The forecast assumes a limitedadditional increase in participation rates. Furtherrising participation rates of women and olderworkers as well as an additional reduction in long-term unemployment could partly offset negativedemographic trends. In this context, raising thequality of the available human resources wouldalso be helpful, especially in view of theeconomy's specialisation in high-value industriesand falling productivity trend growth. Furtherimprovements in access to, and quality of,education as well as an increase in highereducational attainment rates would help relieve theemerging problem of shortages of medium- andhigh-skilled labour. At the same time, possibleadditional immigration flows from this yearonwards, following the end of restrictions on themobility of workers from New Member States,would help mitigate potential labour supplyshortages. Indeed, the forecast assumes a limitedrise in inward migration for 2011 and 2012.

Deficit contained in 2010 but financial marketsupport measures drive up the debt ratio

After having reached 3% of GDP in 2009, thegeneral government deficit widened slightly to3.3% of GDP in 2010. The deficit was almostentirely driven by the fiscal stimulus undertaken inline with the European Economic Recovery Plan(EERP) and financial market support measures. Itsrelatively contained increase can mainly beexplained by the swift economic recovery and theremarkably robust labour market, which dampenedexpenditure growth and compensated somewhatfor the tax revenue shortfalls resulting from taxrelief.

Nevertheless, the 2010 debt-to-GDP ratio rose byalmost 10 pps., reaching 83.2%. The bulk of thissizeable increase was related to the fact that twotroubled banks transferred impaired assets to theirrespective "bad-banks", which are classified underthe government sector. The correspondingliabilities of "bad-banks" have a direct impact onthe debt level.(73)

Graph II.5.3: Germany - General governmentgross debt and deficit

-2

-1

0

1

2

3

4

5

6

04 05 06 07 08 09 10 11 12

% of GDP

50

55

60

65

70

75

80

85

90

Gross debt (rhs) Deficit (lhs)Deficit threshold (3%) Debt threshold (60%)

forecast% of GDP

Sizeable fiscal improvement as of 2011

In the near-term, Germany's budgetary position isexpected to improve on the back of the favourablemacroeconomic environment, including steadyemployment growth, and the consolidation courseadopted by the German authorities as of 2011 tomeet the requirements of the constitutionalbudgetary rule in a timely manner. The rule setsa structural deficit ceiling of 0.35% of GDP for theFederal government from 2016 onwards and callsfor structurally-balanced budgets for the Länder asof 2020.

(73) In line with the Eurostat guidance on accounting rules forfinancial defeasance structures (16 March 2011).

96

Member States, Germany

Table II.5.1:Main features of country forecast - GERMANY


GDP 2397.1 100.0 1.5 2.7 1.0 -4.7 3.6 2.6 1.9Private consumption 1411.1 58.9 1.3 -0.2 0.7 -0.2 0.4 1.2 1.5Public consumption 472.1 19.7 1.3 1.6 2.3 2.9 2.3 1.5 0.9Gross fixed capital formation 422.7 17.6 0.9 4.7 2.5 -10.1 6.0 6.0 4.8of which : equipment 154.7 6.5 1.9 11.1 4.0 -22.3 10.9 10.6 7.9Exports (goods and services) 978.8 40.8 6.4 7.6 2.5 -14.3 14.1 7.6 6.5Imports (goods and services) 860.3 35.9 5.5 5.0 3.3 -9.4 12.6 7.5 7.2GNI (GDP deflator) 2430.9 101.4 1.6 2.3 0.8 -4.9 3.5 2.6 2.0Contribution to GDP growth : Domestic demand 1.2 1.0 1.3 -1.5 1.8 2.1 1.9

Inventories -0.2 0.2 -0.2 -0.3 0.6 0.0 0.0Net exports 0.5 1.5 -0.1 -2.9 1.2 0.5 0.0

Employment 0.1 1.7 1.4 0.0 0.5 0.9 0.5Unemployment rate (a) 8.6 8.7 7.5 7.8 7.1 6.4 6.0Compensation of employees/f.t.e. 2.2 0.9 2.0 0.2 2.2 2.7 2.9Unit labour costs whole economy 0.7 -0.1 2.4 5.2 -0.9 1.0 1.4Real unit labour costs -0.6 -1.9 1.3 3.7 -1.5 0.0 -0.1Savings rate of households (b) 16.2 16.8 17.6 17.2 17.3 17.1 16.9GDP deflator 1.3 1.8 1.0 1.4 0.6 1.0 1.5Harmonised index of consumer prices - 2.3 2.8 0.2 1.2 2.6 2.0Terms of trade of goods 0.3 0.7 -1.5 6.1 -2.9 -2.2 0.0Trade balance (c) 4.2 8.2 7.3 5.6 6.1 5.8 5.7Current-account balance (c) 0.8 7.6 6.7 5.0 5.1 4.7 4.6Net lending(+) or borrowing(-) vis-à-vis ROW (c) 0.8 7.7 6.7 5.0 5.1 4.7 4.6General government balance (c) -2.6 0.3 0.1 -3.0 -3.3 -2.0 -1.2Cyclically-adjusted budget balance (c) -2.7 -0.5 -0.5 -0.8 -2.2 -1.4 -0.8Structural budget balance (c) - -0.5 -0.2 -0.8 -1.9 -1.4 -0.8General government gross debt (c) 58.3 64.9 66.3 73.5 83.2 82.4 81.1


97

In 2011, the general government deficit is forecastto diminish to 2% of GDP benefiting fromcontinuous positive cyclical conditions, federalfiscal consolidation measures (around ¼% ofGDP), the expiry of certain stimulus measures(around ¼% of GDP) and health-care reform(around ¼% of GDP), including a 0.6 pp. increasein the contribution rate to finance rising health-care costs. The major 2011 measures encompassreduced social benefits for long-term unemployed,cuts in public sector wages, as well as a new tax onthe nuclear energy sector and an air traffic charge.Gross debt is projected to decrease to 82.4% ofGDP in 2011 thanks to a partial recuperation ofsome of the financial market support costs as wellas to a favourable denominator effect.(74)

The deficit is set to decline further to 1¼% of GDPin 2012, also on the back of the expiry of certainstimulus measures, e.g. additional investment. Thedebt-to-GDP ratio should fall to 81% of GDP in2012 reflecting healthy nominal GDP growth.

The ongoing federal consolidation appears to belargely growth-friendly – e.g. increases in the

(74) By a technical assumption the potential debt-decreasingeffects related to the winding-down of the assetsaccumulated in the "bad-banks" classified into thegovernment sector, have not been taken into account.

R&D and education expenditure have beensafeguarded. However, higher health-care andunemployment insurance contribution rates add tothe already high tax wedge. Uncertainties about thesustainability of social security systems anda possible additional burden related to financialmarket stabilisation pose downside risks forGermany's public finance in the medium term.Further reconciling fiscal adjustment with raisingpotential growth therefore remains a key challengefor public finances in the years ahead.

6. ESTONIAEconomic recovery gaining further ground

98

Buoyant export growth supports the recovery…

Following a cumulative GDP loss of 19% in2008-09, the Estonian economy rebounded swiftly,with growth accelerating throughout 2010 andreaching 3.1% for the year as a whole.

External trade has been the main driving forcebehind the recovery so far. A buoyant externalenvironment, particularly in Sweden, but also inthe main euro-area trading partners, pushed upexternal demand. Exports of goods increased by53% y-o-y in the last quarter of 2010, with themain contribution coming from electricalmachinery and equipment exports to Sweden.Overall, exports represented over 78% of GDP in2010 – the highest share since the recovery fromthe Russian crisis ten years ago, contributing 14%to annual GDP growth. Such a strongexport-driven recovery reflects the significant costadjustment that took place in 2009-10, whichimproved competitiveness and helped to increaseshare in global trade.

In contrast to the external trade, domestic demandremained rather weak, with signs of recoveryappearing only towards end-2010. Overall,domestic demand increased by 1.4% in 2010, withthe main contribution coming from inventories inthe first half of the year, and a strong rebound ininvestment in the fourth quarter, mainly inequipment. Government investment was lowerthan expected, while construction of dwellingsstalled. Overall, fixed investment declined by over9% in 2010. Private consumption was constrainedby the ongoing deleveraging, high unemploymentand lower wages, and picked up only moderatelytowards the end of the year.

…also in 2011, when domestic demand isexpected to pick up strongly too

External demand is expected to contributepositively to growth on average over the forecasthorizon due to a strong economic outlook inEstonia's main trading partners. Export growth isprojected to remain rather high in 2011,decelerating somewhat in line with demand growthin export markets in 2012.

Private-consumption growth is expected to pick upto 3.5% towards the end of the forecast horizon,

but to remain significantly more moderate thanbefore the crisis, with its GDP share stabilising ataround 50%. Behind the improving outlook lieexpected growth in household disposable incomeand a better employment outlook as economicgrowth accelerates. Savings by households, whichincreased significantly during the crisis, areexpected to decrease but to remain positive overthe forecast horizon, as households continuedeleveraging. Rising interest rates could provideadditional positive impetus to savings, whilehigher prices could reduce households' purchasingpower, weighing on the recovery of privateconsumption. Uncertainty about the medium-termpreferences of households with respect to savingrepresents one of the major risks to the forecast.

Graph II.6.1: Estonia - GDP growth andcontributions

-40-30-20-10

0

10203040

04 05 06 07 08 09 10 11 12Private consumption Public consumptionGFCF InventoriesExports ImportsGDP growth (y-o-y%)

forecast

pps.

Fixed investment is expected to bounce backstrongly in 2011-12, building on the growthmomentum from the fourth quarter of 2010.Investment growth is likely to be broad-based,affecting equipment, public infrastructure andhousing. In particular, investment in equipment isset to accelerate further in 2011 after a significantfall during the crisis. The positive external outlook,improved confidence and increasing profitabilityare expected to provide incentives for a substantialupgrade of existing production facilities and thecreation of new ones to support the ongoingsectoral rebalancing. This increase in investment isalso expected when taking into account the risingcapacity utilisation, which amounted to more than73% in the manufacturing sector in the first quarterof 2011. The renewal and extension of productioncapacities is also facilitated by higher profitabilityin the banking sector and stronger financial sectorconfidence, which contribute to more dynamiclending policies. In parallel, public sector

Member States, Estonia

investment is set to rebound strongly, withinfrastructure investment gaining ground throughhigher absorption of EU structural funds andinvestment related to the carbon credit tradecontracts. Public investment is likely to spill overto residential construction. Overall, fixedinvestment is expected to increase by over 10%annually over the forecast horizon.

Stronger domestic demand and industrial exportwould support import growth, with a slightlynegative trade balance reducing the current-account surplus towards 2012. The improvedprofitability of foreign-owned companies couldlead to an increasing income account shortfall, buta significant part of these profits is likely to bereinvested.

Overall, annual GDP growth is set to be higherthan projected in the previous forecast,accelerating to 4.9% in 2011 before slowing downsomewhat to 4% in 2012. The growth profile isalso projected to be more balanced, with domesticdemand gradually gaining ground both due tohigher investment and recovering privateconsumption.

Labour market is recovering, butunemployment and skill mismatches remainmajor challenges…

After peaking at some 20.4% in early 2010,unemployment (15-64) declined very rapidly tojust below 14% towards the end of the year. Jobcreation has accelerated since spring 2010,reflecting the robust recovery in exportingmanufacturing sectors. Such a strong rebound waspossible due to the high flexibility of Estonia'slabour market as well as to significant adjustmentin labour costs. Employment growth is expected toaccelerate further in 2011, in line with the overallimproved growth outlook, before moderatingsomewhat in 2012. Activity rates, which were veryhigh and increasing throughout the recession, areexpected to decline somewhat.

The adjustment in the labour market was supportedby active labour market policies, as expenditureincreased considerably in 2009 and 2010 toprevent unemployment from becoming structural.The government recently announced its intentionto reinforce labour market policies further and stepup lifelong learning activities. Nevertheless,unemployment is expected to remain relativelyhigh in both 2011 and 2012 notwithstanding rising

labour demand. As the ongoing sectoralrebalancing of the economy requires new skills,there is a risk that unemployment could becomestructural, resulting in an impoverished laboursupply and a constraint on growth. In parallel, theincreasing availability of employmentopportunities in other EU countries could lead tofurther migration, compounding structuralbottlenecks as labour demand rises.

Graph II.6.2: Estonia - Labour market

02468

101214161820

04 05 06 07 08 09 10 11 12

in thousands

0

100

200

300

400

500

600

700

800

Unemployment rate (lhs) Labour force (rhs)Employment (rhs)

forecast% of labour force

Following the significant downward adjustment in2009-10, nominal hourly wages in the wholeeconomy reverted to positive growth in late 2010.Moderate nominal wage growth can be expected inboth 2011 and 2012, reflecting higher demand forlabour, likely skills mismatches and shortages, andrising inflation, with real wage growth turningpositive towards the end of 2011.

…as are rapidly rising prices

After almost a year of negative monthly headlineinflation in 2009, prices started increasing againfrom spring 2010, with HICP inflation reaching2.7% for 2010 as a whole and spiking by the endof the year. Commodity prices in Estonia remainvery responsive to world prices, reflectinga consumption basket highly influenced by foodand energy prices, the prevalence of short-termcontracts, the price-taker nature of the economy, aswell as higher demand in neighbouring countries,notably after a poor harvest in Russia last summer.Tax changes also had a sizeable impact (1 pp.) onaverage inflation. Nevertheless, inflation (overallindex excluding energy, food, alcohol, andtobacco) remained fairly low in 2010. Despite theunusually turbulent time, the impact of the eurochangeover of 1 January 2011 was broadly similarto the experience with previous changeovers.Limited euro-related price increases stemmedmostly from service categories.

99


Table II.6.1:Main features of country forecast - ESTONIA


GDP 13.9 100.0 - 6.9 -5.1 -13.9 3.1 4.9 4.0Private consumption 7.2 51.9 - 8.6 -5.4 -18.4 -1.9 3.2 3.5Public consumption 3.0 22.0 - 3.9 3.8 0.0 -2.1 0.3 0.9Gross fixed capital formation 3.0 21.6 - 6.0 -15.0 -32.9 -9.2 14.9 10.6of which : equipment 1.0 7.0 - 7.4 -11.6 -44.0 12.9 18.5 10.0Exports (goods and services) 9.0 64.7 - 1.5 0.4 -18.7 21.7 16.0 6.4Imports (goods and services) 8.1 58.6 - 7.8 -7.0 -32.6 21.0 16.9 7.1GNI (GDP deflator) 13.5 97.7 - 5.0 -3.5 -11.1 0.8 3.8 2.9Contribution to GDP growth : Domestic demand - 7.6 -7.9 -20.9 -3.0 4.4 4.1

Inventories - 3.0 -4.2 -3.4 4.3 0.0 0.0Net exports - -5.4 5.7 11.3 1.7 0.4 -0.1

Employment -1.6 0.8 0.2 -9.9 -4.8 4.2 1.3Unemployment rate (a) - 4.7 5.5 13.8 16.9 13.0 11.5Compensation of employees/f.t.e. - 24.6 10.1 -3.3 -0.2 4.4 4.0Unit labour costs whole economy - 17.4 16.2 1.2 -7.9 3.8 1.3Real unit labour costs - 6.2 8.4 1.2 -9.2 1.4 -0.9Savings rate of households (b) - -1.7 3.4 13.3 7.4 7.7 5.4GDP deflator - 10.5 7.2 -0.1 1.5 2.4 2.2Harmonised index of consumer prices - 6.7 10.6 0.2 2.7 4.7 2.8Terms of trade of goods - 4.6 -0.2 -2.6 -1.3 -0.4 -0.2Trade balance (c) - -17.2 -12.2 -3.9 -2.6 -2.6 -3.0Current-account balance (c) - -17.2 -8.8 4.5 2.8 1.8 0.1Net lending(+) or borrowing(-) vis-à-vis ROW (c) - -16.2 -7.7 7.8 6.6 5.4 2.4General government balance (c) - 2.5 -2.8 -1.7 0.1 -0.6 -2.4Cyclically-adjusted budget balance (c) - -1.0 -3.8 1.7 2.5 0.3 -2.3Structural budget balance (c) - -1.4 -4.0 -0.2 -0.4 -0.9 -1.1General government gross debt (c) - 3.7 4.6 7.2 6.6 6.1 6.9


100

Looking forward, global commodity prices areexpected to bring inflation up to 4.7% in 2011, butwould contribute to inflation moderation in 2012.Nevertheless, given the history of relatively highinflation in Estonia prior to the last downturn,there is a risk that current inflation developmentsmay affect expectations, adding to an upwardpressure on wages due to skills mismatches. Thiscould hinder competitiveness and, hence, weigh ongrowth prospects.

Budget balance – back in surplus, but somedeterioration expected

The general government finances reacheda marginally positive outcome in 2010, witha surplus of 0.1% of GDP. Although the result wasmarkedly affected by sizeable sales of so-called"Kyoto units"(75), which amounted to 1.0% of GDPin 2010, the outcome was better than previouslyexpected and reflected the considerable adjustmentof public finances implemented in 2009-10.

(75) An Assigned Amount Unit (AAU) is a tradable 'Kyoto unit'or 'carbon credit' representing an allowance to emitgreenhouse gases. AAUs are issued up to the levelspecified in Annex 1 Party to the Kyoto Protocol. Due tothe initial comparison basis, Estonia received a higherquota amount than needed given the current structure of theeconomy, and is able to sell the surplus of the CO2 quotaallocated for the 2008-12 commitment period.

However, the over-performance in comparison toprevious projections was largely a result of a delayin the implementation of planned governmentinvestments, including those related to theabsorption of EU structural funds.

Notwithstanding the strong improvement in themacroeconomic outlook, public finances are set todeteriorate again, moderately in 2011 and moremarkedly in 2012, based on the no-policy-changeassumption. This is, firstly, the result of a gradualreversal of the consolidation measures that wereintroduced temporarily in 2009-10 to deal withacute phase the crisis. Secondly, sales of "Kyotounits" and environmental investment obligationsrelated to those sales will continue to stronglyaffect the profile of public finances over theforecast period. Without these transactions, theheadline general government position would havebeen fairly stable, with deficits of 0.9% of GDP in2010, 1.0% in 2011 and 1.1% in 2012.

The general government debt will remain verylow, projected to increase marginally to 6.9% ofGDP by end-2012. It is assumed that deficit will befinanced – fully in 2011 and partly in 2012 – byrunning down previously accumulated financialassets rather than new borrowing.

7. IRELANDReady for a gradual recovery after facing up to the full costs of thebanking crisis

101

Economic activity continues to be weigheddown by the aftershocks of real estate bust.

Adjusting to the large imbalances built during thepreceding boom years, economic activity inIreland slowly recovers. The crisis started with amajor correction in the Irish real-estate market andspread to the wider economy, with sharp declinesin both employment and real GDP (by end-2010,these were respectively nearly 13% and 12%below their end-2007 levels). It also led to adramatic deterioration in public finances.

In late 2010, as market confidence dwindled in thewake of large deficits, continued upward revisionsof bank losses, and strong deposit outflows, theIrish authorities requested assistance from theEuropean Union and the International MonetaryFund. A financial assistance programme providingfor EUR 85 bn in financing over three years wasput in place in December 2010. The programme issubject to quarterly reviews of fiscal, financial andstructural conditionality and is designed to bringthe deficit to below 3% of GDP by 2015, in linewith the Council Recommendations to Ireland inthe context of the excessive deficit procedure.

Elections earlier this year brought about a changein government, with a coalition of Fine Gael andthe Labour Party. The new government hasannounced an ambitious strategy for the bankingsector following the release of the 2011 vintage ofthe Prudential Capital and Liquidity Assessments(PCAR and PLAR, respectively). These "stresstests", which were well received as being based ona thorough and aptly conservative methodology,have resulted in an estimated capital need of EUR24 bn, of which about EUR 19 bn is to be coveredby public resources. This would bring the totalamount of public support to the banks to aroundEUR 65 bn, or 42% of 2011 GDP.

Strong exports lead return to economic growth

In 2010, real GDP declined by -1.0%. The extentof the contraction was somewhat larger thananticipated in the autumn forecast, mostly becauseof larger-than-anticipated imports and a furtherdecline in investment. The lower 2010 baseimplies a downward revision of the 2011 growthforecast, which is now seen at 0.6%. Growth is still

forecast to accelerate somewhat in 2012. Byhistorical standards (which are inflated by Ireland'ssuccessful catching up process and theunsustainable real estate boom) the projectedgrowth is very modest. This reflects the drawn-outadjustment process, during which domesticdemand is expected to continue to act as a drag,while exports should continue to drive therecovery.

Following its historic drop in 2009, householdconsumption continued to contract in 2010 andfurther moderate declines are expected over theforecast horizon. Households' deleveraging effortsshould continue to weigh on their demandthroughout the forecast period, while the declinesin consumption would also reflect reductions indisposable income on account of higher taxes andincreasing mortgage servicing costs, as well ascontinued subdued labour market developments.Albeit partly offset by positive confidence effects,fiscal consolidation measures will also havea dampening impact.

Graph II.7.1: Ireland - GDP growth andcontributions

-16

-12

-8

-4

0

4

8

12

05 06 07 08 09 10 11 12

pps.


forecast

Gross fixed capital formation declined further by28% in 2010, and another substantial but smallerreduction is envisaged in 2011, before it stabilisesin 2012. While softening, the ongoing downsizingof the construction sector is expected to continueinto 2012, also on the back of planned furtherreductions in public investment. This should besomewhat offset by a moderate pick-up inequipment and machinery investment onceconfidence has been restored and prospectsimprove.


Net exports are expected to continue makingstrong positive contributions to growth throughoutthe forecast horizon. After holding up reasonablywell in 2009, Irish exports increased by 9.4% in2010, on the back of continued competitivenessgains from contained wage dynamics andstrengthening global demand. Similar factors areexpected to continue to underpin a solid exportperformance in 2011-12. Imports have been heldback by subdued domestic demand and, whilepicking up in late 2010, they are not expected tofully offset export growth contribution to overallGDP. The current-account balance is expected toturn into surplus in 2011, for the first time sincethe early part of the last decade, and to increaseover the medium term.

Risks from de-leveraging will weigh ondomestic demand

Considerable risks to the outlook remain. On theexternal side, Ireland's position as a price-taker ininternational markets implies that export prospectsare strongly influenced by exchange ratedevelopments, especially vis-à-vis USD and GBP.Domestically, there is uncertainty on how quicklyand strongly positive confidence effects of fiscalconsolidation could kick in, eventually supportingdomestic demand. Further, a domestic upturn isconditional on the ability of a viable bankingsector to extend credit to the economy. Althoughdomestic banks are expected to be adequatelycapitalised in short order under the banking sectorstrategy announced by the government on31 March 2011, it may take some time before newlending activity resumes in earnest, in which casethe pace of investment could be slower. A key riskis represented by the elevated sensitivity ofhousehold disposable income to developments ininterest rates, from both the ECB and heightenedrisk premia in the euro area periphery per se. Thelarge exposure of Irish households to mortgages onshort-term rates means that the effect of thepass-through of higher interest rates on privateconsumption could be substantial. At the sametime, a faster-than-assumed pace of sectoraladjustment might provide support to consumptionand investment demand.

Correction of imbalances key for recovery

Beyond the challenges associated with reigning inand reversing the deterioration of the publicfinances (see below), the pace of the recovery willalso depend on the speed of correction of other

imbalances accumulated in the past. Notably, theforecast assumes progress in the domesticrebalancing of economic activity from constructionto more productive sectors, in the clean-up ofhousehold and corporate balance sheets as well asfurther regaining of competitiveness.

Graph II.7.2: Ireland - Labour-marketdevelopments

-9-6-30369

121518

05 06 07 08 09 10 11 12-9-6-30369121518y-o-y %

Unemployment rate (lhs) Employment (rhs)

forecast

% of labour force

At the peak of the housing market cycle in 2006,the construction sector accounted for over 13% oftotal employment, nearly double the average sharein the euro area. The shrinking of the constructionsector and the wider recession have been reflectedin a large decline in employment, which has hityoung and low-skilled workers hardest. Althoughthe participation rate has fallen and net outwardmigration has resumed, the rate of unemploymenthas been revised upward to 14.5% this year, as thestabilising mechanisms of emigration and lowerparticipation have not proved as strong aspreviously anticipated. The export-led recoveryand capital-intensive production in key exportsectors imply a very gradual improvement inlabour market conditions, lagging more than usualthis year's expected return to positive economicgrowth.

Price and wage adjustment supportscompetitiveness and export-led growth

During the domestic boom, Ireland sufferedsignificant losses in competitiveness, as reflectedin a strong rise in unit labour costs from 2002 to2008. Over this period, Irish price levels grew tobe among the highest in the euro area.A downward adjustment of prices began in 2009and negative inflation of -1.6% was recorded in2010. While inflation is projected to return topositive territory this year and next, it shouldremain subdued in the absence of strong demandpressures. Inflation of 1.0% this year will be drivenby external energy and administered service

102

Member States, Ireland

increases, while core inflationary pressures remainvery weak. Nominal wage adjustment is alsotaking place, led by corresponding cuts in thepublic sector now feeding through to the privatesector. Wage developments are projected to bevery moderate in 2011-12, thereby helping tofurther recover past competitiveness losses andfacilitating sectoral adjustment.

Balance-sheet adjustments are likely to continue toweigh on domestic demand over the next fewyears. After the steep increase in 2009, thehousehold saving rate remained high in 2010 andis expected to decline only gradually over theforecast horizon. While confidence should improveand reduce precautionary savings, the need of thehighly indebted household sector to furtherdeleverage following the end of the housing boomwill prevent a more marked drop.

Export growth over the forecast horizon is notprojected to show growth in Ireland's market share.To the extent that competitiveness gainsmaterialise, this could provide an upside risk,although this could be offset by the high importcontent of Irish exports. Overall exportdevelopments could be dominated by sector- andeven firm-specific developments in chemicals andpharmaceuticals which have a very high weightingin exports.

Ambitious but realistic consolidation plans

The economic crisis revealed a large structuraldeficit in Ireland. The substantial fall in taxrevenue resulting from the sharp economicdownturn was not matched by sufficiently fastadjustment on the expenditure side in 2008 and2009 and double-digit deficit ratios emerged.

Despite sizeable fiscal consolidation effort of anestimated 8¼% of GDP of permanent measures in2009-10, the structural balance relative to GDPdeteriorated by 3 pps. The structural deficit isestimated at 10½% of GDP in 2010, but isprojected to decline over the forecast period asfurther consolidation efforts are introduced.

In headline terms, the general government deficitreached a record-high level of 32.4% of GDP in2010, due to large one-off banking sector supportmeasures. The latter mostly reflects promissorynotes of 20% of GDP injected into Anglo IrishBank and two smaller building societies. While thefull amount of promissory notes is included in the

government deficit and debt in 2010, the actualborrowing needs related to the notes are spreadover a period of 10 years.

Graph II.7.3: Ireland - General government debtand deficit, one-offs and GDP growth

-10-505

101520253035

05 06 07 08 09 10 11 12

% of GDP

-40

0

40

80

120

General government debt (rhs)Budgetary measures with a one-off effect (lhs)General government deficit (lhs)GDP growth (lhs, y-o-y%)

forecast

% of GDP

The 2011 budget implemented a consolidationpackage of almost EUR 6 bn (3¾% of GDP).Based on this, the deficit is expected to narrow tosome 10½% of GDP this year, higher thanprojected by the national authorities due to lowertax revenue in line with macroeconomicdevelopments. Three-quarters of the measures for2011 are on the expenditure side, including cuts incapital expenditure (1.2% of GDP), savings onpurchases (0.6%), lower social transfers (0.5%)and a reduction in public sector employment(0.2%). A reform of the personal income taxsystem accounts for most of the measures on therevenue side (0.8% of GDP). One-off measuresamount to 0.3% of GDP in 2011.(76)

In 2012, the deficit ratio is projected to decrease to8.8% of GDP taking into account broadconsolidation measures of 2¼% of GDP outlinedin the National Recovery Plan for 2011-14. Theexpenditure-to-GDP ratio should decline by 1½,taking into account a nominal freeze ofexpenditure and rates together with consolidationmeasures of 1¼% of GDP across main expenditureitems. Demographic developments and the expiryof one-off measures would have a smallexpenditure-increasing effect. Despite further taxrevenue increasing measures amounting to almost1% of GDP including carry-over effect of previousmeasures, the revenue-to-GDP ratio is expected toremain broadly unchanged given lower fees fromthe bank guarantee scheme and smaller dividendsfrom state bodies after frontloading in 2011.

(76) One-off measures include disposal of non-financial assetsand higher dividends from state bodies.

103


Table II.7.1:Main features of country forecast - IRELAND


GDP 159.6 100.0 6.8 5.6 -3.5 -7.6 -1.0 0.6 1.9Private consumption 80.8 50.6 5.6 6.3 -1.8 -7.2 -1.2 -1.9 -1.0Public consumption 31.3 19.6 4.8 7.3 2.8 -4.1 -2.0 -4.4 -0.4Gross fixed capital formation 24.7 15.5 7.8 2.9 -14.3 -31.1 -27.7 -13.5 2.0of which : equipment 6.8 4.3 8.1 17.2 -17.4 -22.5 -15.0 6.0 7.0Exports (goods and services) 144.8 90.7 11.7 8.2 -0.8 -4.1 9.4 6.0 5.2Imports (goods and services) 120.4 75.4 11.1 7.8 -2.9 -9.7 6.6 3.2 4.0GNI (GDP deflator) 132.6 83.1 6.4 4.4 -3.5 -11.4 -3.7 -0.3 0.1Contribution to GDP growth : Domestic demand 5.5 4.9 -3.9 -11.3 -5.5 -3.3 -0.4

Inventories 0.0 0.0 -0.8 -1.4 0.8 0.2 0.1Net exports 1.7 1.1 1.5 3.8 3.6 3.5 2.2

Employment 3.8 3.7 -1.1 -8.2 -4.1 -1.5 0.4Unemployment rate (a) 8.2 4.6 6.3 11.9 13.7 14.6 14.0Compensation of employees/head 5.3 5.4 3.4 0.0 -1.9 -0.3 0.7Unit labour costs whole economy 2.3 3.4 5.9 -0.6 -4.9 -2.5 -0.9Real unit labour costs -1.4 2.3 7.5 3.6 -2.4 -3.1 -1.8Savings rate of households (b) - 6.4 9.3 16.4 18.0 18.1 16.1GDP deflator 3.7 1.1 -1.5 -4.0 -2.6 0.6 0.9Harmonised index of consumer prices - 2.9 3.1 -1.7 -1.6 1.0 0.7Terms of trade of goods -0.3 -2.0 -5.9 4.9 0.2 -0.3 0.5Trade balance (c) 20.4 10.5 13.2 20.3 24.2 27.1 28.6Current-account balance (c) 0.6 -5.5 -5.6 -3.1 -0.7 1.2 1.8Net lending(+) or borrowing(-) vis-à-vis ROW (c) 1.0 -5.6 -5.9 -3.4 -1.6 0.9 1.4General government balance (c) 0.6 0.1 -7.3 -14.3 -32.4 -10.5 -8.8Cyclically-adjusted budget balance (c) 0.2 -1.8 -7.4 -12.0 -30.3 -9.2 -8.5Structural budget balance (c) - -1.8 -7.4 -10.0 -10.5 -9.5 -8.5General government gross debt (c) 54.3 25.0 44.4 65.6 96.2 112.0 117.9


104

A sharp increase in the gross-debt-to-GDP ratiofrom 66% in 2009 to 96% in 2010 reflects thelarge primary deficit, including bank rescuemeasures, rising interest expenditure and fallingnominal GDP. Interest rates on the programme'sfinancing are assumed at the levels when theprogramme was agreed in November 2010.Currently higher market interest rates pose a riskof higher interest expenditure, while a lowering ofthe margin on EU loans provided as part of theEU-IMF programme would work in the oppositedirection. In 2011, gross public debt is projected toreach 112% of GDP, including capital injectionsinto banks of EUR 19 bn (12% of GDP) with a netdebt-increasing effect of around 6% of GDP, as

part is covered from Ireland's own resources.These injections are considered in the forecast asfinancial transactions with no effect on thegovernment deficit. However, some of thesecapital injections may have a one-off deficit-increasing effect in 2011; this will be establishedon case-by-case basis post factum by Eurostat.Gross public debt is projected to rise to almost118% of GDP by 2012. On the upside, debt couldbe lowered from the proceeds from any sale of theEUR 5 billion-worth in state-owned assetsidentified for potential sale by the Review Groupon State Assets and Liabilities – none of which isincluded in the current forecast.

8. GREECERebalancing growth amidst ongoing fiscal consolidation

105

Note: This text and the forecast was finalised inearly May, ahead of the fourth quarterly reviewof the Economic Adjustment Programme. It hasnot been updated to reflect the findings of thatreview.

Correcting twin fiscal and external deficitsweighs on economic activity…

Following the establishment of the three-yearEconomic Adjustment Programme in May 2010,Greece adopted comprehensive fiscalconsolidation measures. These are expected tocontinue to have a dampening impact on domesticdemand, contributing to the correction of the twinfiscal and external deficits. In the short term, fiscaltightening will have a strong contraction impact oneconomic activity, on the back of cuts in publicwages, an increasing tax burden and ensuingdeclining disposable income and public spending.However, credible fiscal adjustment efforts anddetermined implementation of structural reformsshould boost confidence and improve sentiment.

The recent downward revision of annual real GDPdata for 2010 (by almost -0.3 pp. to -4.5%) willhave an adverse impact on real GDP dynamics in2011. Domestic demand remains weak, driven byincome losses, the adjustment in the labour marketand credit conditions. Underlying inflation, wagesettlements and unit labour costs are moderating,leading to improved competitiveness. Theprogressive rebalancing of the economy,supportive external demand and growth-friendlyreforms are expected to move the economy back toits potential growth for 2013 onwards. Theinflexion point of activity is estimated to be in thelast quarter of 2010.

Fiscal consolidation is dampening domesticdemand further…

For a third consecutive year, economic activity isset to decline. Real GDP is expected to further fallby 3.5% in 2011 – mainly due to heavy carry-overeffects coming from 2010 – while growth isexpected to turn positive only in the last quartersof the year or later, with the recovery gainingmomentum in after 2012.

The contraction of economic activity, reflected infurther weakening labour demand, is still weighing

heavily on employment, which is set to fallthroughout 2011. Reduced employmentopportunities in the private sector, along with therecruitment freeze and cuts in short-term contractsin the public sector, will push the unemploymentrate up to above 15% through 2012. The situationin the labour market combined with decliningwages should weigh on disposable income over themedium-term, dampening real demand. As a resultalso of continuing tax uncertainty, privateconsumption is projected to contract further withinthe forecast horizon.

Graph II.8.1: Greece - GDP growth andcontributions

-10

-5

0

5

10

07 08 09 10 11 12

pps.


forecast

Tight liquidity and rising non-performing loans areputting strains on the banking system. In line withthe slowdown of economic activity and continuingdeposit outflow, the annual growth rate of credit toprivate sector is now slightly negative. Marketpressures and high spreads have been keeping upthe cost of financing and limiting private sectoraccess to it.

Investment has been falling in recent quarters, inboth housing and equipment. Public investmentactivity is expected to remain particularlydepressed in 2011, as a result of continued fiscalconsolidation efforts. Several initiatives taken inthe public domain – including the acceleration inthe absorption rate of the EU Structural Fundsresources and the new investment law – areimproving market sentiment slightly and wouldassist a recovery in investment as of 2012.

Inflation pressures are fading in response todemand pressures

Inflationary pressures have built up in the courseof 2010, fuelled by VAT-rate rises in the


programme and the increase in excise duties onalcohol, tobacco and fuel. Annual inflation in 2010exceeded 4½% on average. A number of structuralreforms targeting the existing inflexibilities indomestic markets would positively affect bothinflation and inflation expectations. Lookingforward, both headline and core inflation shoulddecline, as base effects and tax effects fade out,and slack in the economy and wage moderationstart feeding through.

Graph II.8.2: Greece - Inflation and inflation atconstant taxes

-1

0

1

23

4

5

6

07 08 09 10 11 12

pps.

Headline inflation Inflation at constant taxes

forecast

The labour market is adjusting. There is evidenceof strong downward pressure on labour costs, inparticular non-basic pay, as the cuts in publicsector wages spill over to the private sector andfirms endeavour to recover competitiveness, and toabsorb indirect taxes in their margins and costs.Employment contracted in 2010 and is projected todecline further by some 2½% in 2011, with theunemployment rate peaking at above 15%. On theother hand, a symmetric faster rebound ofemployment in the recovery phase is possible,especially if ongoing labour market reforms areimplemented as planned, and the economy issuccessful in swiftly reallocating resources fromthe non-traded sectors to tradeables. Wage growthis projected to remain very subdued in line withthe national collective agreement of July 2010 (forminimum wages, but which also plays a guidingrole for other wages as well).

Structural reforms to improve supply prospects

The adjustment programme for Greece contains avery wide agenda of structural reforms. The aim ofthese reforms is to improve the supply-sideconditions of the economy and increase internalcompetition and external competitiveness. Theirimplementation will facilitate the return of theeconomy to potential growth, while strengtheningthis potential. In the course of 2010, Greece

adopted two batches of labour market reforms. ByJuly, Parliament had already voted on legislativechanges related to overtime pay rates, severancecosts, and sub-minima wages for groups at risk,such as young and long-term unemployed. TheGovernment and the social partners also agreedthat the minimum wage would be frozen untilsummer 2012, and then expected to increase in linewith expected euro-area inflation. The new labourlaw of December reforms the mediation andarbitration system and goes in the direction ofmoving the wage bargaining system towards thefirm level, where the firms' growth strategies aredecided. The establishment of special firm-levelcollective agreements could be a promising steptowards making the wage-setting system betteradapted to reflect the firms' economic conditions.

…while the recovery is entirely driven by theexternal sector

The contraction in domestic demand, which isexpected to be sustained over the forecast horizon,is also mirrored by shrinking imports. Totalexports, which started to recover already in 2010,will be further enhanced in 2011-12 by labour costdevelopments and favourable external demandfactors as suggested by high-frequency indicators:new industrial orders for the non-domestic marketare more dynamic than orders for the domesticmarket and the gap has been widening since mid-2010.

Exports of goods should rise by around 6% onaverage in 2011-12, while exports of services – inparticular world trade sensitive merchant shippingand tourist receipts – should recover at a fasterpace in the wake of a sustained adjustment inprices. All in all, the contribution of net exports toGDP growth should be highly positive in 2011 and2012, due to both the accelerating pick-up inexports and the ongoing contraction in imports.The current-account deficit is expected to declineto around 8% of GDP in 2011 and to move closerto 6% of GDP in 2012. Expected competitivenessgains and the benefits from ongoing structuralreforms may result in an even faster adjustment ofthe current-account balance.

The risks to this baseline scenario are broadlybalanced. On the positive side, the contribution ofnet exports and investment to GDP growth mayturn out to be stronger than projected, should theimpact of ongoing and planned structural reformsmaterialise more swiftly. In particular, the rapid

106

Member States, Greece

Table II.8.1:Main features of country forecast - GREECE


GDP 235.1 100.0 3.0 4.3 1.0 -2.0 -4.5 -3.5 1.1Private consumption 174.0 74.0 3.1 2.8 3.2 -2.2 -4.5 -6.4 -2.2Public consumption 48.4 20.6 3.1 8.2 1.5 10.3 -6.5 -2.6 0.1Gross fixed capital formation 40.2 17.1 4.3 5.5 -7.5 -11.2 -16.5 -16.6 -1.9of which : equipment 18.0 7.6 8.6 22.3 6.6 -11.8 -23.5 -16.0 1.2Exports (goods and services) 44.3 18.8 6.3 5.8 4.0 -20.1 3.8 10.7 6.9Imports (goods and services) 69.5 29.6 5.8 9.9 4.0 -18.6 -4.8 -8.4 -3.1GNI (GDP deflator) 228.6 97.3 2.9 3.4 0.7 -1.5 -4.5 -3.7 1.1Contribution to GDP growth : Domestic demand 3.5 4.6 1.0 -1.8 -7.7 -8.0 -1.8

Inventories -0.1 1.6 0.5 -2.3 0.9 -0.5 0.3Net exports -0.4 -2.0 -0.5 2.0 2.3 5.0 2.6

Employment 1.2 1.7 0.2 -0.7 -2.1 -2.6 0.1Unemployment rate (a) 9.9 8.3 7.7 9.5 12.6 15.2 15.3Compensation of employees/head 7.9 6.1 7.0 3.6 -3.5 -1.0 0.1Unit labour costs whole economy 6.0 3.6 6.2 5.0 -1.1 -0.1 -0.9Real unit labour costs -0.2 0.5 2.8 3.7 -3.5 -0.4 -1.3Savings rate of households (b) - 4.4 -0.3 4.2 -0.2 3.2 5.0GDP deflator 6.3 3.1 3.3 1.3 2.6 0.3 0.4Harmonised index of consumer prices - 3.0 4.2 1.3 4.7 2.4 0.5Terms of trade of goods 0.0 0.8 -3.3 1.0 4.0 -3.6 -0.9Trade balance (c) -15.2 -19.5 -20.4 -16.3 -14.2 -13.0 -12.3Current-account balance (c) -6.3 -15.6 -16.3 -14.0 -11.8 -8.3 -6.1Net lending(+) or borrowing(-) vis-à-vis ROW (c) - -13.3 -14.9 -12.9 -10.1 -6.4 -4.0General government balance (c) -6.5 -6.4 -9.8 -15.4 -10.5 -9.5 -9.3Cyclically-adjusted budget balance (c) -6.6 -7.5 -10.4 -14.9 -8.2 -6.1 -6.6Structural budget balance (c) - -7.3 -9.5 -14.0 -8.6 -7.4 -7.9General government gross debt (c) 97.7 105.4 110.7 127.1 142.8 157.7 166.1


107

implementation of measures aimed at enhancinginvestment opportunities and attract FDI mayspeed up the recovery. On the negative side, giventhe usual uncertainty on the inflexion of the cycle,one cannot at the time of the writing exclude thepossibility that the economy will take longer thanexpected to return to positive territory.

Ongoing fiscal consolidation to be furtherstrengthened in 2011

The 2010 general government deficit publishedand validated by Eurostat stands at 10½% of GDP,2¾ pps. of GDP higher than the ceiling establishedin May 2010 during the setting up of theadjustment programme. The fiscal slippagerecorded in 2010 stems from the worse-than-expected revenue performance, which were onlypartly compensated for by lower expenditure, thesector reclassification of public enterprises andtheir inclusion in general government, and thesignificantly worse-than-estimated fiscal positionof social security and local authorities. At the sametime, the general government consolidated grossdebt in 2010 was almost 143% of GDP, up from127% of GDP in 2009.

The 2011 budget law foresees the implementationof fiscal consolidation measures – including thoseagreed in May – of some 5¾% of GDP. Around

half of these measures are intended to enhancerevenue, and most of them are permanent. The restcomes from spending cuts and includesretrenchment of unproductive and untargetedspending, a reduction in short-term contracts in thepublic sector, better targeting of universalhousehold subsidies, and better management anduse of state assets, particularly in the collection ofarrears.

The implementation of fiscal policy in 2011remains challenging. While the Government hasconfirmed its commitment to meet the deficittarget, fully recouping the slippage of 2010, it hasnot yet announced any additional measures. Basedon current trends and the budgetary execution sofar, additional measures will be needed to ensurethat the 2011 deficit ceiling is respected. Theupward revision of the 2011 budget deficit forecaststems mainly from the tax revenue performance inthe first quarter of 2011, the downward revisionfor the yield of some fiscal measures in the statebudget, and a base effect from the worse-than-expected 2010 fiscal outcome.

9. SPAINSubdued growth despite strong external demand

108

Rebalancing of the economy continues aspositive growth returns

The Spanish economy experienced a long-lastinghousing and credit boom before the financial andeconomic crisis, which resulted in the build-up oflarge internal and external imbalances. On the backof strong domestic demand, GDP growth averagedover 3½% per year between 1995 and 2007 andwas accompanied by robust job creation.A correction began in early 2007 and wasaccelerated by the international financial crisis.After seven quarters of negative growth, theeconomy started to stabilise in the course of 2010,partly due to a positive impulse from world trade.The economic recovery is set to continue and GDPis forecast to grow by 0.8% and 1.5% in 2011 and2012 respectively. Initially, economic growthshould be driven predominantly by externaldemand, while domestic demand is expected totake over this role by 2012. Assumed higher oilprices and interest rates have prompted some$changes in GDP growth projections compared tothe autumn 2010 forecast. Despite these negativeshocks, GDP growth has been upward revised for2011 because of even stronger exports. In contrast,these negative shocks have prompted a downwardrevision of GDP growth in 2012.

Spanish exports grew more strongly than expectedin 2010 and should continue to contributepositively to GDP growth going forward.Domestic demand is set to remain weak during2011 due to the significant deleveraging takingplace in all sectors of the economy. High privatesector imbalances have accumulated during thehousing boom. The sharp correction experiencedsince 2008 has prompted significant adjustments,including a reallocation of resources away fromthe construction sector, banking sectorrestructuring and consolidation, and a sharpincrease in the saving rate of private sector,leading to positive net lending capacity for bothhouseholds and firms. In addition, Spain hasembarked on an ambitious fiscal consolidationpath necessary to bring the public deficit back toa sustainable level. Domestic demand is forecast togain some momentum in 2012 on the back ofa gradual recovery of private investment andpositive, albeit weak, private consumption.

Slow recovery of domestic demand

Annual average growth in private consumptionturned positive in 2010, driven by some temporaryfactors, including a VAT increase in July, whichprompted households to advance their spending tothe first half of the year. Private consumption is setto remain subdued over the forecast horizon due toongoing deleveraging, moderate wage growth,lower growth of social transfers and benefits, highunemployment, and a projected increase in interestrates (given that 85% of outstanding mortgageloans have variable rates). However, lower jobdestruction than in 2010 and some increase inprivate sector wages will underpin moderategrowth in gross disposable income in 2011 and afurther increase in 2012. In addition, the savingrate of households is expected to fall over theforecast horizon to its long-term average of around11%, having jumped to 18% in 2009 as householdsembarked on a rebalancing process. This hike wascaused by households increasing theirprecautionary savings when faced with a very highrise of unemployment. In addition, householdstended to save the extra income from the fiscalstimulus. In contrast, temporarily higher inflationin 2011 will reduce real gross disposable income.In addition, a further decline in house prices is setto reduce households' wealth. All in all,households are expected to remain net lenders overthe forecast horizon.

Graph II.9.1: Spain - GDP growth andcontributions

-8-6-4-20

2468

06 07 08 09 10 11 12

Domestic demand InventoriesNet external demand GDP (y-o-y%)

forecast

pps.

Low average capacity utilisation (although withlarge differences across sectors), tight financingconditions and the still-high indebtedness of thecorporate sector, mainly related to the housingmarket, are weighing on investment growth.

Member States, Spain

Financing conditions for firms and households – interms of both the availability and the cost offinancing – continue to be tight and are set toremain a challenge in the medium term. This ispartly explained by the ongoing restructuring ofthe banking sector, including the consolidation ofthe savings banks, which should result in a moresound and resilient banking system and eventuallyease the current financing constraints. In addition,expected higher interest rates will put additionalupward pressure on financing costs for the privatesector over the forecast horizon. Nevertheless,investment is set to gradually improve and torecord positive growth rates in 2012. Thisimprovement is expected to come largely fromcorporate investment. In the last two years, privateinvestment has been driven, almost exclusively, byreplacement investment while net investmentaccounted for just 20% of total corporateinvestment. The stronger performance of theexport sector, mainly in 2011, and the betterbusiness environment in 2012 will improvecapacity utilisation, especially in export-orientedsectors. Also, the post-boom adjustment inresidential investment is forecast to run its courseduring 2012. Public investment, however, is notexpected to return to positive territory over theforecast horizon due to the ongoing fiscalconsolidation.

Strong export performance driving economicgrowth

Exports grew more strongly in 2010 than initiallyexpected, recording a particularly robustperformance in the last quarter. This trendcontinued in the first few months of this year andis expected to be sustained over the forecasthorizon, although at a more moderate pace. Therecovery in exports stems mainly from theeconomic recovery of Spain's main tradingpartners, growing trade with emerging economies,and some improvement in the competitiveness ofthe Spanish economy due to declining unit labourcosts.

Intermediate goods have been driving the strongexport performance so far and they are expected toplay a key role also in the future. In addition,tourism is expected to increase more strongly. Interms of geographical diversification, Spanishexports go mainly to other EU economies, whichaccount for over 70% of total exports. While thecontribution of extra-EU exports is still relativelylow, they increased substantially in 2010,

recording twice the rate of growth of intra-EUexports. The robust export performance may alsobe explained by the presence of more competitivefirms in the export sector as compared to the restof Spanish economy. These firms tend to be larger,more productive, and characterised by lower unitlabour costs. Furthermore, there is also somerecent evidence that weaker domestic demand iscausing some firms to switch from domestic toexternal markets, thus increasing the export base ofthe Spanish economy.

Graph II.9.2: Spain - Net external borrowing,GDP and GNI

90

110

130

150

170

190

04 05 06 07 08 09 10 11 120

2

4

6

8

10

12

Net external borrowing (rhs)GDP (lhs)GNI (lhs)

% of GDP

forecast

index 2000=100

Strong export growth combined with less dynamicimports, due to weak internal demand, resulted in adecrease in the trade and current-account deficits.While the adjustment of the external imbalance isexpected to continue, supported by strong externaldemand, the pace of adjustment will be reducedover the forecast horizon due to a higher energybill.

Unemployment remains high, whileemployment picks up by the end-2011

High unemployment will weigh on privateconsumption over the forecast horizon. Theunemployment rate has reached over 20% and isexpected to further increase in 2011 due toadditional job shedding. This forecast is subject toa high uncertainty given that the active populationis being influenced by two opposing forces (thediscouraged worker effect – mostly the youngworkers faced with a very high unemployment –and the additional worker effect – mostly womenentering the labour force either as an additionalearner or responding to a job loss in thehousehold). First signs of employment creation areexpected to appear no earlier than at the end of thisyear, in year-on-year terms, due to a gradualrecovery of the private sector, driven to some

109


extent by the positive spillovers from exportingfirms, and continued wage moderation.

Wages are expected to moderate by historicalstandards over the forecast horizon due to a wagecut followed by a wage freeze in the public sector,and relatively contained wage growth in theprivate sector. Recent labour-market reforms haveallowed some flexibility for firms to opt out of thecollective wage agreements and to introducechanges to working conditions (especially workinghours). Creating permanent jobs at a sufficientlyfast rate to absorb high unemployment is a keychallenge for the Spanish economy. In addition tohigh cyclical unemployment, resulting from theeconomic contraction during the crisis and stillweak economic growth during the recovery, thenumber of unemployed has also increased due tothe ongoing structural adjustment in theconstruction sector. In addition, higher rates oflong-term unemployment indicate an increase inthe structural component of unemployment.Moreover, Spain's labour market is still quitesegmented, with high levels of employmentprotection for permanent contracts and low levelsof job security for temporary workers. While thereform of the labour market of June 2010 aims toreduce this duality, changes will inevitably taketime.

Some wage moderation despite temporarilyhigher inflation

Higher inflation is expected in the first half of2011 due to higher oil prices and other temporaryfactors, including the July 2010 increase in VAT,higher duty on tobacco and higher administrativeprices (especially electricity). This will result in arelatively large divergence between headline (3%)and core (1.7%) inflation in 2011. Moreover, thedifferential with the euro area is expected to bepositive for processed food and energy. In thesecond half of 2011, prices are forecast to growmore slowly and inflation is expected to fall toaround 2% in December of this year and belowthat level in 2012.

Unlike previous years, despite temporarily higherinflation, aggregate wages are forecast to growmore moderately in 2011, mainly due to a wagecut in the public sector. That will lead to a secondyear of decline in unit labour costs (ULC).However, with somewhat higher wage growth in2012 and a decrease in productivity growth (due toa positive employment growth for the first time

since 2007) ULC are forecast to increase slightlyin 2012. All in all, ULC developments in Spainover the forecast horizon should lead to animprovement in Spain's competitive positionrelative to other euro-area countries.

Risks to the baseline scenario

The baseline scenario is subject to considerablerisks. As external demand remains an importantdriver of economic growth, any weakening ofexternal demand would have a negative impact onthe overall economic recovery. In addition,availability and the cost of financing for firms andhouseholds continue to be a possible risk in themedium term, although progress with therestructuring of banks has lowered the riskpremium on sovereign bonds. Further progresswith banking sector restructuring and fiscalconsolidation would boost confidence in theSpanish economy and improve access to, and thecost of, financing. There are also some additionalrisks on the domestic front. Further delays inemployment creation, due to more negativeperceptions on the strength and duration of theincipient recovery, would have repercussions forprivate consumption, hence weakening overalleconomic growth. Similarly, a higher-than-expected saving rate of households faced withpersistent high unemployment may also putadditional negative pressure on domestic demand.

Fiscal consolidation set to accelerate further

The frontloading of fiscal consolidation delivered asignificant correction of the budget balance. Thegeneral government deficit was 9.2% of GDP in2010, down from 11.1% in 2009, and slightlybelow the government target of 9.3% of GDP. Thesizeable reduction compared to 2009 was largelyachieved mainly through higher revenue fromtaxes on production and imports. In particular,VAT revenue surged, mainly due to the increase inVAT rates in mid-2010 and the effect of the 2009change in VAT returns. This modification of theVAT return system had trimmed down receipts in2009, which then grew significantly in 2010following the disappearance of this one-off effect.

The outcome for the different levels of governmentin relation to their targets has been uneven and thenotable over-performance at central governmentlevel offset other slippages, mainly by the socialsecurity system and regional governments (9 out of

110

Member States, Spain

17 autonomous communities breached the budgetdeficit target of 2.4% of GDP).

Graph II.9.3: Spain - Public finances,moving averages

20

30

40

50

60

70

80

04 05 06 07 08 09 10 1112

% of GDP

Debt Revenues Expenditures

forecast

In 2011, fiscal consolidation is set to acceleratefurther. The government deficit is forecast at 6¼%of GDP, slightly above the government projection,due mainly to a less favourable macroeconomicscenario. Total revenues are set to rise by 4¼% in2011, helped by revenue-increasing fiscalmeasures in both direct and indirect taxation –such as the increases in VAT rates introduced inmid-2010 – and in excise duties. Total expenditureis expected to decline by close to 3%, implyingthat it will also shrink as a percentage of GDP.

This is underpinned by a number of discretionarymeasures formally adopted in the 2011 budget.These include a freeze in public sector wages andreductions in public investment, which areaccompanied by the phasing out of the 2010stimulus package of around 0.5% of GDP.Achieving the planned expenditure restraint in2011 will also depend on full compliance withtargets by the regional governments.

Based on the unchanged-policy assumption, the2012 budget deficit is forecast to reach 5¼% ofGDP. Amid still-high public deficits and low GDPgrowth, government debt is set to increase from60.1% of GDP at the end of 2010 to 71% of GDPin 2012.

Table II.9.1:Main features of country forecast - SPAIN


GDP 1053.9 100.0 3.1 3.6 0.9 -3.7 -0.1 0.8 1.5Private consumption 596.4 56.6 3.0 3.7 -0.6 -4.2 1.2 0.8 1.1Public consumption 222.8 21.1 3.7 5.5 5.8 3.2 -0.7 -1.4 -0.3Gross fixed capital formation 253.0 24.0 4.3 4.5 -4.8 -16.0 -7.6 -3.4 1.8of which : equipment 59.7 5.7 4.6 10.4 -2.5 -24.8 1.8 3.1 4.4Exports (goods and services) 246.4 23.4 7.6 6.7 -1.1 -11.6 10.3 7.0 5.8Imports (goods and services) 269.0 25.5 8.4 8.0 -5.3 -17.8 5.4 1.7 3.8GNI (GDP deflator) 1029.5 97.7 3.0 2.9 0.4 -3.3 0.9 0.5 1.3Contribution to GDP growth : Domestic demand 3.5 4.5 -0.7 -6.4 -1.3 -0.6 1.0

Inventories 0.0 -0.1 0.1 0.0 0.1 0.0 0.0Net exports -0.4 -0.8 1.5 2.7 1.0 1.4 0.5

Employment 2.2 2.8 -0.5 -6.6 -2.4 -0.6 0.9Unemployment rate (a) 13.7 8.3 11.3 18.0 20.1 20.6 20.2Compensation of employees/f.t.e. 4.0 4.8 6.4 4.1 0.7 0.9 1.2Unit labour costs whole economy 3.1 4.0 4.9 1.0 -1.5 -0.4 0.6Real unit labour costs -0.8 0.7 2.4 0.4 -2.5 -1.5 -0.5Savings rate of households (b) - 10.7 13.4 18.0 13.1 11.0 11.0GDP deflator 4.0 3.3 2.4 0.6 1.0 1.0 1.1Harmonised index of consumer prices - 2.8 4.1 -0.2 2.0 3.0 1.4Terms of trade of goods 0.4 0.1 -2.3 4.1 -4.2 -3.2 -0.8Trade balance (c) -4.8 -8.6 -7.8 -4.2 -4.4 -4.2 -4.0Current-account balance (c) -3.3 -10.0 -9.6 -5.5 -4.5 -4.1 -4.1Net lending(+) or borrowing(-) vis-à-vis ROW (c) -2.4 -9.6 -9.2 -5.1 -3.9 -3.6 -3.5General government balance (c) -2.4 1.9 -4.2 -11.1 -9.2 -6.3 -5.3Cyclically-adjusted budget balance (c) -2.3 1.3 -4.1 -9.2 -7.0 -4.3 -3.9Structural budget balance (c) - 1.3 -3.8 -8.6 -7.0 -4.3 -3.9General government gross debt (c) 55.4 36.1 39.8 53.3 60.1 68.1 71.0


111

10. FRANCEContinued recovery increasingly supported by investment

112

Recovery throughout 2010: stable pace,changing nature

France came out of the recession in the secondquarter of 2009, and the economy recoveredfurther in 2010, with GDP growing on average by1.6%, at a rather stable pace across quarters.However, the composition of growth changedsubstantially in the course of the year: privateconsumption accelerated markedly during the finalphase of the government's recovery plan, whichsupported purchasing power and households'consumption, including through one-off socialtransfers and a car scrapping premium. Investmentgrowth turned positive in the second quarter after astrong and long correction, against the backgroundof a progressive stabilisation in the constructionsector. External trade and inventories proveduneven, broadly offsetting each other:contributions to growth were positive for netexports and negative for inventories in the first andfourth quarters, and vice-versa for the second andthird quarters. This can be potentially explained bythe importing and subsequent destocking of someequipment goods.

Overall, in spite of the recovery, the expectedclosure of the destocking cycle has notmaterialised yet; nevertheless the pick-up in worlddemand has resulted in a positive contribution ofnet exports to growth for the first time in ten years.Moreover, unemployment has started to decrease,albeit only slightly. The contraction ofemployment in industry and construction was onlyone third as large as its expansion in the servicessector, half of which was due to short-timecontracts. Subsidised employment increased, but ata much slower pace than in 2009. The impact onthe economy of the autumn 2010 strikes againstthe pension reform has been marginal: less than0.1% of GDP, mostly linked to lower energyproduction and exports. While adverse weatherconditions in the last quarter contributed to aslowdown in the construction sector, they alsoboosted heating expenses.

Looking forward, some of the features of theFrench economy, which have allowed the countryto perform much better than the euro-area averageduring the crisis, are expected to remain assets,like the resilience of private consumption (withsubstantial buffers due to historically high savings

rates, and a dynamic demography). Nevertheless,other features could moderate the recovery: therelatively large automatic stabilisers, the rather lowdegree of openness of the economy, and thelimited size of the manufacturing sector. Thisexplains why economic growth in 2010 laggedbehind levels recorded in those member states withmore open and manufacturing-based economies.

Inflationary pressures under control

Core inflation is set to accelerate only mildly, fromaround 1% in 2011 to close to 1½% in 2012. Theunemployment level, which stood at 9.5% inMarch, is expected to decrease by only 1/4 pp. ayear over the forecast period. Another factorlimiting the likelihood of intense wage bargainingis the new framework for the minimum-wagesetting procedure, which has put an end to thepractice of discretionary hikes on top of the legalindexation. This is expected to anchor wageexpectations downwards, given the high share ofemployees paid the minimum wage or onlyslightly above.

The headline HICP (2.2% in 2011) is forecast tostay below levels recorded in some peer countries,due to historically lower contributions of energy toHICP inflation, coupled with the absence of anyshort-term debate on the energy mix. Moreover, atthis stage no significant hikes have been plannedfor consumption taxes or administered prices. Suchdecisions seem particularly unlikely until the nextelectoral round (mid-2012), as recently shown bythe cancellation of a gas price increase. However,in the medium-run, the convergence of some prices(e. g. electricity) towards market levels could havesome inflationary impact. The current forecastassumes that most of this adjustment takes placeafter 2012.

Growth acceleration still based on domesticdemand, but rebalancing towards investment

Economic growth is forecast to accelerate at amoderate pace, from 1.6% in 2010 to 1.8% in 2011and 2.0% in 2012. It would still be driven bydomestic demand. However, given the unsteadyconfidence of private households, as opposed topositive business surveys, some internalrebalancing of domestic demand towardsinvestment is expected. This acceleration of

Member States, France

investment is set to improve employmentprospects, notably with fewer job destructions inindustry, and a gradual return to job creation in theconstruction sector. At the same time, the recentgeneral pension reform and cancellation ofexemptions to the job search obligation areassumed to boost the active population. All in all,the expected improvement of employmentprospects, coupled with disinflation, is in turn setto support a moderate acceleration of privateconsumption in 2012.

Graph II.10.1: France - GDP growth andcontributions

-4-3

-2-10

123

45

04 05 06 07 08 09 10 11 12Domestic demand Net exportsGDP growth (y-o-y%)

pps.

forecast

Private consumption: resilience in spite ofinflationary pressures and fiscal consolidation

The pace of private consumption growth isexpected to remain broadly stable, with a moderateacceleration in 2012. The substantial increaserecorded in the last quarter of 2010 (linked to theend of the car-scrapping premium) implies astrongly positive base effect in 2011. Moreover, inthe first quarter, the car-scrapping premium is stillexpected to support consumption, albeit to a lesserextent, due to the average delay between the ordersand the corresponding deliveries. The negativeafter-effect of the premium is forecast tomaterialise in the second quarter of 2011, hence aslight decrease in private consumption for thisquarter. As weather conditions have normalisedcompared to the very cold last quarter of 2010,energy consumption is set to decrease in early2011.

Looking at private consumption in year 2011 as awhole, the positive impact of employment growthis expected to be offset by inflationary pressures,the withdrawal of the recovery plan, andproportionally increasing tax payments (partly dueto the reduction in tax spending). In this context,and against the background of limited wage-

bargaining opportunities, real disposable income isforecast to slow down in 2011. However, thehouseholds' savings rate is expected to decrease, asit reached historically high levels during the crisisowing to precautionary savings. Consequently, nosignificant slowdown of private consumption isexpected to occur in 2011.

As for 2012, consumption is supported by theacceleration of real disposable income, thanks todisinflation coupled with higher nominal increasesin wages and non-labour income, which more thancompensate for the effect of a moderate rebound inthe savings rate.

Investment and stocks set to be major growthdrivers

Composite business climate indexes are abovetheir long-term averages and increasing,suggesting a continued pace of expansion for thecoming quarters.

An acceleration of gross fixed capital formation istherefore expected. Capacity utilisation rates arestill slightly below their long-term averages, butrapidly increasing, and bottlenecks will becomemore likely. French firms anticipate strongerdemand, and are set to adapt their supplycapacities accordingly (notably through purchasesof equipment goods). Moreover, they are expectedto complete projects put on hold during the crisis,while financing conditions stay rather favourable.The reform of the local business tax, excludingproductive assets from the tax base, is also likelyto support investment. However, as financingconditions are forecast to become tighter,manufacturing investment is forecast not toaccelerate further in 2012, unlike constructioninvestment, which is set to recover markedly onlyin 2012. This lagged upswing in the constructionsector should be seen against the background of arecent increase of building permits, and low stocklevels. A catch-up of public works is also likely,owing to the electoral cycle at the local level.

Together with this expected increase ininvestment, destocking is expected to slow downmarkedly, in line with what has been alreadyobserved in some other advanced economies(whereas in France the destocking cycle has beenof unusual duration and magnitude). The negativecontribution of inventories to growth reachedalmost 2% of GDP in 2009, after a first negativecontribution in 2008 (-0.3% of GDP), and no

113


significant upward contribution in 2010, due to asharp destocking in the last quarter. Businesssurveys show that inventory levels are nowassessed as low, whereas order books are fillingup. Consequently, inventories are forecast tocontribute positively to growth in 2011 (in spite ofa negative base effect), and even more in 2012.

External trade: stabilisation in sight, at last

A striking trend in past years - even before thecrisis - has been the constant erosion of exportmarket shares. These market shares are expected tostabilise over the forecast period, as the absence ofstrong second round inflationary effects allowsmoderate increases in unit labour costs, of around1% a year. Non-price competitiveness is likely tobenefit somewhat from recent measures aiming atfostering innovation and research. In 2011, foreigndemand is set to be driven by a rebound in importsfrom the US and Germany.

However, the contribution of external trade toGDP growth is set to remain negative: foreigndemand addressed to France (the pace of which isbroadly stable over the forecast period) isprojected to be less dynamic than imports, whichare driven by solid domestic demand acceleratingin 2012. Against this background, the tradebalance is set to deteriorate further in 2012.Overall, the current external deficit is expected towiden to more than 4% of GDP at the end of theforecast period.

Risks to the forecast are broadly balanced

Upside risks are mainly linked to the contributionof inventories to growth: although this contributionis projected to be positive, the assumption is onlyfor a marked slowdown of destocking, not arebuilding of previous stock levels.

There are upside as well as downside risksconcerning the decrease assumed for thehouseholds' savings rate in 2011, depending ondevelopments in the financial markets and fiscalconsolidation, and their consequences andperception by households.

Other downside risks are linked to the recentevents in Japan: the structure of French foreigntrade shows a relatively small exposure, but theimpact of this crisis may materialise through otherchannels, in view of the importance of Japanesesupplies for certain production processes. For

instance, the relatively large French automobilesector could be hit by significant shortages ofcomponents.

Consolidation year zero

The recovering macroeconomic environment wasaccompanied by a decrease in the generalgovernment deficit, which reached 7% of GDP in2010, down from 7½% in 2009. The balance ofdiscretionary measures in 2010 is slightly positive(by around ¼% of GDP) and therefore contributedto this improvement: the positive impact of thephasing-out of the recovery plan (some ¾% ofGDP) more than offset the new expansionarymeasures adopted in the 2010 budget, whichincluded the reform of the local business tax (-½%of GDP) and reduced VAT in the catering sector (-0.1% of GDP). In addition, exceptional factorsplayed a role, notably dividends from state-ownedenterprises (around 0.1% of GDP).

Graph II.10.2: France - Public finances

0

2

4

6

8

10

04 05 06 07 08 09 10 11 12

% of GDP

50

60

70

80

90

100% of GDP

General government debt (rhs)General government deficit (lhs)Deficit threshold (3%)Debt threshold (60%)

forecast

The deficit is foreseen to improve in 2011 toaround 5¾% of GDP, broadly in line with theofficial forecast contained in the latest update ofthe Stability Programme. The improvement isbased on the budgetary retrenchment presented bythe authorities in the Draft Budget for 2011. Thesemeasures consist mainly of tax increases and areexpected to increase the tax burden by ¾% ofGDP, to around 43½%, among the highest in theeuro area and EU. On the expenditure side, thephasing out of the remaining measures of therecovery plan, together with the implementation ofthe RGPP (General Review of Public Policies) andthe recently adopted reform of the pension system,would improve the deficit by around ½% of GDP.Those steps would more than offset the budgetaryimpact of the public investments related to the

114

Member States, France

Table II.10.1:Main features of country forecast - FRANCE


GDP 1907.1 100.0 2.0 2.4 0.2 -2.6 1.6 1.8 2.0Private consumption 1112.8 58.3 2.1 2.6 0.5 0.6 1.7 1.6 1.8Public consumption 469.8 24.6 1.5 1.5 1.7 2.7 1.4 0.6 0.3Gross fixed capital formation 392.1 20.6 2.2 6.0 0.5 -7.1 -1.4 3.4 5.0of which : equipment 99.3 5.2 3.1 9.1 3.5 -9.6 4.1 7.0 7.0Exports (goods and services) 439.6 23.0 5.2 2.5 -0.5 -12.4 10.5 6.7 6.6Imports (goods and services) 476.6 25.0 5.3 5.6 0.6 -10.7 8.2 6.8 7.5GNI (GDP deflator) 1922.8 100.8 2.0 2.6 0.1 -2.8 1.5 1.8 2.1Contribution to GDP growth : Domestic demand 1.9 3.1 0.8 -0.6 1.0 1.8 2.1

Inventories 0.0 0.2 -0.3 -1.9 0.2 0.2 0.4Net exports 0.0 -0.9 -0.3 -0.2 0.4 -0.2 -0.4

Employment 0.6 1.6 0.7 -1.2 0.1 0.8 0.9Unemployment rate (a) 10.0 8.4 7.8 9.5 9.7 9.5 9.2Compensation of employees/f.t.e. 2.7 2.3 2.4 1.6 2.3 2.0 2.3Unit labour costs whole economy 1.3 1.5 2.9 3.0 0.8 1.1 1.1Real unit labour costs -0.3 -1.0 0.3 2.5 0.3 -0.7 -0.8Savings rate of households (b) 15.3 15.2 15.1 16.0 15.9 15.3 15.7GDP deflator 1.6 2.5 2.6 0.5 0.5 1.8 1.8Harmonised index of consumer prices 1.8 1.6 3.2 0.1 1.7 2.2 1.7Terms of trade of goods 0.0 1.5 -1.2 2.3 -3.5 -1.3 0.9Trade balance (c) 0.4 -2.1 -2.8 -2.2 -2.6 -3.1 -3.3Current-account balance (c) 0.6 -2.2 -2.7 -2.9 -3.5 -3.9 -4.2Net lending(+) or borrowing(-) vis-à-vis ROW (c) 0.6 -2.1 -2.7 -2.8 -3.2 -2.9 -2.9General government balance (c) -3.4 -2.7 -3.3 -7.5 -7.0 -5.8 -5.3Cyclically-adjusted budget balance (c) -3.7 -3.7 -3.4 -5.6 -5.1 -3.9 -3.7Structural budget balance (c) - -3.8 -3.5 -5.6 -4.9 -3.9 -3.7General government gross debt (c) 57.1 63.9 67.7 78.3 81.7 84.7 86.8


115

"Investissements d'avenir" programme, worseningthe 2011 deficit by around 0.1% of GDP.

The general government deficit is expected tocontinue to decrease in 2012, albeit only slightly,reaching approximately 5¼% of GDP. Theincrease in social benefits is set to deceleratethanks to the economic recovery and theimprovement of the labour market. Newdiscretionary measures with an impact in 2012,including the reform of the pension system, arealso expected to contribute to lowering the deficit.This deficit projection is still significantly abovethe government’s target of 4.6% of GDP includedin the latest update of the Stability Programme.Possible additional measures that may support theimprovement of the 2012 deficit projected by theFrench authorities still need to be further specifiedand could therefore not be taken into account atthis stage. In addition, the French authoritiesanticipate a more favourable economicenvironment in 2012 than that in this forecast.

The debt ratio is expected to continuously rise overthe forecast horizon, close to 90% of GDP in 2012.This rise is related to the still high expecteddeficits. The "Investissements d'avenir"programme should increase the generalgovernment debt by around ¼% of GDP in 2011and 2012. The increase in debt-service

requirements could crowd out more productiveexpenditure necessary to further stimulate growth.

The consolidation strategy announced by theFrench authorities is backed by some structuralreforms, targeting the long-term sustainability ofpublic finances and the overall budgetaryframework. The reform of the pension systemincludes a gradual raising of the minimumretirement age from 60 to 62. As for the budgetaryframework, the French authorities have announcedmeasures aiming at better monitoring and reachingthe objective set for the evolution of healthcarespending. In addition, a constitutional reform hasbeen announced; this notably introduces bindingmultiannual budget planning. For each year, thislays down a minimum level of fiscal receipts,together with a maximum growth rate of publicexpenditure, in volume terms. Each year, theannual central government and social securitybudgets will set targets on both the revenue and theexpenditure side in line with those presented in themultiannual budget planning; otherwise theConstitutional Court would not enforce them. Still,local authorities, benefiting from a constitutionalautonomy regarding their budgets, would not beconstrained by this multiannual budget planning,therefore potentially limiting the impact of thereform. This constitutional reform still needs to beadopted by the Congress.

11. ITALYSlow recovery continues

116

A moderate recovery under way

Italy is experiencing a moderate recovery after thesevere output loss recorded during the 2008-09crisis. Over the forecast horizon, real GDP is notexpected to accelerate as long-standing structuralweaknesses are set to continue weighing on Italy'seconomic growth prospects.

In 2010 as a whole, real GDP expanded by 1.3%.In quarterly terms, real GDP growth reached 0.5%in the first two quarters and then eased to 0.3% and0.1% in the two subsequent quarters.

A strong expansion of external demand,particularly in the first half of the year, generateda rebound in export volumes, which led therecovery. Together with tax incentives that expiredin June, external demand also supportedinvestment in equipment. But investment inconstruction continued to decline in 2010 due tothe protracted weakness of the property market anda strong contraction in government capitalspending.

Exports of goods grew significantly faster thanexports of services. However, driven by the upturnin investment in equipment and the significantupswing in stockbuilding, merchandise imports,especially of intermediate goods, outpaced exports.As a result, net exports provided a negativecontribution to real GDP growth in 2010.

Despite improved financial market conditions,private consumption dynamics were mutedthroughout 2010 also due to a still-fragile labour-market situation. While overall privateconsumption rose compared to 2009, expenditureon durable goods, which until the end of 2009 hadbenefited from tax incentives to buy energy-efficient goods, declined.

Exports to be the main growth driver also in2011-12

Real GDP is expected to grow by 1.0% in 2011and 1.3% in 2012, around ½ pp. below theeuro-area average in each year. In quarterly terms,real GDP growth is forecast to be modest in thefirst quarter of 2011 and accelerate thereafter, toaround 0.3-0.4% q-o-q until the end of 2012.

Supported by sustained external demand, exportsare set to continue driving the recovery in 2011-12.Although there is evidence of a gradual shift intheir geographical orientation towards fast-growing emerging markets, Italian exports are stillmainly dependent on demand prospects ineuro-area partners. Export growth rates are thus setto remain below those of global demand. Asimports are forecast to grow slightly less thanexports in 2011-12, on the back of slow domesticdemand dynamics, net exports are projected tomake a small positive contribution to real GDPgrowth in both years.

External demand is expected to continuesupporting investment in equipment, which willalso benefit from improved profitability. At thesame time, however, still low levels of capacityutilisation in industry and the need for furtherbalance-sheet adjustment, notably within small andmedium-sized enterprises, will limit the scope fornew investment.

Investment in construction is projected to continuecontracting in 2011 and return to modest positivegrowth only in 2012. While investment inresidential building is expected to pick up ashousing market conditions improve, governmentinvestment spending is set to continue decliningover the forecast horizon as part of the budgetaryconsolidation strategy.

Private consumption growth is forecast to remainmoderate in 2011-12, as labour market conditionsare expected to improve only gradually and higherinflationary pressures are set to dampen theincrease in real disposable income.

Risks to the outlook for the Italian economy appearsomewhat tilted to the downside. In particular,inflation could prove higher than anticipated due tothe effects of the ongoing geopolitical tensions inthe MENA region on energy prices, with negativespillovers mainly on private consumption.Moreover, a more marked rise in interest rates thancurrently assumed by financial markets couldadversely affect firms' investment decisions.

A mild recovery in headcount employment

In 2010, employment declined further, although byless than in 2009. Over 2009-10, the negative

Member States, Italy

impact of the crisis was more pronounced on full-time equivalent than on headcount employment (incumulative terms -3.6% as against -2.3%) becausefirms chose to hoard labour through the wagesupplementation scheme (CIG), wherebyemployees stop working or reduce hours workedbut keep their job at reduced pay. Throughout thecrisis, requests to access this scheme rose steadily.However, the composition shifted from ordinaryCIG benefits to special ones under an extendedCIG scheme covering longer inactivity spells andworkers otherwise ineligible by reason of sector,firm size or type of employment contract.

Over the forecast horizon, firms – in particular inmanufacturing – are expected to reabsorbemployees benefiting from the CIG scheme beforestarting to hire new workers. Therefore, thegradual recovery in output is assumed to translatefirst into an expansion of hours worked and only ata later stage in additional headcount employment,which is set to start rising marginally in 2011 andaccelerate somewhat in 2012.

Graph II.11.1: Italy - Employment developments

99

100

101

102

103

104

105

03 04 05 06 07 08 09 10 11 12

index2003=100

Full-time equivalent Hours worked Persons

forecast

Reflecting the moderate decline in headcountemployment and a shrinking labour supply inresponse to depressed labour market conditions,the unemployment rate increased only graduallyover 2009-10, stabilising at around 8½% at the endof 2010. However, the youth unemployment raterose by more than 6 pps. over the same period,exceeding 28% in the first months of 2011. Alsolong-term unemployment(77) as a share of totalunemployment soared by over 4 pps. in 2010, to48.5%. Over the forecast period, the totalunemployment rate is set to remain above 8% onaccount of the modest recovery in headcountemployment.

(77) People having sought a job for more than 12 months.

As in 2009 the contraction in real GDP was muchsharper than the fall in employment, the decline inlabour productivity already under way since 2008intensified. In 2010 further job losses, togetherwith the moderate GDP recovery, implieda rebound in productivity. As labour marketconditions are expected to improve slowly,productivity is forecast to rise mildly in 2011-12,in line with its pre-crisis trend.

Beyond the increases in contractual wages in linewith projected HICP inflation excluding importedenergy, as foreseen in the reformedwage-bargaining framework, weak labour-marketconditions and productivity developments arepoised to leave little scope for additional wageincreases at the level of firms or sectors. Asa result, after remaining broadly constant in 2010,unit labour costs are expected to increase onlymoderately in 2011-12. The projected evolution ofunit labour costs over the forecast horizon,however, would not be sufficient to allow Italy toregain competitiveness vis-à-vis the rest of theeuro area.

Energy prices drive inflation up in 2011

After a sizeable decline in 2009, HICP inflationincreased to 1.6% on average in 2010. Theacceleration of prices in the last quarter of 2010was mainly due to the dynamics of the energycomponent, amplified by a low base effect from2009.

In 2011, mainly due to significantly higher energyprices, inflation is expected to continue increasingin the first half of the year and reach 2.6% onaverage, in line with the euro-area average. Nomajor second-round effects from highercommodity prices are expected, thanks tostill-weak demand and the inflation benchmark ofthe reformed wage-bargaining framework. Asa consequence, core inflation is set to rise moremildly (1.8%, up from 1.5% in 2010). In 2012, asoil prices are expected to stabilise, the energycomponent of the HICP is set to deceleratesignificantly and both headline and core inflationare forecast at 1.9%.

As the Italian economy is highly dependent onimported energy, the marked rise in import pricesworsened the terms of trade and led to a significantdeterioration in the trade balance and thus in theexternal deficit in 2010. According to nationalaccounts data, the external deficit reached around

117


3% of GDP in 2009 and 4¼% in 2010. Accordingto recent balance-of-payments figures calculatedby the Bank of Italy, the external deficit isestimated to be around ¾% of GDP lower in bothyears, due to a smaller deficit in the balance ofprimary income. External balance projections for2011-12 incorporate the revised primary incomestatistics.(78) Over the forecast horizon, the externaldeficit is forecast to remain between 3¼% and3½% of GDP.

Fiscal consolidation gains traction

After deteriorating in 2008-09 largely due to theeffect of automatic stabilisers, the situation ofItaly's public finances improved in 2010. Thegeneral government deficit narrowed to 4.6% ofGDP in 2010, from 5.4% in 2009, mainly thanks toa decline in expenditure, and the primary balanceremained only marginally negative.

Consolidation measures adopted in previous yearshelped to curb capital and current spending in2010. As a share of GDP, current primaryexpenditure decreased by over 1 pp. Regarding thewage bill, very moderate increases in contractualpublic wages were granted, although some arrearswere paid, while constraints to recruitment broughtabout a decline in payroll numbers. Governmentconsumption for health services was kept in checkalso by measures to reduce the cost ofpharmaceutical products. Social transfers rose onlymarginally as a share of GDP since pensionexpenditure reflected indexation to a subdued 2009inflation rate, while transfers to the unemployedremained elevated, in particular due to thosegranted on an ad hoc basis through the extensionof the CIG scheme. Interest expenditure fell further(to 4.5% of GDP) due to historically lowshort-term interest rates. Capital spending declinedsubstantially in 2010 given the temporary impactof some recovery measures adopted in 2009. Asa result, total expenditure fell by around 0.5%y-o-y and 1¼ pps. of GDP, to 50.6%.

Revenues declined by around ½ pp. of GDP in2010, to 46.0%. Capital taxes were more thanhalved in 2010, mostly due to the scaling back ofone-off measures. By contrast, current taxrevenues rose by around ¼ pp. of GDP thanks tothe recovery in indirect taxes, also supported bythe larger-than-anticipated proceeds of a measure

(78) This creates a break in the series in 2011. The balance ofpayments figures are expected to be incorporated in revisednational accounts data later in 2011.

adopted in 2009 that prohibits the offsetting of taxdues with unaudited tax credits aboveEUR 15 000. Direct taxes were broadly flat interms of GDP, with positive developments inpersonal income taxes – also boosted by a deferredtax payment from 2009 – and some recovery incorporate taxes. In contrast, withholding taxes paidby households on bank deposit interests plunged.

The deficit is expected to continue declining overthe forecast horizon, by around ½ pp. of GDP in2011 and a further ¾ pp. in 2012. This outlookincorporates the multi-annual consolidationpackages covering 2011 and 2012 in place, butwith a more cautious assessment of theeffectiveness of some of the measures to combattax evasion and a smaller decline in capitalexpenditure.

In 2011, current primary expenditure is again set togrow less than nominal GDP. The ½ pp. of GDPfall from 2010 is almost entirely due tocompensation of employees, which is affected by afreeze of nominal wages to their 2010 levels,accompanied by further restrictions on recruitment.Intermediate consumption is set to grow modestlyin 2011, as strict limits on transfers to regional andlocal governments are assumed to curtail theirpurchases of goods and services. Social transfersare expected to increase in line with nominal GDPgrowth, as access to retirement has been postponedby several months while outlays related to theweak labour market are set to decrease. Capitalspending is expected to drop by almost ½ pp. ofGDP, with half of this fall explained by theplanned sale of broadband licences, recorded asone-off disposal of government assets. Interestexpenditure is anticipated to start growing again asa share of GDP. Overall, total expenditure is set todecline to around 50% of GDP in 2011.

Revenues from current taxes are projected toincrease broadly in line with nominal GDP in2011, essentially thanks to indirect tax proceeds,while direct taxes are negatively affected by thepostponement of some personal income taxpayments to 2012. Capital revenues are expectedto continue falling, mainly due to fading one-offcapital tax proceeds. Total revenues are set toremain stable as a share of GDP.

As a result, the primary balance is projected toreturn to surplus in 2011, at around ¾% of GDP,whereas the headline deficit is expected todecrease to 4% of GDP. In 2012, the deficit is set

118

Member States, Italy

to decline further, to 3.2% of GDP, and theprimary surplus to expand to almost 2% of GDP.After improving by ¾ pp. of GDP in 2010, thestructural deficit is expected to narrow by aboutthe same amount over the rest of the forecasthorizon.

Table II.11.1:Main features of country forecast - ITALY


GDP 1519.7 100.0 1.4 1.5 -1.3 -5.2 1.3 1.0 1.3Private consumption 912.3 60.0 1.3 1.1 -0.8 -1.8 1.0 0.6 1.1Public consumption 326.2 21.5 0.8 0.9 0.5 1.0 -0.6 -0.4 0.1Gross fixed capital formation 289.7 19.1 1.5 1.7 -3.8 -11.9 2.5 2.2 3.1of which : equipment 121.2 8.0 2.2 3.1 -5.0 -16.3 10.5 5.1 4.7Exports (goods and services) 362.4 23.8 4.4 4.6 -4.3 -18.4 9.1 6.0 5.7Imports (goods and services) 368.7 24.3 3.9 3.8 -4.4 -13.7 10.5 4.6 5.1GNI (GDP deflator) 1496.9 98.5 1.5 1.0 -2.2 -5.2 1.5 1.7 1.3Contribution to GDP growth : Domestic demand 1.2 1.2 -1.2 -3.3 0.9 0.7 1.3

Inventories 0.1 0.1 -0.2 -0.6 0.7 -0.1 -0.1Net exports 0.1 0.2 0.0 -1.3 -0.4 0.3 0.1

Employment 0.3 1.0 -0.4 -2.6 -0.7 0.4 0.9Unemployment rate (a) 9.6 6.1 6.7 7.8 8.4 8.4 8.2Compensation of employees/f.t.e. 3.3 2.4 3.8 1.5 2.0 1.5 1.8Unit labour costs whole economy 2.3 1.9 4.8 4.3 0.0 0.9 1.3Real unit labour costs -0.8 -0.7 2.0 2.0 -0.6 -0.7 -0.5Savings rate of households (b) 18.6 14.8 15.2 14.9 13.4 13.2 13.1GDP deflator 3.1 2.6 2.8 2.3 0.6 1.6 1.8Harmonised index of consumer prices 3.0 2.0 3.5 0.8 1.6 2.6 1.9Terms of trade of goods -0.4 1.5 -2.9 8.0 -3.0 -1.9 0.5Trade balance (c) 1.7 0.2 -0.1 0.1 -1.3 -1.5 -1.3Current-account balance (c) (d) 0.4 -1.8 -3.2 -3.0 -4.2 -3.5 -3.3Net lending(+) or borrowing(-) vis-à-vis ROW (c) (d) 0.5 -1.7 -3.2 -2.9 -4.2 -3.5 -3.2General government balance (c) -4.7 -1.5 -2.7 -5.4 -4.6 -4.0 -3.2Cyclically-adjusted budget balance (c) -4.9 -3.0 -3.2 -3.2 -2.9 -2.6 -2.2Structural budget balance (c) - -3.1 -3.4 -3.9 -3.1 -2.7 -2.3General government gross debt (c) 111.8 103.6 106.3 116.1 119.0 120.3 119.8

(a) Eurostat definition. (b) gross saving divided by gross disposable income. (c) as a percentage of GDP.(d) Break in the series in 2011 as the forecast incorporates the recent revision of Italy's balance of payments

made by the Bank of Italy that is not yet reflected in historical National Account data.

119

Graph II.11.2: Italy - Drivers of debtdevelopments

-6

-4-2

0

2

46

8

10

04 05 06 07 08 09 10 11 12Annual change in debt-to-GDP ratioPrimary balance % of GDP - inverted signImpact of implicit interest rate minus nominal GDP growthStock-flow adjustment % of GDP

forecast

In 2012, current primary expenditure is projectedto increase by 1¼% relative to 2011, resulting in adrop of ¾ pp. of GDP. Compensation ofemployees is set to remain constant in nominalterms, while intermediate consumption is assumedto continue increasing at a moderate pace. Capitalspending is expected to be held back mainly by the

protracted restraint in local spending. Interestexpenditure is set to increase further, to 5.1% ofGDP.

Current revenues are expected to rise slightly morethan nominal GDP in 2012, thanks in part to theabove-mentioned postponement of personalincome tax payments, whereas capital revenues areset to recover some of the previous years' losses.

Gross government debt as a share of GDP rose bya further 3 pps. in 2010, to 119%. The impact ofthe difference between the implicit interest ratepaid on debt and nominal GDP growth – theso-called snowball effect – was the maincontributor, together with the further accumulationof liquidity held by the Treasury with the Bank ofItaly and loans to Greece, affecting the stock-flowadjustment. The debt ratio is set to peak at around120¼% of GDP in 2011 and then decline thanks tothe increasing primary surplus.

12. CYPRUSImbalances weighing on the economic recovery

120

Moderate and rebalanced recovery in 2010…

The Cypriot economy exited the recession in thefirst half of 2010, with growth recovering ata stable pace throughout the year. Annual GDPgrowth averaged 1%.

Domestic demand (excl. inventories), hitherto thekey driver of growth, continued to shrink, albeit ata slower pace than in the previous year. Despitetighter lending and adverse labour-marketconditions, private consumption picked upmoderately, on the back of continued wage growthand somewhat improved confidence. Publicconsumption also supported growth. Nevertheless,with lacklustre foreign demand for housing and therestructuring of corporate balance sheets,investment remained on a downward path.Inventory accumulation provided a considerablepositive impulse to economic activity, after thelarge destocking that took place in 2009.

Graph II.12.1: Cyprus - GDP growth andcontributions

-9

-6

-3

0

3

6

9

12

04 05 06 07 08 09 10 11 12


pps.

forecast

On the other hand, the improvement in the externalenvironment also led to significant growth inexports of goods. Tourism receipts posted a mildrecovery after a strong decline in 2009. Moreover,financial intermediation and business servicescontinued to grow solidly. Inventory build-up andone-off factors, such as the import of buses andother equipment, led to growing imports, aftera significant correction during the previous year.

The downward adjustment of the labour marketcontinued in 2010 also, with the impactconcentrated in labour-intensive sectors such asconstruction and trade. The unemployment rate

remained on a rising trend, averaging 6.5%, upfrom 5.3% in 2009.

…is expected to continue in 2011, gainmomentum in 2012…

The recovery of economic activity is projected tocontinue into 2011 and to gain momentum in 2012.During this period, the contribution of the externalsector in growth composition is set to gain ground.Exports of goods and services, mainly financialand business services, should pick up in line with arebound in global trade and an improved outlookin Cyprus' main trading partners. Also, tourism isexpected to benefit from political developments inother competing Mediterranean destinations.Imports are projected to recover and to resumegrowth in line with domestic demand. The lattershould expand moderately, driven by recoveringprivate consumption, on the back of an improvinglabour market outlook and continued wage growth.However, weak foreign and domestic demand forhousing is likely to continue to weigh on theconstruction sector. Although construction otherthan housing, such as infrastructure projects,should support investment, this would not besufficient to fully offset the impact of the fall inhousing demand on total construction investment.Investment in equipment is also projected toremain on a downward trend.

The strengthening economic outlook is expected tobenefit the Cypriot labour market. Consistent withimproving economic conditions, employment isprojected to recover modestly whileunemployment should ease gradually from its peakat the end of last year.

The external imbalance weighs on theeconomic recovery…

Given this economic outlook, the challenge for theCypriot economy is to achieve a balanced growthpath, leading to further correction of the largenegative balance on the external account, ina context of higher potential growth.

Due to the economic slowdown, the current-account deficit almost halved between 2008 and2010. The reduction would have been even morepronounced in the absence of one-off factors andrising oil prices, which affected 2010. It is

Member States, Cyprus

noteworthy that this improvement took place intandem with a significant deterioration of the fiscalposition. This implies a significant improvement inthe private sector's balance sheet, following yearsof rising indebtedness and rapid credit expansionin the pre-crisis years. The substantial savings ofthe private sector are reflected in subduedconsumption, shrinking investment and,consequently, lower growth.

However, the current-account deficit is still large,especially given the subdued economic activity.Significant dissavings of the public sector may befinanced by either increasing foreign debt ora further rise in domestic private savings. Thelatter would entail lower output growth bycrowding out private consumption or investment.In the medium term, the deficit is set to continue toimprove, but at a moderate rate, reflecting lowerGDP growth.

Competitiveness developments are important indetermining how sustainable the adjustment of theexternal imbalance will be. Given the cyclicalimpact on productivity, wage developments arecrucial in safeguarding the country's competitiveposition in price terms. In particular, it isenvisaged that average annual compensation peremployee will exceed projected productivitygrowth over the forecast period. Specifically, thewage indexation mechanism (Cost of livingallowance; COLA), which adjusts wages toinflation over the previous 6 months, should exertupward pressure on wage levels in 2011.Productivity growth is expected to remainsubdued, in line with moderate activity and risingemployment. As a result, unit labour costs may riseby more than the average in the euro area. All inall, the disconnection between wage growth andproductivity gains is undermining thecompetitiveness of the Cypriot economy.

Inflation is projected to rise to almost 3½%, in linewith prices of imported oil, on which Cyprus ishighly dependent, the impact of the VAT hike onfoodstuffs and pharmaceuticals and the gradualrecovery of domestic demand. In 2012, inflation isexpected to move closer to its trend at 2¼%. Coreinflation is likely to remain contained andapproach the euro-area average in 2012.

Overall, risks appear to be balanced. Demand maystrengthen beyond expectations should growth ofCyprus' major trading partners surprise on theupside or should improved confidence and

employment conditions lead to higher privateconsumption. MENA-area turmoil may strengthenfurther Cyprus' status as a regional safe-haventhrough the tourism, trading and shippingchannels. Investment may be sustained throughvarious announced construction and infrastructureprojects. However, risks associated with adversespillovers from Greece, particularly in view of thelarge exposure of the financial sector, are notnegligible. Moreover, further oil price hikes, onwhich Cyprus is highly dependent, would weighon growth. Furthermore, a tightening of creditconditions, coupled with the already higherfinancing costs and the high indebtedness ofprivate agents, could delay the rebound inconsumption and investment.

…and so does the fiscal deficit

Public finances in Cyprus deterioratedsubstantially as a result of the global economiccrisis and discretionary fiscal stimulus measures,as well as rather large composition effects due toa less tax-rich GDP growth pattern. As economicgrowth rebalances towards a more export-orientedpattern, this may complicate consolidation efforts.

The budgetary deficit in 2010 declined to 5.3% ofGDP from 6% the previous year. This is lowerthan the estimated outturn in the 2011 Budget Lawfor a deficit of 5.9%. In 2010 however, revenuesbenefited from a one-off factor of almost ¾ pp. ofGDP, associated with the profit on an interest-swap agreement and a transfer of higher-than-usualCentral Bank profits. The structural deficit fell toabout 5% in 2010 from 5¾% of GDP in 2009.

These changes reflect higher revenues, which werepartially offset by higher expenditure. On the onehand, direct tax revenues benefited from the laggedimpact of the deemed dividend distribution fee.(79)

Indirect tax revenues were supported by rise in theexcise duties of petroleum products imposed inmid-2010, while social contribution revenues wereboosted by the first full-year impact of theincreased contribution rates adopted in the firsthalf of the 2009 as part of the pension reform. Onthe other hand, current expenditure continued torise, despite the containment of publicconsumption and interest payments, on the back ofrising social outlays due to the increase inunemployment benefits and the enactment of othersocial policy measures.

(79) a 15% special contribution on the 70% of undistributedcorporate profits realised in the last two years

121


Table II.12.1:Main features of country forecast - CYPRUS

2009 Annual percentage changemio EUR Curr. prices % GDP 92-06 2007 2008 2009 2010 2011 2012

GDP 16945.7 100.0 4.3 5.1 3.6 -1.7 1.0 1.5 2.4Private consumption 11538.6 68.1 - 9.4 7.1 -2.9 0.8 1.4 2.2Public consumption 3364.4 19.9 - 0.3 6.2 5.8 0.5 3.0 1.8Gross fixed capital formation 3486.7 20.6 - 13.4 6.0 -9.1 -7.9 -3.9 -0.8of which : equipment 983.6 5.8 - 11.9 12.7 -9.3 -12.0 -5.0 1.0Exports (goods and services) 6824.2 40.3 - 6.1 -0.3 -11.3 0.6 4.1 4.3Imports (goods and services) 7720.3 45.6 - 13.3 8.1 -19.3 3.1 2.2 2.5GNI (GDP deflator) 16640.9 98.2 4.1 3.9 3.0 3.1 0.3 1.6 2.4Contribution to GDP growth : Domestic demand - 8.8 7.1 -2.9 -1.0 0.8 1.7

Inventories - 0.3 1.1 -4.7 3.3 0.0 0.0Net exports - -4.0 -4.5 5.7 -1.4 0.7 0.6

Employment - 3.2 2.8 -0.7 -0.3 0.2 0.8Unemployment rate (a) - 4.0 3.6 5.3 6.5 6.3 5.6Compensation of employees/head - 3.0 2.3 3.2 2.8 3.8 3.2Unit labour costs whole economy - 1.1 1.5 4.3 1.5 2.5 1.7Real unit labour costs - -3.4 -3.4 4.6 -0.5 -0.6 -0.4Savings rate of households (b) - 7.9 6.5 9.1 - - -GDP deflator 3.2 4.6 5.1 -0.3 2.0 3.1 2.1Harmonised index of consumer prices - 2.2 4.4 0.2 2.6 3.4 2.3Terms of trade of goods - 0.6 -2.5 2.7 -0.7 -0.2 0.0Trade balance (c) - -29.7 -31.9 -25.0 -26.7 -27.0 -27.2Current-account balance (c) - -11.6 -17.0 -7.9 -8.9 -8.1 -7.2Net lending(+) or borrowing(-) vis-à-vis ROW (c) - -11.6 -16.9 -7.6 -8.7 -7.9 -7.1General government balance (c) - 3.4 0.9 -6.0 -5.3 -5.1 -4.9Cyclically-adjusted budget balance (c) - 2.7 -0.1 -5.5 -4.6 -4.5 -4.7Structural budget balance (c) - 2.7 -0.1 -5.8 -5.1 -4.6 -4.8General government gross debt (c) - 58.3 48.3 58.0 60.8 62.3 64.3


122

For 2011, the Budget Law targeted a deficit of5.4% of GDP, on the basis of an estimated deficitfor 2010 of 5.9%. With a view to reducing thebudget deficit in line with the Council'srecommendations, the Cypriot authorities adoptedboth a fiscal consolidation package togetherwiththe Budget yielding an estimated consolidationimpact of 1 pp. of GDP, out of which 0.6 pp. ofGDP is on the revenue side and permanent innature. At the same time, the coalition partiesagreed on an additional package that was expectedto be voted on by the Parliament last February andto yield an additional 0.6 pp. of GDP ofconsolidation in 2011, based on both revenue-supporting and expenditure-containing measures.The aforementioned consolidation packages, takenat face value, would have improved both theheadline and the structural balance by 1.6 pps. ofGDP, bringing the 2011 deficit down to 3.8%.However, at the current juncture, the latter packagehas been only partially implemented. In particular,only the bank levy has been adopted, although nowas a permanent rather than as the temporarytwo-year measure first contemplated. Themeasures concerning the harmonisation of waterpricing and savings from the public sector's wagemoderation are still under discussion.

The present projection is for a deficit of 5.1% ofGDP for 2011. This projection, taking into account

the one-off impact of measures adopted in 2010,incorporates a more prudent assessment of revenueprospects, given a less tax-rich growthcomposition, and possible overruns on theexpenditure side, in view of past trends on keyitems such as the wage bill and social transfers. Italso includes expenditure-increasing measurestaken in the first quarter of the current year, suchas: (i) 'social' measures to mitigate the impact ofthe VAT rise on foodstuffs and pharmaceuticals(0.13 pp. of GDP); (ii) support to Cyprus Airways(0.11 pp.); and (iii) compensation paid to thepersonnel of the failed Eurocypria airlines(0.04 pp.). Moreover, measures which are stillunder discussion with an uncertain outcome, orwith no information on the modalities or the timingof implementation are not taken into account.

Based on the no-policy-change assumption, thedeficit is set to subside marginally to 4.9% of GDPin 2012, due to minor savings on the public wagebill from the lower contribution from the COLAand the social outlays in line with an improvementin the labour market. With still moderate growthand an increasing deficit, the debt-to-GDP ratioshould remain on a rising trend and reach about64% of GDP by 2012.

13. LATVIAEconomic and budgetary re-balancing continues at full speed

123

Growth outlook remains favourable

With clearly positive quarterly indices during2010, Latvia's economy recorded a minor declineof 0.3% in 2010, reflecting the strong negativecarry-over from 2009. Recent indicators suggesta sustained pace of recovery and confirma favourable outlook for 2011-12 in line with theCommission autumn forecast. The economy isundergoing a substantial rebalancing fromnon-tradeable to tradeable sectors as the share ofexports in GDP widened to 53% in 2010 from arange of 42% to 48% in the pre-crisis period.Exports are further projected to rise to about 60%of GDP by 2012. The process of rebalancing issupported by significant drops in unit labour costsin 2009-10 as well as rapidly rising demand frommajor trading partners. On the other hand, theexpected broadening of the growth base towardsprivate consumption and investment will fosterimports and is likely to bring net exports to nearlya zero contribution to GDP growth in 2011. Thislatter effect could be reinforced should the euroappreciate further.

Graph II.13.1: Latvia - GDP growth andcontributions

-35

-28-21

-14

-7

07

14

21

04 05 06 07 08 09 10 11 12

pps.

Dom. demand, ex. invent. InventoriesNet exports GDP growth (y-o-y%)

forecast

Another dimension of the re-balancing of theeconomy is the large growth dispersion acrosssectors. Value added in the manufacturing sectorsurged by 15.4% in 2010 and the underlyingmonthly indicators for sales and new orders pointto further improvement in 2011. Public utilitiesalso grew rapidly by 12.7% in 2010 due mainly tohigh energy demand, although the latter is likelyto be tamed by higher prices of energy inputs. Instark contrast, construction output and financialintermediation fell by 24.2% and 10.5% in 2010respectively, following even steeper declines in

2011 and are therefore expected to play anincreasing role in the projected acceleration ofGDP growth to 3.3% in 2011 and 4.0% in 2012.

2009. The two sectors are likely to bottom out in

Employment expectations pick up

08-09, theAfter a significant contraction in 20labour market is recovering at a slower pace thaneconomic output and is expected to continue at thismoderate pace, although net job creation surprisedon the positive side towards the end of 2010.Furthermore, the economic sentiment surveys inthe first four months of 2011 show favourableemployment expectations in the industrial andservice sectors and even in the construction sectoremployment prospects are rising again, althoughfrom a very low base and with some moderation inApril. Therefore, stronger job creation could beconsidered a positive risk to the forecast.

Graph II.13.2: Latvia - Labour market

02468

101214161820

04 05 06 07 08 09 10 11 12

in thousands

0

200

400

600

800

1000

1200

1400

Unemployment rate (lhs) Labour force (rhs)Employment (rhs)


The labour force is expected to remain relativelystable in 2011-12, as the trend decline in theworking age population will be largely offset byhigher participation rates under the assumption thatthe economic recovery would motivate part of thediscouraged job seekers to re-enter the labourmarket. Migration flows, which are responsible fornearly half of the decline in the working agepopulation, would reduce the rate ofunemployment but also limit labour supply andpotential growth, though it is not creating a distinctshortage of labour skills yet. Overall, theunemployment rate is set to improve relativelyquickly from a year-average of 18.7% in 2010 tobelow 16% in 2012, but a faster decline could notbe excluded. Job vacancy rates remain low, but aturning point could be reached soon, as the margin


between structural and actual unemployment isnarrowing quickly. The share of structuralunemployment increased dramatically, to 14.3% inthe Commission estimates for 2010, due mainly toa large number of job losses in the constructionsector which are unlikely to be recovered in full inthe near future.

Commodity prices, VAT hike push up inflation

)

Looking ahead, inflation is expected to move very

Falling Primary income exposes remaining

plus dropped to 3.6% of

The Harmonised Index of Consumer Prices (HICPincreased above the EU average in the beginningof 2011, due to increased VAT rates and theeffects of labour costs increases, in the light ofhigher labour compensations in both the public andprivate sectors at the end of 2010, and theminimum wage hike by 11% as of January 2011.Nevertheless, when the impact of VAT andimported energy and agricultural commodities isexcluded, price indices remain almost unchangedin relation to a year earlier. This illustrates thatinflation pressures are strongly linked tosupply-side factors while the impact of risingwages is relatively low. Commodity prices remaina major threat to inflation in 2011, given thecountry's high sensitivity to import price shocks,due to the small size of the domestic market and itshigh energy intensity.

close to the EU average as the effects of importprices and administrative measures fade out.However, such price dynamics will also depend onmoderate wage developments which limit thetransmission of imported inflation to labour costs,and preserve recent gains in competitiveness.

external balance risks

The current-account surGDP in 2010 from 8.6% in 2009. The narrowingwas driven by a steep decline in the net inflow ofprimary income while trade in goods andnon-factor services improved for the third year in arow. Primary income is likely to shift into negativeterritory in 2011-12 since retained earnings inforeign-owned companies are rapidly improving,reflecting higher profitability of the banking sectorin the beginning of 2011. This is likely to move thewhole current account to a small deficit in 2011-12(and, simultaneously, improve the financialaccount) along with the gradual recovery in importdemand, pushed up by increasing householdconsumption and the expected rebound in

corporate investments. Exports will continue togrow at a rapid pace, as demand from the Balticneighbours and Scandinavian countries issustained.

Graph II.13.3: Latvia - Current account,inflation, unit labour costs

-24

-18

-12

-6

0

6

12

18

24

30

04 05 06 07 08 09 10 11 12

y-o-y%

Current account (% of GDP) HICP ULC

forecast

Although the current account is not projected to

Fiscal position improves due to consolidation

7.7% of GDP

post excessive deficits in the medium run, someexternal imbalances remain, as private externaldebt and net foreign financial liabilities arerelatively high at around 180% and 85% of GDP atthe end of 2010, respectively. Nevertheless, thesignificant loss in external competitivenessaccumulated before the crisis is to a large extentcorrected and current estimates of unit labour costspoint to further improvement against tradingpartners in 2011-12, but the margin of adjustmentwill be substantially weaker than in 2009-10.Further improvement in competitiveness will bekey for the country's capacity to maintainsustainable economic growth. A return of foreigninvestor interest, helped by the macroeconomicstabilisation and the resulting recent sovereignrating upgrades, could improve non-pricecompetitiveness, through factors such astechnology upgrades, product quality anddifferentiation, trade channels, and energyefficiency.

measures, but challenges remain

The general government deficit wasin 2010, 2 pps. lower than the 2009 outcome andclearly better than originally planned by thegovernment (8.5% of GDP). Although the headlineoutcome is in line with expectations in theCommission's autumn forecast, it reflects a largerunderlying adjustment, as it includes the impact ofsizeable financial sector stabilisation measures,amounting to 2.3% of GDP, more than twicehigher than what was previously expected. These

124

Member States, Latvia

Table II.13.1:Main features of country forecast - LATVIA

2009 Annual percentage changemio LVL Curr. prices % GDP 92-06 2007 2008 2009 2010 2011 2012

GDP 13082.8 100.0 1.8 10.0 -4.2 -18.0 -0.3 3.3 4.0Private consumption 8053.8 61.6 - 14.8 -5.2 -24.1 -0.1 3.0 3.5Public consumption 2569.7 19.6 - 3.7 1.5 -9.2 -11.0 -2.0 0.0Gross fixed capital formation 2806.8 21.5 - 7.5 -13.6 -37.3 -19.5 9.2 12.0of which : equipment 1240.4 9.5 - - - - - - -Exports (goods and services) 5741.7 43.9 - 10.0 2.0 -14.1 10.3 8.6 6.6Imports (goods and services) 5935.3 45.4 - 14.7 -11.2 -33.5 8.6 8.6 7.7GNI (GDP deflator) 14080.8 107.6 1.5 9.7 -2.0 -10.8 -5.5 -0.6 3.2Contribution to GDP growth : Domestic demand - 13.5 -8.4 -30.7 -6.7 3.5 4.9

Inventories - 1.6 -4.1 -1.5 5.8 0.0 0.0Net exports - -5.1 8.2 14.2 0.6 -0.2 -0.8

Employment -1.7 3.6 0.9 -13.2 -4.8 1.5 1.7Unemployment rate (a) 12.5 6.0 7.5 17.1 18.7 17.2 15.8Compensation of employees/head - 35.1 15.7 -12.2 -6.5 1.5 1.5Unit labour costs whole economy - 27.2 22.0 -7.0 -10.6 -0.3 -0.8Real unit labour costs - 5.8 6.6 -5.6 -8.5 -2.4 -2.3Savings rate of households (b) 2.6 -5.0 5.0 9.4 - - -GDP deflator 30.3 20.3 14.4 -1.5 -2.3 2.2 1.6Harmonised index of consumer prices - 10.1 15.3 3.3 -1.2 3.4 2.0Terms of trade of goods - 7.2 -1.8 -2.9 1.1 0.6 0.0Trade balance (c) -13.8 -23.9 -17.7 -7.1 -6.4 -6.8 -7.5Current-account balance (c) -4.6 -22.3 -13.1 8.6 3.6 -0.3 -1.6Net lending(+) or borrowing(-) vis-à-vis ROW (c) -2.2 -20.4 -11.6 11.1 5.6 3.1 1.5General government balance (c) - -0.3 -4.2 -9.7 -7.7 -4.5 -3.8Cyclically-adjusted budget balance (c) - -4.4 -6.3 -6.6 -5.1 -3.1 -3.6Structural budget balance (c) - -4.4 -6.3 -6.1 -3.7 -4.0 -4.5General government gross debt (c) - 9.0 19.7 36.7 44.7 48.2 49.4


125

After a substantial fall in 2009, revenues stabilised

The 2011 budget law was passed in December

he general government debt is set to increase

financial sector measures included the directrecapitalisation costs of Parex Banka and theMortgage and Land Bank, as well as therecognition of expected losses on government'sdeposits in Parex Banka according to therestructuring plan. The outcome for 2009 wasrevised from -10.2% of GDP to -9.7% of GDP dueto the clarified treatment of sales of the AssignedAmount Units or tradeable 'Kyoto carbon credits'.

in 2010, due to several taxation measures, notablyan increase in the VAT rate from 18% to 21%, andsome revival in domestic demand. Currentexpenditure declined in 2010, as the governmentcontinued trimming public finances towards moresustainable levels. Additional savings came fromsome delays in the implementation of plannedgovernment investments, including onesco-financed by the EU structural funds. T

2010, complemented by a supplementary budget inApril 2011. The most notable measures thatentered into force from January 2011 include afurther increase in VAT standard and reduced ratesto 22% and 12%, respectively, and a broadening ofthe tax base under the standard VAT rate. On theexpenditure side, several subsidies and benefitshave been abolished or revised, while expenditure

of government entities, including the wage bill,was further cut. Overall, consolidation measures in2011 would improve the fiscal outlook by over2 pps. of GDP. Coupled with the revival ineconomic activity, this is expected to bring thegeneral government deficit to 4.5% of GDP in2011. However, the accounting of financial sectorstabilisation measures remains a risk factor to theoutlook for 2011. Based on the assumption ofunchanged policy, the fiscal outlook for 2012further improves to reach a deficit of 3.8% of GDPin line with the macroeconomic scenario of theforecast and as the full effect of the supplementary2011 budget materialises. Thanks to better thanexpected results so far, further consolidation needsto bring the deficit below 3% of GDP in 2012 ina sustainable manner would be of a clearly smallermagnitude compared to previous years.

somewhat, reaching 49.4% of GDP by the end ofthe forecast period. While no further borrowing isexpected under the international assistanceprogramme, the authorities are likely to return toborrowing from international financial markets inthe second half of 2011.

14. LITHUANIAStrong recovery as domestic demand picks up

126

The economy returns to growth due to strongexports and inventories

Lithuania's economy has quickly recovered from adeep recession. Following a contraction of nearly15% in 2009, output expanded by 1.3% in 2010,reflecting a particularly strong fourth quarter(4.6% y-o-y growth).

The recovery has been driven by two factors.Firstly, the rebound in the global economy and inparticular a robust growth performance ofLithuania's main export partners, namelyGermany, Russia, the other Baltic States andPoland. This has led to a surge in exports,especially in oil products, pharmaceuticals, capitalgoods and transport services. Improvedcompetitiveness, underpinned by strong wagediscipline, has also supported the vigorous exportdynamics. However, imports expanded somewhatmore strongly than exports as the recoverygathered momentum. As a consequence tradedeficit further widened in 2010. A second driver ofgrowth has been the upturn in the inventory cycle,with firms starting to quickly rebuild depletedstocks. This upswing in inventories added almost6 pps. to Lithuania's growth in 2010.

Graph II.14.1: Lithuania - GDP growth andcontributions

-30

-20

-10

0

10

20

04 05 06 07 08 09 10 11 12

pps.

Domestic demand InventoriesExternal balance GDP (y-o-y%)

forecast

On the other hand, domestic demand (excludinginventories) further contracted as consumers, non-financial corporations and the public sectorcontinued to restore their balance sheets. Privateconsumption was hampered by wage adjustment,cuts in social benefits, increases in indirect taxesand negative credit growth. Wages contracted by1.9% in 2010, although quarterly data show an

Unemployment peaked at 18.3% in the secondquarter of 2010 before resuming its downwardtrend along the rebound in output. In particular,youth unemployment soared to nearly 37% by thesecond quarter of 2010, spurring a pronouncedemigration wave. Investment resumed strongly inthe second half of 2010, especially in equipmentand non-residential construction. However, for theyear as a whole, investment was flat due to theweak first half.

upward trend since the second quarter of the year.

Inflation fell rapidly, although fears of a

The recovery is expected to gather further

in

The current account surplus is projected to vanish

deflationary spiral proved unfounded. Whileturning negative in the first quarter of 2010,headline inflation quickly increased on the back ofhigher food and energy prices as well as laggedeffects of excise duties hikes in the previous year.Core inflation turned negative in the first half of2010 but has picked up towards the end of the yearas macroeconomic conditions improvednoticeably.

momentum as domestic demand picks up

Economic activity is expected to accelerate2011 and remain strong in 2012 as domesticdemand progressively becomes the main engine ofgrowth. Private investment is set to increase on theback of a more favourable business outlook.Continued frontloading of EU co-financedprojects, predominantly to infrastructure andenergy efficiency enhancements, is to supportpublic investment as well. Amid a brighter labourmarket outlook, private consumption is set torecover, especially at the end of the forecasthorizon. Skill mismatches have been emerging insome sectors, putting upward pressure on wages.The planned reversal of pension cuts from1 January 2012 will also add to consumptiondynamics. The healthier financial sector is alsoexpected to provide sufficient credit to sustain therebound in output.

in 2011, as the increasing trade deficit iscompensated by positive net current transfers. In2012, the current account balance is expected toturn negative, with the trade deficit widening.Export growth is expected to remain robust, butgradually ease over the forecast horizon, partly due

Member States, Lithuania

to negative base effects. The base effects will alsoaffect imports, though to a smaller extent.

Graph II.14.2: Lithuania - Current-accountbalance

-20

-15

-10

-5

0

5

10

04 05 06 07 08 09 10 11 12

%

Goods ServicesIncome balance Current transfersCurrent account balance

forecast

Inflation is likely to accelerate, driven by higherenergy, commodity and food prices. Increases inexcise duties on tobacco and fuel (from thebeginning of 2011) as well as expiration of thereduced VAT rate on heating (currently plannedfor September 2011) will also add to inflationdynamics. Core inflation is projected to steadilyincrease over the forecast horizon, albeit from lowlevels, as the negative output gap is progressivelyclosed.

The balance of risks to the baseline scenario seemsto be tilted to the upside. Positive risks related toreduced global risk aversion and an improvedbusiness outlook might trigger stronger-than-projected capital inflows. Moreover, thedeleveraging process might prove to be lessprotracted as both household and corporate debtremain relatively low compared to other EUMember States or major economies. As themomentum builds up and is sustained, a positivefeedback loop between the real and financial sectormight emerge, further strengthening outputdynamics. On the other hand, downside risks relateto a slow reduction in structural unemployment,weakened resolve for the remaining fiscalconsolidation as well as higher-than-expectedenergy prices.

Significant fiscal consolidation efforts haveyielded results, but need to continue

The budgetary outturn in 2010 was much betterthan initially expected, with the generalgovernment deficit reaching 7.1% of GDP - farbelow the government's deficit target of 8.1% ofGDP. This reflects higher-than-expected revenue

growth and continued fiscal consolidation efforts.In July 2010 the government extended sometemporary expenditure-reducing measures, such ascuts in salaries for politicians, lawyers andgovernment officials. It also prolonged thereduction of transfers of contributions to thesecond pillar pension funds. Moreover, maternitybenefits were reduced and a part of the sicknessleave benefits were to be permanently paid by theemployers rather than the Social Security Fund.However, some other expenditure items, includinginterest payments, healthcare spending, capitalexpenditure and social benefits increased in 2010.

Graph II.14.3: Lithuania - General governmentbalance and gross debt

-10

-5

0

5

10

15

20

25

30

04 05 06 07 08 09 10 11 12

% of GDP

-20

-10

0

10

20

30

40

50

60

General gvt. balance (lhs) Gross debt (rhs)

forecast

% of GDP

The 2011 budget aims at a deficit of 5.8% of GDP,in line with the EDP. On the back of an improvedmacro-economic forecast underlying the 2011Convergence Programme, the government reducedits deficit targets to 5.3% of GDP in 2011 and2.8% in 2012. To meet budgetary targets, thegovernment relies on strong revenue growth, partlydue to better tax compliance, and some increasesin non-tax revenue, which mainly relate to a higherinflow of EU structural funds. However, additionaltax revenues, expected in the Tax ComplianceStrategy are uncertain and are likely to materialiseonly gradually. In January 2011 excise duties ontobacco and fuel were increased according to EUlegislation. Personal income tax for the self-employed was reduced from 15% to 5% as of2011. The 2011 budget foresees a 4.6% increase ingovernment expenditures compared to the 2010budget due to higher debt service costs andincreased social expenditure. According to thethree-year investment programme, generalgovernment investment is planned to slightlydecrease in 2011, before resuming in 2012.

In 2012, some temporary consolidation measures(including reduced pension benefits) will expire,hence raising government expenditure by

127


Table II.14.1:Main features of country forecast - LITHUANIA

2009 Annual percentage changebn LTL Curr. prices % GDP 92-06 2007 2008 2009 2010 2011 2012

GDP 91.5 100.0 1.2 9.8 2.9 -14.7 1.3 5.0 4.7Private consumption 63.0 68.8 - 12.1 3.7 -17.7 -4.5 3.3 3.9Public consumption 20.1 21.9 - 3.2 7.3 -1.9 -3.4 0.5 3.0Gross fixed capital formation 15.7 17.1 - 23.0 -5.2 -40.0 0.0 16.9 13.8of which : equipment 3.7 4.0 - 21.9 -17.1 -49.8 14.7 19.0 12.5Exports (goods and services) 50.0 54.6 - 3.0 11.6 -12.7 17.4 11.2 7.1Imports (goods and services) 51.3 56.1 - 10.7 10.3 -28.4 17.9 12.0 8.0GNI (GDP deflator) 93.3 101.9 - 8.0 3.5 -10.1 -1.7 4.1 4.6Contribution to GDP growth : Domestic demand - 14.2 2.3 -22.2 -3.8 4.9 5.5

Inventories - 1.3 1.4 -5.3 5.7 0.7 0.0Net exports - -5.7 -0.7 12.7 -0.5 -0.7 -0.8

Employment -0.9 2.8 -0.7 -6.8 -5.1 2.1 2.8Unemployment rate (a) 9.5 4.3 5.8 13.7 17.8 15.5 12.7Compensation of employees/head - 13.9 14.3 -11.1 -1.3 3.4 5.8Unit labour costs whole economy - 6.5 10.4 -2.8 -7.6 0.5 3.9Real unit labour costs - -1.8 0.5 0.9 -9.4 -2.7 1.0Savings rate of households (b) - -5.2 -2.2 7.8 - - -GDP deflator 40.2 8.5 9.8 -3.7 2.1 3.3 2.9Harmonised index of consumer prices - 5.8 11.1 4.2 1.2 3.2 2.4Terms of trade of goods - 0.9 3.6 -5.9 2.4 0.4 0.2Trade balance (c) - -15.0 -13.0 -3.1 -4.3 -5.0 -5.5Current-account balance (c) - -15.1 -13.1 2.6 1.8 0.2 -0.6Net lending(+) or borrowing(-) vis-à-vis ROW (c) - -12.9 -11.2 7.0 5.8 3.9 2.9General government balance (c) - -1.0 -3.3 -9.5 -7.1 -5.5 -4.8Cyclically-adjusted budget balance (c) - -3.6 -5.4 -7.1 -5.1 -4.7 -4.8Structural budget balance (c) - -3.0 -5.4 -7.5 -5.7 -5.3 -5.4General government gross debt (c) - 16.9 15.6 29.5 38.2 40.7 43.6


128

approximately 0.6% of GDP. Under the customaryno-policy-change assumption, government sectorwages are projected to increase. While thegovernment has adopted a broad recommendationextending the wage freeze for government officialsinto 2012, specific provisions have not yet beenoutlined. Consolidation measures under discussionfor 2012 include the raising of excises on diesel

(0.1% of GDP), introducing a tax on cars (0.1% ofGDP) and a real estate tax on private households(0.1% of GDP). On the basis of the no-policy-change assumption, the general government deficitis expected to narrow to 5.5% of GDP in 2011 and4.8% in 2012. Government debt is projected toincrease from around 38% of GDP in 2010 tonearly 44% in 2012.

15. LUXEMBOURGStrong growth, but still below pre-crisis average pace

129

Economic activity is back at its pre-crisis level

During the recession, real GDP in Luxembourg fellby 7.9% from peak to trough (from the secondquarter of 2008 to the second quarter of 2009).GDP started to grow again in the third quarter of2009, and almost reached its pre-crisis level in theautumn of 2010. The recovery in 2010 hasessentially been generated by an increase in publicconsumption and public investment decided by thegovernment as part of the EERP on the one hand,and a strong increase in net exports on the otherhand. Private consumption, which slowed downfrom 4.7% in 2008 to 0.2% in 2009, asa side-effect of the strong rise in unemploymentand the deterioration in consumer confidence, isexpanding again and increased by 2.0% in 2010. Intotal, real GDP expanded by 3.5% in 2010 afterfalling by 3.6% in 2009.

This rather strong growth momentum is expectedto continue in 2011-12 as domestic demand willstrengthen and external trade will probably remainrather supportive. In total, real GDP growth isexpected to remain stable in 2011 and to accelerateslightly in 2012. Although such growth rates aresubstantially higher than those currently expectedfor most other Member States, they are still belowthe average rates recorded in Luxembourg beforethe crisis (4.7% on average between 2000 and2007). A particular feature of the composition ofgrowth this year is that investment figures are verydynamic, reflecting investment in equipment(mostly imported) planned by a number of largecompanies. The financial sector, which has beenthe country's main growth engine in recent decadesand now represents almost 30% of total valueadded, seems to have withstood the crisis ratherwell. It is worth noting that the sector is stronglyinternationalised in its ownership and activities,which makes it particularly sensitive todevelopments abroad.

Job creation benefits mainly non-residentemployment

Employment performed particularly well duringthe recession and its resilience surprised even themost optimistic observers. Employment neverdecreased during the crisis, although it deceleratedstrongly from the very high growth rates recordedin 2008 (4.7% over the year) to about 0.9% in

2009. This is the highest figure in the whole EU,where employment declined by nearly 2% onaverage. This massive labour hoarding wasprobably due to a large part to the reluctance offirms to lay off people whom they had founddifficult to hire during the boom years, but it wasalso helped by a systematic recourse to short timeworking encouraged by the government. At theend of 2009 employment growth accelerated again,reaching an average growth of 1.6% in 2010.Employment is expected to rise faster in 2011 and2012.

Graph II.15.1: Luxembourg - Domesticemployment and frontier workers

0

2

4

6

8

04 05 06 07 08 09 10 11

y-o-y%

-10123456789

Unemployment rate (lhs)Domestic employment (rhs)Frontier workers (net balance, rhs)

% of labour

Unemployment has risen during the crisis, fromabout 4.2% of the active population (nationaldefinition) in the spring of 2008 to around 6% in2010, which is however still quite low incomparison with the rest of the EU. It stronglyincreased in the autumn of 2008 but began to slowdown in the course of 2009 and remained broadlystable during 2010. The job creation expected overthe forecast period is not likely to result in a strongdecline in unemployment, as again mostlynon-resident workers seem to benefit from it aswas the case before the crisis. During the crisis, thenumber of non-resident workers was slightlydecreasing while national employment growthremained slightly positive. This is explained by therelatively high share of non-resident workers in theprivate sector and in temporary jobs. But since thesummer of 2010, non-resident employment growthhas been outperforming national employmentagain, as in the years preceding the crisis.


Table II.15.1:Main features of country forecast - LUXEMBOURG


GDP 38072.9 100.0 4.3 6.6 1.4 -3.6 3.5 3.4 3.8Private consumption 12939.5 34.0 2.5 3.3 4.7 0.2 2.0 1.8 2.3Public consumption 6364.9 16.7 4.2 2.8 2.7 4.6 2.9 1.0 3.5Gross fixed capital formation 6576.1 17.3 4.4 17.9 1.4 -19.2 2.6 12.0 6.0of which : equipment 1627.3 4.3 3.3 23.9 3.4 -37.8 4.4 26.0 4.0Exports (goods and services) 63802.4 167.6 7.5 9.1 6.6 -8.2 6.3 6.8 6.5Imports (goods and services) 51260.2 134.6 7.3 9.3 8.5 -10.2 6.7 8.0 7.0GNI (GDP deflator) 26793.9 70.4 2.7 12.8 -5.4 -9.6 4.8 3.5 3.1Contribution to GDP growth : Domestic demand 2.8 5.0 2.2 -3.1 1.6 2.7 2.3

Inventories 0.0 -0.9 -0.1 -0.8 0.4 0.0 0.0Net exports 1.6 2.6 -0.6 0.3 1.5 0.7 1.5

Employment 3.3 4.5 4.7 0.9 1.6 2.1 2.3Unemployment rate (a) 3.1 4.2 4.9 5.1 4.5 4.4 4.2Compensation of employees/head 3.3 3.7 2.1 1.8 1.6 2.0 4.6Unit labour costs whole economy 2.4 1.6 5.4 6.7 -0.3 0.7 3.0Real unit labour costs -0.6 -2.0 1.1 7.0 -5.5 -2.5 0.3Savings rate of households (b) - - - - - - -GDP deflator 3.0 3.6 4.2 -0.3 5.5 3.3 2.6Harmonised index of consumer prices - 2.7 4.1 0.0 2.8 3.5 2.3Terms of trade of goods -0.4 3.3 0.5 -0.9 -1.3 -1.0 -0.5Trade balance (c) -11.1 -8.8 -10.4 -7.7 -8.1 -9.2 -9.4Current-account balance (c) 11.1 10.1 5.3 6.9 7.8 7.8 7.6Net lending(+) or borrowing(-) vis-à-vis ROW (c) - 9.7 4.7 6.2 7.8 7.8 7.6General government balance (c) 2.2 3.7 3.0 -0.9 -1.7 -1.0 -1.1Cyclically-adjusted budget balance (c) - 1.9 2.3 1.5 0.1 0.3 -0.4Structural budget balance (c) - 1.9 2.3 1.5 0.1 0.3 -0.4General government gross debt (c) 6.4 6.7 13.6 14.6 18.4 17.2 19.0


130

Inflationary pressure stemming from risingenergy prices

Average inflation (measured by the HICP) fell tozero in 2009, but it resumed rising at the end of2009, reaching 2.8% in 2010. It amounted to 3.8%in the first quarter of 2011 due to a strong increasein energy prices. Core inflation increased to around2.3%, inter alia because of higher administeredprices. Inflation is projected to decelerate slightlyover the rest of 2011 and in 2012.

After having risen by 3.5% a year on averagebetween 2004 and 2007, wage growth sloweddown from 2008 onwards to 1.6% in 2010. Wagesare expected to rise by 2% in 2011 as theautomatic indexation of wages has been postponedfrom spring to October 2011. With the followingindexation threshold already expected to bereached in spring 2012, wages are projected toincrease strongly in that year (by around 4.5%).

Slow improvement of the budget balance

The general government balance, which hadamounted to a surplus of 3% in 2008, turned into a0.9% deficit in 2009. This was one of the lowestdeficits recorded in 2009 in the EU, in large partthanks to the favourable situation of publicfinances before the crisis. Based on recent updated

information, the deficit increased to about 1.7% ofGDP in 2010, which is considerably less thanpreviously expected. The increase is partly a resultof the delayed impact of the crisis on governmentrevenues and the rise in expenditure due to thestimulus package. Revenues rose slower thanexpenditure even though they are recovering aftera slight decline in 2009. In 2011, revenues, and inparticular taxes paid by households, shouldaccelerate, while expenditure will slightly slowdown after three years of strong growth (about8.5% a year on average from 2008 to 2010). Thiswill lower the deficit to about 1% of GDP. In2012, a drop in revenues from corporate taxation isexpected as a delayed effect of the crisis. Thus,at unchanged policy, the deficit is forecast tobroadly stabilise despite better economicconditions.

Public debt rose from 14.6% of GDP in 2009 to18.4% at the end of 2010. It is expected to rise toaround 19% of GDP by 2012, still one of thelowest in the EU. The increase is essentiallya result of the deficit position of the centralgovernment. In contrast, the social security systemshould continue to run substantial surpluses,which, as in the past, will be used to increase itsreserves, currently estimated at 29% of GDP.

16. HUNGARYRecovery firming up, with a gradual rebalancing of growth

131

Export-led recovery in 2010

The economy, having emerged from a recessionthat saw GDP contracting by 6.7% in 2009, hasnow been growing for five consecutive quarters.The recovery has been led by a strong exportperformance, capitalising on better-than-expectedglobal trade demand and translating to GDPgrowth of 1.2%. Domestic demand, by contrast,continued to decline. Private consumptionexpenditure fell by a further 2.1% followinga sharp contraction of 7.8% in 2009. The boost todisposable income from personal income taxchanges introduced in January 2010 was more thanoffset by the climbing costs of foreign currencydenominated mortgage repayments as the Swissfranc appreciated against the forint, while thepropensity to save increased compared to theprevious year. The unemployment rate rose to11.2%, masking a modest increase in employmentand a larger increase in the activity rate.

Gross fixed capital formation dropped by 5.6% lastyear, suggesting that companies producing for thedomestic market had not yet perceived favourableconditions for investment. Credit supply hasremained tight both in the non-financialcorporations sector and in the household sector.Since the weakness of domestic demand has keptimports from keeping pace with export growth, thecurrent account continued to improve, postinga surplus of 1.7% of GDP in 2010.

A slow rebalancing

Looking ahead, the Hungarian economy isexpected to consolidate its recovery and slowlymove towards rebalancing as domestic demandstarts to contribute to GDP growth. At the sametime, the external sector will continue to contributesignificantly to growth over the forecast horizon.

Specifically, GDP is expected to expand by 2.7%and 2.6% in 2011 and 2012, respectively. In 2011,domestic demand is forecast to contribute togrowth by 1½ pps., with net exports contributing1 pp. In 2012, the composition of growth isprojected to remain similar, after taking intoaccount the recent structural reform package andthe other fiscal consolidation measures announcedin Hungary's Convergence Programme.

Prospects for private consumption are set toimprove from last year, although opposing factorsare at work. Household consumption will beaffected by several factors: first, the personalincome tax (PIT) reform – to be phased insuccessive steps by 2013 – institutinga combination of a 16% flat tax rate withsubstantial tax credits for those with children (andamounting to a loss of 1.8% of GDP of revenue forthe government from this year, with an additionalcut of ¾% of GDP in 2012). The positive effect ondisposable income is likely to be tempered by thefact that the tax cut mainly supports thosehouseholds with higher wages, who tend to havea lower marginal propensity to consume; in fact,a large proportion of lower income households areactually expected to be worse off as a result.(80)

Moreover, chiefly from 2012, the gradual phasingout of employment tax credits will further reducethe effect on disposable income.

Second, the twofold impact of the recent effectiveabolishment of the mandatory private pensionpillar on private consumption also deserves specialmention. The yield realised on assets that are beingtransferred to the public pension pillar is expectedto boost consumption over the forecast horizon.These can be collected tax-free at the time of thetransfer, or invested under favourable terms involuntary pension funds. An adverse near-termeffect may be expected associated with an increasein precautionary savings related to the pensionreform reversal.

Third, private consumption may be negativelyaffected by the financial sector levy of 0.7% ofGDP introduced in 2010, which is likely todampen the supply of credit to households.

Finally, the planned cuts in social transfers, to beintroduced mainly from 2012, are expected to havea significant negative effect on consumption.

In 2011 and 2012, investment will receive a boostfrom flagship investments by large multinationals

(80) According to the Fiscal Council's calculations published on8th November 2010, as many as 40% of taxpayers arewithout children and do not earn enough income to benefitfrom the tax reform. Since then, a new policy has beenintroduced in the public sector to compensate those whosetake-home pay would otherwise decrease because of thereform. Pressure has also been put on the private sector tofollow suit.


and will also be supported by the corporate incometax cut. In contrast, the temporary levies on theenergy, telecoms and retail sectors that wereannounced in autumn 2010 are likely to lead tolower investment in the affected sectors, whichmay have a broader negative impact on thebusiness environment through increasedinstitutional uncertainty. Finally, the financialsector levy that will also apply in 2012, although ata reduced level, will lengthen the persistence oftight credit conditions. Lending to medium andlarge corporations is forecast to remain particularlytight, with conditions easing towards the end of2011. In addition to these developments,a reclassification of assets is also expected to takeplace between the public and the private sectors, asthe state buys back selected public-privatepartnership investments.

The current account is expected to remain insurplus over the forecast horizon. The continueddynamism of exports should be more thansufficient to compensate for the import growthaccompanying the rather subdued recovery ofdomestic demand.

Graph II.16.1: Hungary - GDP growthand unemployment rate

-8

-6

-4

-2

0

2

4

6

04 05 06 07 08 09 10 11 12

y-o-y%

5

6

7

8

9

10

11

12

GDP growth (lhs) Unemployment rate (rhs)

forecast

% of labour force

Public works continue to push up statisticalemployment

Unemployment will start to decline over the courseof 2011, with the expansion of employment in theprivate sector expected to pick up pace in 2012.Public works are expected to continue to playa considerable part in this (during the recession,employment was propped up mainly by extendedpublic work schemes). The new public worksscheme foresees a switch to the large-scaleemployment of part-time workers this year, withan expansion in the number of those employed, butfrom a budget that is considerably smaller in 2011

than that in 2010. This means that in full timeequivalent terms, the expected employmentdevelopments are considerably less positive. In2012, too, part time employment is expected todominate in the public works scheme, with anincreased impact on the overall statistics due toa larger budget.

Inflation decreasing but above target

The Harmonised Index of Consumer Prices inHungary reached an annual average of 4.7% in2010, with core inflation lower at 3%. This reflectsimported inflation and poorly anchoredinflationary expectations to a large extent, liftedfurther by an increase in certain indirect taxes andtaking place in spite of a still negative output gap.In 2011 inflation is expected to start declining,with the appreciation of the forint to an extentmediating the impact of rising energy prices. Asthe shocks on the cost side are anticipated to fadeaway, inflation is projected to further decrease to3.5% in 2012.

The relatively weak wage pressure given the PITchanges and the slow recovery of full timeequivalent employment is expected to contribute tokeeping core inflation low. An element to note inconnection with the expected wage developmentsis that the additional pay provided to low-incomeemployees in the public sector to ensure that theirearned income does not decrease as a result of thePIT reform is administered in the form ofnon-wage compensation.

Fiscal slippages and consolidation steps

In 2010, the general government budget deficitcame out at 4.2% of GDP compared to the targeted3.8% of GDP. The slippage was essentially due tolower tax revenues both at the central and locallevel.

In 2011, the budget is forecast to post a surplus ofaround 1.6% of GDP in 2011. This is much betterthan the targeted deficit of 2.9% of GDP in thebudget, but somewhat worse than the updatedgovernment forecast of a 2% of GDP surplus.

The headline budgetary developments areimproved by one-off items of 8% of GDP in netterms. Although some of these items, totallingclose to 3% of GDP (receipts from theextraordinary levies and the repatriation of assetsfrom the private pension fund to the budget), were

132

Member States, Hungary

already included in the original budget, there arealso some new developments. On the revenue side,the repatriated assets from the private pensionpillar are expected to eventually generate higherone-off revenue than budgeted by about 7% ofGDP (i.e. the overall revenue will be about 9% ofGDP). On the expenditure side, the recentgovernment decision on the assumption of the debtof two state-owned transport companies and thebuy-out of selected PPP investments may generateone-off outlays of 2% of GDP. Overall, theheadline deficit without the one-off items would besomewhat above 6% of GDP.

Regarding the underlying fiscal developments in2011, this forecast foresees revenue shortfalls of0.7% of GDP (in particular relating to thecorporate income tax and indirect taxes) andexpenditure overruns of 0.3% of GDP compared tothe budgeted figures; this takes into account theslippages observed in 2010 and some recent worsethan foreseen budgetary developments. Theexpected underlying budgetary slippages of 1% ofGDP in 2011 are expected to be largely, but notfully, compensated by the recently adopted savingmeasures (such as a permanent cut of the operatingexpenditures of budgetary institutions) of around0.7% of GDP in net terms.

In order to address the high level of underlyingdeficit, which could have been only temporallycompensated by one-off revenues andextraordinary levies, and also taking into accountthe enacted further tax cuts in 2012 and 2013, theHungarian government announced its structuralreform package on 1 March. It aims at a budgetaryimprovement of close to 2% and 3% of GDP in2012 and 2013, respectively. Expenditure savingswould chiefly be generated by: (i) a large-scalereduction in labour market spending;(ii) eliminating one-third of pharmaceuticalsubsidies; (iii) tightening early retirement schemesand sick pay; (iv) reviewing all current recipientsof disability pension and benefits; and(v) streamlining the institutional network of localgovernments. Moreover, additional revenue isexpected from: (i) a prolongation by one year ofthe full extraordinary levy on financial institutionsrather than the planned reduction foreseen for2012; (ii) the introduction of an electronic road tollfrom 2013; and (iii) the postponement of theearlier enacted further reduction of the corporateincome tax in 2013.

Regarding the consolidation measures, in severalcases the parameters are already worked out, whilefor a smaller part of the programme the conceptualwork has only recently started (notably publictransport and local governments). These latterareas have also been characterised by frequentslippages in the past. Taking the consolidationmeasures at face value and taking the second-round effects into account, the expected impact ofthe package is foreseen to be around 1⅓% of GDPand slightly more than 2% of GDP in 2012 and2013 respectively. However, taking also intoconsideration the implementation risks, thebudgetary impact is expected to be 1% and 1½%of GDP in the years in question.

In the context of the recent ConvergenceProgramme, a number of additional correctivesteps were published. They include: (i) a furtherreduction in the employment tax credit; (ii) somerevenue increasing measures, such as the increasein excise duties, changes in the domain of greentaxes and the widening of the tax base of corporateincome tax; (iii) and the nominal freeze of publicsector wages and of operating expenditures ofcentral budgetary institutions in 2012. Taking intoconsideration also the indirect effects, e.g. thewage compensation provided to those with lowerwages in the public sector, these correctivemeasures could generate an additional adjustmentof close to 1% of GDP.

For 2012, the deficit is forecast to come out at3.3% of GDP in 2012 compared to the autumn2010 forecast of 6.2% of GDP. This reflects theabove-mentioned measures included in theconsolidation package of 1% of GDP andadditional corrective measures included in theConvergence Programme of close to 1% of GDP.This also takes into account implementation riskswhere appropriate as is standard practice. Inaddition, the forecast incorporates the permanentlyhigher pension contributions and lower interestexpenditures due to the pension reform reversal(1½% of GDP). On the other hand, the forecastalso integrates slippages that are expected to becarried over from 2011 and the slightly slower andless tax rich economic recovery compared to theearlier expectations (independent from the effectsof the consolidation measures). If all measureswere taken at face value (i.e. without theintegration of implementation risks), the deficitwould be expected to come out just below 3% ofGDP.

133


There are positive and negative risks around thepresented scenario. Implementation risks could behigher than forecast, notably regarding the nominalfreeze of the public wage bill and expenditure ongoods and services, but the possibility that thegovernment may take further steps to implementthe consolidation package in full can also not beexcluded. Furthermore, corporate income taxesmay increase faster than it is assumed now basedon the recovery of the economy.

Table II.16.1:Main features of country forecast - HUNGARY

2009 Annual percentage changebn HUF Curr. prices % GDP 92-06 2007 2008 2009 2010 2011 2012

GDP 26054.3 100.0 2.9 0.8 0.8 -6.7 1.2 2.7 2.6Private consumption 13901.8 53.4 - 0.2 0.4 -7.8 -2.1 2.7 1.0Public consumption 5792.7 22.2 0.9 -7.3 1.0 -0.2 -1.9 -0.8 0.5Gross fixed capital formation 5441.6 20.9 4.6 1.7 2.9 -8.0 -5.6 1.5 4.5of which : equipment 2010.0 7.7 - 8.0 2.9 -12.2 1.0 7.0 8.0Exports (goods and services) 20175.3 77.4 12.5 16.2 5.7 -9.6 14.1 9.6 9.2Imports (goods and services) 18817.2 72.2 12.7 13.3 5.8 -14.6 12.0 9.3 8.6GNI (GDP deflator) 24750.7 95.0 - -0.8 1.3 -5.3 1.1 2.2 2.0Contribution to GDP growth : Domestic demand 2.8 -1.2 1.0 -6.0 -2.6 1.6 1.5

Inventories 0.2 -0.1 -0.2 -4.7 1.6 0.2 0.0Net exports -0.1 2.1 0.0 4.0 2.2 1.0 1.2

Employment - -0.3 -1.3 -2.8 0.2 0.4 3.0Unemployment rate (a) - 7.4 7.8 10.0 11.2 11.0 9.3Compensation of employees/f.t.e. - 6.7 7.0 -2.2 -0.2 2.6 2.0Unit labour costs whole economy - 5.6 4.8 1.9 -1.1 0.3 2.3Real unit labour costs - -0.3 0.0 -2.4 -3.9 -2.2 -0.2Savings rate of households (b) - 10.3 8.4 10.9 - - -GDP deflator 12.8 5.9 4.8 4.4 2.9 2.6 2.5Harmonised index of consumer prices - 7.9 6.0 4.0 4.7 4.0 3.5Terms of trade of goods - -0.1 -1.1 1.0 -0.2 -0.4 0.0Trade balance (c) -4.5 -0.2 -0.6 3.5 4.7 5.0 5.9Current-account balance (c) - -7.0 -6.9 -0.4 1.7 1.6 1.9Net lending(+) or borrowing(-) vis-à-vis ROW (c) - -6.2 -6.0 1.3 3.7 3.2 3.9General government balance (c) - -5.0 -3.7 -4.5 -4.2 1.6 -3.3Cyclically-adjusted budget balance (c) - -6.1 -4.5 -2.0 -2.1 2.7 -3.3Structural budget balance (c) - -5.2 -4.1 -2.0 -3.1 -5.2 -4.0General government gross debt (c) - 66.1 72.3 78.4 80.2 75.2 72.7


134

Graph II.16.2: Hungary - General governmentbalance and public debt

-10

-8

-6

-4

-2

0

2

4

05 06 07 08 09 10 11 12

% of GDP

0

20

40

60

80

100% of GDP

General government balance (lhs) Public debt (rhs)

forecast

The structural balance is expected to deteriorate bymore than a cumulative 3% over 2010 and 2011 inthe light of the fact that tax cuts have been offset

by one-off and temporary revenues. In 2012, dueto the consolidation measures, a structural effort ofabout 1¼% of GDP is projected.

Regarding debt developments, the recently decideddebt assumption from public transport companiesof up to 1.4% of GDP and the buy-out of formerPPP projects of 0.6% of GDP increase the grossdebt. However, the pension reform reversal hascreated the potential to reduce the gross publicdebt by up to around 7% of GDP, since only a part(1.8% of GDP) of the one-off revenue of 9% ofGDP will be used to contribute to the financing ofthe 2011 budget. According to the preliminaryestimations, ⅔ of this is government papers, whichwill automatically reduce the public debt ratio byaround 4% of GDP. The remaining assets of 3% ofGDP (non-domestic securities) will be liquidatedonly slowly and it is assumed that one-third of this(around 1% of GDP) will reduce the gross publicdebt in 2011 and the remaining will reduce debt in2012. Overall, assuming no reduction of thegovernment's existing FX deposits at the centralbank of around 3% of GDP and the maintenance ofthe current stronger HUF exchange rate comparedto the end-2010 level, the gross public debt isexpected to decrease to about 80% of GDP in 2010to around 73% in 2012.

17. MALTAModerate growth outlook after a strong rebound in 2010

135

After a sharper-than-estimated recession, theMaltese economy rebounded strongly in2010…

Revised national accounts data released by theNational Statistical Office in March 2011 showthat the impact of the global recession on theMaltese economy was much stronger than initiallyreported, putting the scale of the contraction in realGDP in 2009 at 3.4% compared to less than 2%estimated earlier, and thus only slightly below thatof the euro area as a whole (4.1%). Domesticdemand, particularly the sharp retrenchment ininvestment and the drop in inventories, was themain driver of the GDP contraction. Exports alsofell sharply but the high import-intensity ofconsumption and investment resulted in importsdeclining even faster, leading net exports tocushion the drop in real GDP.

Exports and business investment reboundedsharply in 2010, driving a strong economicrecovery, with real GDP growth reaching 3.7%.Goods exports drove the rebound in exports, whileservices exports remained subdued. The increasein imports lagged behind that in exports, leading toa strong positive contribution of net exports. Thepick-up in investment in machinery and equipmentwas partly offset by sustained weakness in housingconstruction. Also, private consumption declinedfurther on the back of subdued wage growth andhigh energy prices.

…but some deceleration is expected over theforecast horizon

Real GDP growth is expected to slow down to 2%in 2011 as the momentum of the recoverymoderated in the second part of 2010. Slightlyhigher growth, at 2.2%, is projected for 2012.

Investment is again expected to contribute stronglyto overall growth in 2011, supported bya significant expansion in public investment. Ascapacity utilisation rates have risen to pre-crisislevels, private investment is also foreseen toremain relatively buoyant, mostly driven by furthergrowth in machinery and equipment. Investmentgrowth is expected to slow down considerably in2012, mainly due to falling public investment,while private investment is projected to remain

dynamic. Housing construction is likely to remainrelatively weak over the forecast horizon.

Private consumption is expected to return topositive growth in 2011, given rising disposableincomes but will remain subdued on account ofvery weak consumer confidence, affected also byexpectations of rising inflation in the comingmonths. Private consumption is forecast to pick upmore strongly in 2012 as inflationary pressuressubside and disposable incomes improve further.

Graph II.17.1: Malta - GDP growth andcontributions

-12-9-6-30369

12

04 05 06 07 08 09 10 11 12

pps.

Changes in inventoriesNet exportsGFCFGovernment consumptionHousehold consumptionGDP (y-o-y%)

forecast

Exports of goods are projected to continuegrowing at a relatively fast pace over the forecasthorizon, reflecting in particular the expected strongperformance of the electronics component, whichaccounted for about 45% of merchandise exportsin 2010. Services exports are also expected to pickup over the next two years.

Net exports are assumed to give rise toa marginally negative contribution to economicgrowth in 2011 due to the ongoing recovery inhighly import-intensive domestic demandcomponents. The slowdown in investment growthin 2012 is expected to contain import growth,thereby resulting in a positive contribution to GDPgrowth from net exports.

After widening to almost 6% of GDP in 2009 onaccount of a sharp increase in net outflows ofprimary incomes, the external deficit is estimatedto have narrowed in 2010, reflecting the improvedbalance of goods and services. Unfavourableterms-of-trade developments are expected to leadto a worsening of the external balance in 2011.


A small downward correction is projected in 2012from improved net exports.

Risks to the outlook are tilted to the downside.A rise in credit-servicing costs, on account of theexpected increase in short-term interest rates,could have a negative impact on credit provisiondue to the large share of loans with floatinginterest rate arrangements. In addition, ongoinggeopolitical tensions in the MENA region mayhave a toll on tourist arrivals as of this year and onnet exports more generally in view of Malta'spositive trade balance with Libya.

Labour market conditions improve further…

Following a marginal decline in 2009, employmentrebounded in 2010. This outweighed the increasein labour supply, resulting in a marginal drop inthe unemployment rate. Employment is expectedto increase at a more moderate pace in 2011 and2012, in line with labour supply, leaving theunemployment rate broadly unchanged.

Compensation per employee fell in 2010 followingyears of relatively strong growth. This is projectedto reverse in 2011-12. In 2012 in particular thecost-of-living adjustment mechanism (COLA) isbound to put pressure on wages. Following therecovery in labour productivity in 2010 as a resultof the strong rebound in economic activity,productivity gains are expected to moderate overthe forecast horizon. As a result, after decliningconsiderably in 2010, unit labour costs areprojected to grow faster than for the euro-areaaverage, thereby putting pressure on theinternational competitiveness of the traditionalmanufacturing sectors.

…while inflation remains above the euro areaaverage

HICP inflation in Malta has exceeded the euro-area average by over 1pp. in 2008-10. Averageinflation is expected to rise to 2.7% in 2011, from2% in 2010, before decelerating to 2.2% in 2012.As a result, it is projected to remain above theeuro-area average during the forecast horizon, butto a lesser extent than in 2008-10.

Services are set to be the largest contributor toHICP inflation over the forecast horizon, also dueto their relatively large weight in the index. Somefactors that are expected to push up services pricesare the announced increase in VAT for hotel and

private accommodation as of 2011 as well asimproving demand conditions in 2012.

Graph II.17.2: Malta - HICP and contributions

-1

0

1

2

3

4

5

04 05 06 07 08 09 10 11 12

pps.

EnergyUnprocessed foodProcessed foodNon-energy industrial goodsServicesHICP (y-o-y%)

forecast

Given Malta's high dependence on imported oil forenergy, the energy component of the HICP is alsoexpected to be a strong driver of inflation in 2011,with a slight deceleration expected in 2012. Foodinflation is also projected to be rather dynamic in2011, as a result of increases in global food pricesand the increase in excise duties on alcohol andtobacco in the budget for 2011, but is expected toease in 2012.

Further improvement in the budgetary position

The general government deficit narrowed slightlyto 3.6% of GDP in 2010, compared to 3.7% ofGDP in 2009.

On the expenditure side, compensation ofemployees grew only moderately, whereasintermediate consumption and social transfersrecorded more pronounced increases. Total currentexpenditure rose by 3.5%. Gross fixed capitalformation remained flat reflecting weak absorptionof EU funds, the postponement of some projectsand one-off sales of shipyards assets. On therevenue side, tax proceeds grew moderately in2010 as the rebound in the economy was driven byrelatively tax-poor components (exports andinvestment). By contrast, social contributionsincreased by more than the economy-wide wagebill, also benefitting from the proceeds of a taxamnesty. Total current revenues grew by 2.8%.

The general government deficit is forecast tonarrow to 3% of GDP in 2011, while a balancedposition in primary terms is expected for the firsttime since 2007. Around two-thirds of the deficitreduction between 2010 and 2011 is related to theexpiry of some temporary measures supporting the

136

Member States, Malta

economy that were adopted in the 2010 budget.Current primary expenditure is expected todecelerate compared to 2010, mainly due to theexpiry of the above-mentioned support measuresand the efficiency gains targeted in the budget,although social transfers are expected to keepincreasing at a fast pace due to buoyant age-relatedentitlements. After the stagnation recorded in2010, capital expenditure is set to reboundstrongly. Meanwhile, direct taxes are set toaccelerate on the back of improved corporateprofitability as well as higher household income.Indirect taxes will benefit from the increase inexcise duties and the modest rebound in privateconsumption, while social contributions are set toincrease more moderately given the one-off impactof the tax amnesty in 2010.

Graph II.17.3: Malta - General governmentgross debt and deficit

40

45

50

55

60

65

70

75

80

04 05 06 07 08 09 10 11 12

% of GDP

012345678910

Gross debt (lhs) Deficit (rhs)

forecast

% of GDP

The debt ratio increased by 6.5 pps. of GDPbetween 2008 and 2010 and, based on theno-policy-change assumption, is forecast tocontinue increasing over the forecast horizonreflecting a modest primary surplus. The upcomingrestructuring of Air Malta may give rise toadditional government expenditure, therebyentailing upward risks for both the deficit and debtprojections.

In 2012, based on the no-policy-changeassumption, the deficit ratio is expected to remainunchanged as higher tax revenues are broadlyoffset by expected increases in the public sectorwage bill and social transfers.

Table II.17.1:Main features of country forecast - MALTA


GDP 5850.7 100.0 3.5 4.4 5.3 -3.4 3.7 2.0 2.2Private consumption 3704.4 63.3 - 0.8 4.0 -1.4 -0.7 0.8 1.4Public consumption 1239.4 21.2 - 0.5 12.1 -1.3 0.6 0.5 1.1Gross fixed capital formation 875.5 15.0 - 4.8 -25.3 -18.6 10.0 11.0 3.0of which : equipment - - - - - - - - -Exports (goods and services) 4540.9 77.6 - 3.1 1.0 -8.4 17.2 6.1 6.1Imports (goods and services) 4579.2 78.3 - 1.6 -1.1 -11.1 12.6 6.4 5.6GNI (GDP deflator) 5429.4 92.8 2.8 4.1 5.2 -6.6 3.9 2.0 2.2Contribution to GDP growth : Domestic demand - 1.7 -0.8 -4.1 1.0 2.2 1.6

Inventories - 1.4 4.0 -2.3 -1.1 0.0 0.0Net exports - 1.3 2.0 3.0 3.7 -0.2 0.6

Employment 1.0 3.2 2.6 -0.3 2.2 1.3 1.4Unemployment rate (a) 6.5 6.4 5.9 7.0 6.8 6.8 6.7Compensation of employees/head 5.2 1.5 4.9 2.9 -1.7 2.0 3.0Unit labour costs whole economy 2.7 0.3 2.3 6.1 -3.1 1.3 2.3Real unit labour costs 0.1 -2.8 -0.4 3.5 -5.9 -1.3 0.0Savings rate of households (b) - - - - - - -GDP deflator 2.5 3.2 2.7 2.6 3.0 2.6 2.3Harmonised index of consumer prices - 0.7 4.7 1.8 2.0 2.7 2.2Terms of trade of goods - 0.6 -5.6 -5.4 3.0 -0.4 0.4Trade balance (c) -18.3 -18.0 -21.1 -16.6 -14.9 -16.0 -15.8Current-account balance (c) - -5.6 -5.6 -6.9 -4.1 -4.7 -4.5Net lending(+) or borrowing(-) vis-à-vis ROW (c) - -4.6 -5.1 -5.7 -2.8 -3.3 -3.0General government balance (c) - -2.4 -4.5 -3.7 -3.6 -3.0 -3.0Cyclically-adjusted budget balance (c) - -2.1 -5.3 -2.8 -3.5 -3.0 -3.1Structural budget balance (c) - -2.8 -5.6 -3.4 -4.3 -3.1 -3.1General government gross debt (c) - 62.0 61.5 67.6 68.0 68.0 67.9


137

18. THE NETHERLANDSGradual rebalancing of growth

138

The reliance of economic growth on netexports…

After a severe contraction by 4% in 2009, theDutch economy recorded positive GDP growth of1.8% in 2010, driven by the external sector, whiledomestic demand (excluding inventories) stillcontributed negatively to economic growth.

Although private consumption growth turnedpositive again in 2010, it remained modest at only0.4%. This outcome could be related to the rise inunemployment and relatively low wage increases.Consumer confidence, although improving,remained negative throughout the year. Afterrecording virtually no q-on-q growth in the secondand third quarters of 2010, consumption reboundedin the final quarter of 2010 with a positive rate ofgrowth of 0.5% q-o-q. However, this improvementtook place against the backdrop of a relatively coldwinter, which increased energy consumption.

Investment growth turned out to be negative forthe second consecutive year, mainly due to thestrong negative carry-over from 2009. Moreover,the different components of investment displayedwidely divergent patterns. Investment inconstruction remained depressed in 2010 anddecreased even more compared to 2009. On theother hand, investment in equipment contributedpositively and significantly to gross fixed capitalformation. However, as capacity utilisation ratesremained well below their long-term averages,investment in equipment was mainly based onreplacement investment, and therefore it has alsonot yet recovered to pre-crisis levels.

Net exports proved to be one of the main drivers ofeconomic growth, as the very open Dutcheconomy benefitted from the strong recovery inworld trade. The reliance of growth on net exportsimproved the trade balance and positivelycontributed to the current-account surplus.However, it was the improvement in the balance ofprimary income (which turned negative inresponse to the crisis) that mainly accounted forthe strong rebound in the current-account balance,bringing it back to its pre-crisis level at over 6½%of GDP.

…is expected to gradually diminish asrecovery becomes more broad-based.

Economic activity is forecast to continue growingmoderately, by 1.9% in 2011 and 1.7% in 2012.These growth rates are relatively modest in light ofthe severe contraction in 2009 and reflect therelatively drawn out and more moderate recoveryfollowing a financial crisis. In fact, only in the firsthalf of 2012 is real GDP expected to reach its precrisis level.

Consumer confidence, whilst still negative, hasshown some signs of improvement in the firstmonths of 2011 compared to 2010. Privateconsumption is expected to progressively firm overthe forecast horizon, due to the recovery inhousehold gross disposable income. This mainlyresults from the gradual improvement in the labourmarket, which is expected not only to lead tohigher employment but also to exert upwardpressure on wage developments. It is assumed,however, that real disposable income will benegatively impacted by the increase in inflationforeseen over the same period. Furthermore, thebudgetary consolidation is expected to restrainconsumption growth, through – amongst otherthings – lower public employment, wagemoderation in the public sector and a higher taxburden. On balance real disposable income isexpected to increase moderately. Finally, wealtheffects, both financial and non-financial (inparticular housing), which can have a large impacton private consumption in the Netherlands, are notexpected to play an important role in 2011. Laggedeffects from 2010 should be broadly neutral, as anincrease in the stock market positively affected thewealth of households, while (limited) pricedeclines on the housing market somewhatdecreased housing wealth. All in all, privateconsumption growth is expected to increasegradually from 0.4% in 2010 to 0.8% in 2011 and1.1% in 2012.

As the capacity utilisation rate and producerconfidence are recovering, investment is expectedto positively contribute to economic growth inboth 2011 and 2012. A further pick-up ininvestment is expected in 2012 when capacityutilisation rates are forecast to reach their pre-crisislevels, driving corporations to undertake newinvestment. Since corporations have continuously

Member States, The Netherlands

improved their balance sheets, financingconditions should not create constraints forinvestment, although rising interest rates couldlead to somewhat muted dynamics. The outlookfor investment in the construction sector, despitethe recent improvement of the relevant confidenceindicator, remains subdued. A large spare capacityin especially the non-residential segment isexpected to dampen investment in construction.Finally, gross fixed capital formation by thegovernment is set to decrease in 2012 as a result ofthe consolidation measures put in place. Overall,investment is forecast to expand by around 3% in2011 and 4% in 2012.

Net exports are expected to positively contribute toeconomic growth throughout the forecast horizon.However, growth would rely gradually less on netexports and more on internal demand, as a result ofa combination of higher domestic demand andlower export growth in the wake of moderatingworld trade developments. The contribution of netexports is expected to fall gradually from 1% in2010 to 0.9% and 0.5% in 2011 and 2012respectively, while domestic demand (includinginventories) is expected to see its contribution toGDP growth gradually increase over the forecasthorizon, from 0.8% pp. in 2010 to 1.2% pps. in2012.

Graph II.18.1: The Netherlands - GDP growthand contributions

-6

-4

-2

0

2

4

6

04 05 06 07 08 09 10 11 12

pps.

Net exportsInventoriesDom. demand, excl. invent.Real GDP growth (y-o-y%)

forecast

Inflation on the rise

After two years of low inflation of around 1% in2009 and 2010, HICP is expected to risesignificantly to 2.2% in 2011, mainly as a result ofincreases in energy prices and unprocessed foodprices. Although the impact of these increases isforecast to gradually fade out in 2012, thecontinuous improvement in the labour market in2011-12 is expected to put pressure on wages and

unit labour costs. The continued expectedimprovement in private consumption in 2012 willalso put additional pressure on inflation. Onbalance, HICP inflation is expected to only slightlydecrease from 2.2% in 2011 to 2.1% in 2012.

ng markets could improve thegrowth outlook.

t in the labour market

to 4.2% and 4.0%in 2011 and 2012 respectively.

This macroeconomic scenario is subject to bothpositive and negative risks. On the negative side,a further increase in the oil price could hold backthe global recovery, which would particularlyimpact the Netherlands due to the openness of theeconomy. Furthermore, the recovery in the Dutchhousing market might further lag the economicupturn, hampering the pick-up in privateconsumption through negative confidence andwealth effects. On the positive side, more buoyantdemand from emergi

The gradual improvemenis expected to continue.

In 2009, the unemployment rate increased byslightly more than ½ pp. to 3.7% and further to4.5% in 2010, which is still rather modest giventhe size of the contraction in output during theeconomic and financial crisis. The tight labourmarket before the crisis played an important role,as employers were reluctant to fire personnel giventhe difficulties to attract and retain qualifiedworkers before the crisis. Based on short-termindicators, in particular more positive consumerexpectations about unemployment and risingnumbers of unfilled vacancies, the prospects forunemployment developments point to a continuedgradual decrease, though rates are expected toremain above pre-crisis levels over the forecasthorizon. Employment growth in the course of 2011is driven by the private sector, as the public sectoris negatively affected by the consolidationmeasures of the government aiming to reduce thesize of government. From a more medium-termperspective, positive economic growth is expectedto increase both the labour supply, as discouragedworkers return to the labour force, and labourdemand, given the increase in economic output.Overall, the unemployment rate is forecast tofollow a slightly downward path

Nominal unit labour costs are expected to increaseover the forecast horizon as the improved labourmarket prospects and rising inflation are set tocreate upward pressure on wages in the privatesector, although the wage moderation in the public

139


Table II.18.1:Main features of country forecast - THE NETHERLANDS


GDP 572.0 100.0 2.6 3.9 1.9 -3.9 1.8 1.9 1.7Private consumption 262.6 45.9 2.1 1.8 1.1 -2.5 0.4 0.8 1.1Public consumption 162.7 28.4 2.6 3.5 2.5 3.7 1.5 -0.1 -0.1Gross fixed capital formation 108.9 19.0 2.9 5.5 5.1 -12.7 -4.8 3.0 4.1of which : equipment 31.3 5.5 4.2 8.6 4.9 -19.0 7.6 7.7 8.0Exports (goods and services) 395.9 69.2 6.2 6.4 2.8 -7.9 10.9 6.4 6.0Imports (goods and services) 354.6 62.0 6.2 5.6 3.4 -8.5 10.5 5.8 6.1GNI (GDP deflator) 556.5 97.3 2.8 2.9 -1.7 -4.7 4.9 2.0 1.8Contribution to GDP growth : Domestic demand 2.3 2.8 2.2 -2.8 -0.3 0.9 1.2

Inventories 0.0 0.1 -0.1 -0.9 1.1 0.1 0.0Net exports 0.3 1.0 -0.2 -0.2 1.0 0.9 0.5

Employment 1.1 2.2 1.2 -1.2 -0.6 0.5 0.7Unemployment rate (a) 4.7 3.6 3.1 3.7 4.5 4.2 4.0Compensation of employees/f.t.e. 3.5 3.4 3.6 2.2 1.1 2.9 2.5Unit labour costs whole economy 1.9 1.7 3.0 5.1 -1.2 1.4 1.6Real unit labour costs -0.4 -0.1 0.6 5.3 -2.8 -0.4 -0.6Savings rate of households (b) 15.6 13.0 12.0 13.4 12.2 12.4 12.8GDP deflator 2.4 1.8 2.4 -0.2 1.6 1.9 2.1Harmonised index of consumer prices 2.2 1.6 2.2 1.0 0.9 2.2 2.1Terms of trade of goods 0.5 -0.1 -0.1 -0.8 -0.6 0.0 0.2Trade balance (c) 5.8 7.6 7.3 6.7 7.4 8.3 8.7Current-account balance (c) 5.6 8.4 4.8 3.4 6.7 7.7 8.3Net lending(+) or borrowing(-) vis-à-vis ROW (c) 5.3 8.2 4.4 3.1 6.0 7.1 7.7General government balance (c) -1.6 0.2 0.6 -5.5 -5.4 -3.7 -2.3Cyclically-adjusted budget balance (c) -1.4 -0.9 -0.5 -3.6 -3.8 -2.5 -1.3Structural budget balance (c) - -0.9 -0.5 -3.6 -3.7 -2.5 -1.3General government gross debt (c) 62.4 45.3 58.2 60.8 62.7 63.9 64.0


140

ward pressure on labour costdevelopments.

l

government deficit in 2012 to 2.3% ofGDP.

The general government debt increased from60.8% of GDP in 2009 to 62.7% of GDP in 2010.The relative moderate increase, taking into account

sector may have some spill-over effects on privatesector wage dynamics. Furthermore, employers'social contributions are expected to increase,exerting further up

Graph II.18.2: The Netherlands -Public finances

30

40

50

60

70

80A strong improvement in the generagovernment balance and debt set to stabilise

The general government balance stabilised in2010, with a deficit of 5.4% of GDP. The deficitoutturn was the result of a combination of higherexpenditure and higher revenue. Total governmentexpenditure increased mainly due to lagged effectsof the economic crisis, in particular the rise inunemployment benefits, while higher total generalgovernment revenue was underpinned by theeconomic recovery. For 2011, the generalgovernment balance is expected to considerablyimprove from a deficit of 5.4% of GDP to 3.7% ofGDP. The improvement mainly follows from thewithdrawal of the stimulus package and theconsolidation measures put in place by theprevious and current government. Continuedconsolidation is expected to further improve thegeneral

04 05 06 07 08 09 10 11 12

% of GDP

-3-2-101234567

General government debt (lhs)General government deficit (rhs)

forecast

% of GDP

n2011 as more debt redemption by banks isexpected to mitigate the increase in the debt levelensuing from a still-high deficit and the debt ratiois expected to stabilise around that level in 2012.

the size of the deficit, is mainly due to therepayment by banks of the financial support givenby the government in response to the financial andeconomic crisis. The general government debtratio is expected to increase further to 63.9% i

19. AUSTRIAStronger growth, but subject to greater risk

141

Export-driven recovery in 2010setting the stage for higher investment

The recovery of the Austrian economy gainedfurther ground in 2010. GDP growth averaged 1%q-o-q in the second to fourth quarter afteressentially stagnating in the first and reached anannual average of 2%. Net exports were the maindriver of growth, with a contribution of 1.2 pps.Exports of goods and services expanded bya robust 10.8%.

While overall gross fixed capital formationdeclined by 1.3% in 2010, investment inconstruction diminished by 3.4%, not least becauseof slashed local government residentialconstruction budgets. In addition, sentiment in theconstruction sector has been broadly stable,leading indicators such as new orders and buildingpermits still fall short of signalling an upturn. Theperformance of equipment investment was morepromising. The strong rise in exports put capacityutilisation in manufacturing on a sustained upwardpath, which ignited a firm revival of equipmentinvestment in the second quarter of 2010 andbodes well for investment activity in the comingquarters.

Having played a major stabilising role throughoutthe recession, private consumer demand continuedto increase steadily, albeit moderately, throughout2010, posting 1% growth for the year. This reflectsabove all favourable labour-market developmentsas evidenced by the reversal of the employmentloss of 2009. Consumer confidence was also rathersolid throughout the second half of 2010 and in thefirst few months of 2011.

2011 and beyond – domestic demand regainsground

The recovery of the Austrian economy is set tocontinue and become more broad-based. The latestsurvey data suggest that the upward trend inindustrial activity will be sustained. Austria isamong a group of countries enjoying close tieswith the German economy, and with its exportingsectors in particular, and benefits indirectly fromthe ongoing buoyant demand in the emergingeconomies of Latin America and Asia. Theincrease in unit labour costs paused in 2010 aslabour productivity growth resumed.

Labour-productivity growth is projected to remainsolid in 2011-12 while wage growth continues tobe moderate. Thus, relative unit labour costs areset to decrease mildly and to support strong exportgrowth in line with demand in relevant markets.

Meanwhile, equipment investment is projected toincreasingly turn into a major growth-supportingfactor. Companies are expected to continuerenewing and expanding their capital stock inresponse to rapidly increasing capacity utilisation.The latter reached 86.3% in April 2011 thusexceeding the long term average. A gradualrecovery in construction investment may also takeplace later in 2011 and into 2012.

Graph II.19.1: Austria - Investment inequipment and capacity util isation

-8

-4

0

4

8

07Q3 08Q1 08Q3 09Q1 09Q3 10Q1 10Q3 11Q160

70

80

90

Gross fixed capital formation equipment (lhs)Capacity utilisation in manufacturing (rhs)Capacity utilisation long term average (rhs)

q-o-q% %

The growth of private consumption expenditure isset to remain restrained at about 1% in 2011-12.Higher energy and food prices at the onset of 2011have worked their way into consumer priceinflation and are likely to weigh on household realdisposable income and consumer demand. Due tohigher inflation, real wages are likely to decline in2011 and to pick up only in 2012.

All in all, real GDP is forecast to grow by 2.4% in2011 and 2% in 2012. The projected strengtheningof investment activity along with continued growthof private consumption will bring abouta rebalancing of growth towards domestic sourceswith net exports nevertheless maintaining animportant role.


Graph II.19.2: Austria - GDP growth andcontributions

-5.0

-2.5

0.0

2.5

5.0

04 05 06 07 08 09 10 11 12Net tradeDomestic demandGDP growth (y-o-y%)

pps.forecast

Revival of inflation in 2011

Having stayed below 2% for most of 2010,inflation reached 3.3% in March 2011. About onethird of this year-on-year increase was attributableto higher motor and heating fuel prices. Another0.4 pp. was due to the increase in the tax oncigarettes introduced in the context of fiscalconsolidation. Wholesale prices were up by 12% inMarch over the previous year. Core inflation,defined as HICP excluding energy andunprocessed food, has not remained unaffected bythese surges as they seem to have spilled over intoservice prices, where the annual rate of changeaccelerated from 1.6% in January to 2.3% inMarch 2011. The rise in inflation is erodingpurchasing power as it exceeds the increase innegotiated wages. These effects are projected togradually subside by 2012, leading to a moderationof inflation. Wage dynamics should remaincontained over the forecast horizon asunemployment remains above pre-crisis levels.

Labour market to improve further

In view of the severity of the recession,employment held up relatively well, declining byaround 1½% in 2009. In 2010, job growth resumedand by the end of the year the employment losswas reversed on the back of steadily growinglabour demand in services and a recovery inindustrial employment. As of March 2011,unemployment is 14% lower compared to the peakof October 2009. This, however, reverses less thanhalf of the unemployment increase caused by thecrisis. The economic recovery seems to betriggering additional labour supply as theparticipation rate has gained ½ pp. in 2010 to reach77.4%. Accordingly, the projected employmentincreases of the order of slightly below 1% in both

2011 and 2012 are likely to bring about only agradual decline in unemployment.

Statistical revision leads to upward shift ofgovernment deficit

Following the outcome of the discussions betweenthe Austrian authorities and Eurostat on theimplementation of rules contained in the "Manualon Government Deficit and Debt", on 31 March2011 Austrian public finance figures were revisedfrom 1995 onwards. While the changes concerningthe period up to 2006 are less significant, those forthe years 2007-10 raised the general governmentdeficit by between 0.4 and 1% of GDP. Therevisions stem from three sources: 1) theassumption by the government of 70% of the costsof infrastructure financing of the Austrian FederalRailways, 2) the costs of financing the regionalpublic hospitals, and 3) the assumption of a part ofthe liabilities of the "bad bank" KA Finanz.

The general government deficit rose from 4.1% in2009 to 4.6% in 2010. The increase was entirelydue to the above-mentioned statistical revision.Without it the deficit would have come in at about3.5% of GDP in both years. Additionaldiscretionary measures came into force in 2010and burdened the budget by about ¼% of GDP(namely parts of the 2009 tax reform such as relieffor families with children and tax cuts for the self-employed). The accelerated depreciation provisionfor investments, for fixed assets adopted in January2009, also weighed somewhat on the budget in2010. However, the discretionary measures were toa large extent offset by higher-than-expected taxreceipts. It should be stressed that the estimateddeterioration in the structural budget balance in2010 includes the above-mentioned assumption ofthe bad bank's liabilities (equivalent to about 0.4%of GDP).

Fiscal consolidation, facilitated by the favourableeconomic developments, is set to begin in 2011,and is projected to result in a narrowing of thedeficit to 3.7% of GDP in 2011 and 3.3% in 2012.The Austrian government's initial intention was toarrive at a deficit lower than 3% of GDP as soon as2012, but the above-mentioned revision challengedthis plan.

At the end of December 2010, the Austrianparliament adopted a budget law for 2011, whichcontained a package of measures (amounting toaround 3/4% of GDP) aimed at bringing Austrian

142

Member States, Austria

Table II.19.1:Main features of country forecast - AUSTRIA


GDP 274.3 100.0 2.2 3.7 2.2 -3.9 2.0 2.4 2.0Private consumption 149.0 54.3 1.7 0.7 0.5 1.3 1.0 1.1 1.1Public consumption 54.5 19.9 2.0 2.1 4.0 0.4 -2.4 0.8 0.8Gross fixed capital formation 58.0 21.1 1.4 3.9 4.1 -8.8 -1.3 3.0 2.9of which : equipment 22.0 8.0 1.5 6.6 7.5 -14.5 1.8 8.3 5.0Exports (goods and services) 138.6 50.5 6.1 8.6 1.0 -16.1 10.8 7.0 6.8Imports (goods and services) 126.2 46.0 5.0 7.0 -0.9 -14.4 9.2 5.9 6.3GNI (GDP deflator) 271.4 98.9 2.2 3.6 2.0 -3.6 1.8 2.4 1.9Contribution to GDP growth : Domestic demand 1.7 1.6 1.8 -1.1 -0.2 1.4 1.4

Inventories 0.0 0.7 -0.6 -1.0 1.1 0.1 0.0Net exports 0.5 1.3 1.1 -1.8 1.2 0.9 0.6

Employment 0.5 1.5 1.6 -1.6 1.0 0.8 0.7Unemployment rate (a) 4.2 4.4 3.8 4.8 4.4 4.3 4.2Compensation of employees/f.t.e. 2.7 3.0 3.2 2.3 1.6 2.5 2.7Unit labour costs whole economy 0.9 0.8 2.7 4.8 0.6 1.0 1.4Real unit labour costs -0.6 -1.2 0.8 3.9 -0.9 -0.8 -0.3Savings rate of households (b) - 16.2 16.5 16.0 15.0 14.9 15.0GDP deflator 1.6 2.1 1.9 0.8 1.5 1.7 1.8Harmonised index of consumer prices 1.9 2.2 3.2 0.4 1.7 2.9 2.1Terms of trade of goods -0.1 -0.5 -2.1 2.1 -1.5 -1.8 -0.5Trade balance (c) -2.2 0.4 -0.2 -0.8 -0.8 -1.1 -1.2Current-account balance (c) -0.5 4.0 3.7 2.6 2.6 2.6 2.8Net lending(+) or borrowing(-) vis-à-vis ROW (c) -0.6 4.1 3.7 2.7 1.5 1.7 2.1General government balance (c) -2.6 -0.9 -0.9 -4.1 -4.6 -3.7 -3.3Cyclically-adjusted budget balance (c) -2.6 -2.0 -2.2 -2.9 -3.7 -3.2 -2.9Structural budget balance (c) - -2.0 -2.2 -2.9 -3.7 -3.2 -2.9General government gross debt (c) 64.7 60.7 63.8 69.6 72.3 73.8 75.4


143

public finances back to a sustainable path. Almosthalf of the consolidation effort is to take place onthe revenue side. The biggest item is a bank levy(0.2% of GDP), designed in response to the latestglobal financial crisis and intended to collecta contribution from financial institutions to thecosts of stabilising the financial sector borne by theAustrian authorities. The effect of the latter isbeing mitigated, however, by the withdrawal ofa fee on loans. Another substantial element in thepackage is a rise in the fuel tax and in the tax oncigarettes (a combined effect of around 0.2% ofGDP). Apart from this, the set of agreed measurescomprises inter alia: the introduction of a tax onairline tickets, a rise in the tax on property sales byprivate foundations and an increase in registrationfees for less environment-friendly vehicles, thetotal effect of which should have only a modestbudgetary impact.

The measures on the expenditure side consistmainly of cuts in family allowances and pensionentitlements as well as some saving in the area oflong-term care. Some reductions in administrativecosts are also foreseen across the board. The effectof these expenditure measures will coincide witha drop in spending on labour market relief as theshort-time work scheme is being phased out.However, the consolidation effort will partly beoffset by additional spending on education, R&D

and energy-saving renovation of buildings agreedby the government coalition partners in theconsolidation package.

The execution of consolidation plans should befacilitated by the recent agreement between thethree layers of government on the new edition ofthe Austrian Stability Pact, which prescribesconsolidation targets for each layer. The agreementalso foresees strengthening the Pact's enforcementmechanism and streamlining the financing oflong-term care across the central, regional andlocal governments.

Due to statistical revisions for the period from1999 onwards, gross government debt surpassed72% of GDP in 2010. The revision stemmed fromboth the above-mentioned adjustment to thegeneral government deficit series and, lesssignificantly, a reclassification of other itemsimpacting only on debt (e.g. treatment of cashcollaterals and regional public housing unit).Throughout the forecast period, the debt ratio isprojected to rise continuously, from almost 74% ofGDP in 2011 to over 75% of GDP in 2012.

20. POLANDRecovery continues as strong private demand counterbalancesrapid fiscal consolidation

144

Broad-based rebound supported by exportsand resilient labour market

In 2010, real GDP growth increased to 3.8% upfrom 1.7% in 2009. Compared to the countrieswhich experienced a severe recession in 2009 therebound was subdued, but from a strong base. Thelevel of real GDP in Poland has increased by 11%since 2007, much more than in any other EUcountry.

Real GDP growth in 2010 was driven by privateconsumption and restocking. Improving labourmarket prospects underpinned private consumptionwhile rebounding external demand fuelled thedomestic manufacturing sector and strengthenedthe turnaround in the inventories cycle. Privateinvestment, however, was held back by theuncertain global outlook and constrained creditsupply, although inflows of EU funds supportedpublic investment spending. All in all, investmentshrank by 2% for the second year running. Thecontribution of net exports was slightly negative,as the appreciating currency and strengtheningdomestic demand resulted in accelerating importdemand.

Recovery broadens as investment spendingpicks up

The recovery is set to broaden further with realGDP projected to increase by 4% in 2011 and3.7% in 2012. The main growth drivers are agradually improving labour market (in particularaccelerating wages in the private sector),rebounding consumer and business confidence, along-awaited increase in private investment on theback of high rates of capacity utilisation andimproved profitability, and increased foreigncapital inflows.

Private investment is expected to pick up in 2011after two years of decline. Many companies hadput investment on hold during the crisis, uncertainabout the global outlook. Given the improvedglobal outlook, high rates of capacity utilisation,and the strong financial position of the corporatesector, these projects are likely to be implementedin the medium term. Finally, capital formation isset to benefit from a robust increase in public

investment in infrastructure ahead of the Euro2012 football championship.

Real disposable income and consumption willbenefit from growing employment, increasingwages and returning consumer confidence, thoughthe increase in indirect taxes and higher inflationwill somewhat limit this positive impact. Thehousehold saving rate is expected to fall, reflectingmainly recent changes in the pension system andother fiscal consolidation measures. Overall,private consumption growth will graduallyincrease over the forecast horizon, although stillremaining below pre-crisis levels. The impact ofexternal trade on growth is likely to be slightlynegative in 2011, as accelerating domesticdemand, in particular growing investment, maystimulate imports, outweighing the effects ofongoing strong expansion of exports.

-4

-2

0

2

4

6

8

10

04 05 06 07 08 09 10 11 12

External demandDomestic demandInventoriesGDP growth (y-o-y%)

forecast

Graph II.20.1: Poland - GDP growth and contributionspps.

The recovery is expected to moderate somewhat in2012 due to public investment and publicconsumption growth. Still, real GDP growth isprojected to remain close to potential as the labourmarket situation improves further and privateinvestment accelerates on the back of a projectedloosening of credit conditions.

This scenario is subject to broadly balanced risks.On the upside, a stronger-than-expected rebound inglobal demand and risk appetite would boostexports and investments. On the downside,a delayed consolidation of public finances couldadversely affect market sentiment, and increase thecosts of borrowing for the private sector.

Member States, Poland

Current-account deficit widens as foreigncapital flows in

The current-account deficit, which temporarilyimproved to 2.1% of GDP in 2009 following thesharp depreciation, is estimated to have reached3.1% of GDP in 2010. It is projected to widenfurther to above 4% of GDP over the forecasthorizon, reflecting a rebound in investmentfuelling demand for imports. Ample globalliquidity and a growing interest rate differential ledto increased portfolio and other capital inflowsreaching 8.7% of GDP in 2010, mainly financingsovereign debt. The resulting increase in incometransfers is expected to widen the current-accountdeficit further.

Inflation set to moderate in the medium term

The rate of HICP inflation decreased from 4% in2009 to 2.6% in 2010, as the effects of the steepdepreciation of the domestic currency petered outfollowing the crisis. It is, however, expected toincrease again in 2011 reaching 3.8%, as elevatedfood and energy prices and a rise in administeredprices and indirect taxes (VAT and excise duties)start to push up headline inflation. Despite growingwage pressure, it is forecast to moderate to 3.2% in2012, reflecting developments in non-corecomponents of the index.

Despite relatively modest productivity increases,slow wage growth in 2009-10 kept unit labourcosts in check. Looking ahead, emerging laboursupply constraints and the unwinding ofcrisis-driven wage moderation are expected toresult in wage acceleration in the private sectorover the forecast horizon, which is likely to fuelcore inflation and affect unit labour costs, despitea nominal freeze of the wage fund in the publicsector.

Labour market faces supply side constraints

After a moderate rise in the unemployment rate in2009 (by 1.1 pps. to 8.2%), it increased further to9.6% in 2010 as labour supply increased owing,inter alia, to recent structural reforms. The sharper-than-anticipated downward adjustment of realwages mitigated the effects of the slowdown onemployment, which grew by 1% in 2009-10.

Employment growth is set to reach 1.1% in 2011and 1% in 2012, as hiring is expected to remainmuted due to the effect of labour hoarding duringthe crisis. This will result in unemployment falling

to 8.8% by the end of the forecast horizon.However, in the medium term, mountingdemographic pressures will put a limit on theexpansion of labour supply. Further reformsfavouring dynamic employment creation andlonger working life will be needed to sustaina permanent recovery of domestic demand withoutundermining the competitiveness of the economy.

Considerable fiscal consolidation

After a sharp deterioration in 2009, due to thefinancial and economic crisis and a sizeablestimulus package to counteract its consequences,the general government deficit continued toincrease in 2010. Despite higher-than-projectedGDP growth and some minor consolidationmeasures, it increased from 7.3% to 7.9% of GDPon the back of lower-than-expected revenues fromCorporate Income Tax (CIT), higher consumptionand investment expenditure and higher-than-expected interest expenditure.

In the 2011 Budget Law, the government hasimplemented a range of reforms to consolidatepublic finances. These measures, together with therebound in economic growth, are expected to bringabout a considerable reduction in the headlinedeficit. On the revenue side, the main effect comesfrom the amendment of the pension reform thatreduces the contribution transferred to the privatepension funds from 7.3% to 2.3% of gross wages.The difference is henceforth retained in the publicfirst pillar and classified as budget revenue. Theother measures include a 1 pp. temporary increasein VAT rates, the abolition of some VAT andexcise duty exemptions and a freeze in PersonalIncome Tax (PIT) thresholds. As a result of thosemeasures, as well as a higher tax base resultingfrom faster GDP growth and improvement in CITannual settlements, the revenue ratio is expected toincrease from 37.9% in 2010 to 40.0% in 2011.Developments on the expenditure side are drivenmainly by a freeze of the wage fund of publicsector employees (with the exception of teachers),and an expenditure rule which limits real growth to1% in all newly enacted and existing discretionaryexpenditure items. Together with additional cuts(spending on active labour market policies, funeralbenefit) and the impact of the 2009 abolition ofearly retirement pensions, the new measures areexpected to contain any further increase in theexpenditure ratio, keeping it constant at 45.8% in2011. As a result of the reforms implemented andthe changes in the macroeconomic environment

145


the headline deficit is expected to drop from 7.9%of GDP in 2010 to 5.8% of GDP in 2011.

Graph II.20.2: General government finances

36

38

40

42

44

46

48

06 07 08 09 10 11 12

% of GDP

0

1

2

3

4

5

6

7

8

9% of GDP

Total expenditure (lhs)Total revenue (lhs)Deficit (rhs)

forecast

The headline deficit is projected to fall to 3.6% ofGDP in 2012, driven by further budgetaryconsolidation. The main austerity measures (freezein the wage fund, expenditure rule) implemented inthe 2011 budget are expected to remain in force in2012 and be complemented by an additional rulelimiting the deficit of the local governmententities, though the budgetary effect of this ruleremains uncertain. The fiscal rules, together withannounced cuts in public investment at bothcentral and local levels, are expected to have

a large impact on the expenditure ratio which isforecast to drop from 45.8% in 2011 to 43.7% in2012. A slightly worse labour market situation andtax elasticities lower than those underlying thenational projections presented in the ConvergenceProgramme would, however, result in a slowdownin the increase of the revenue ratio, to a mere0.1 pp.

Given the structural character of most of theimplemented and announced reforms and growthclose to potential, the structural deficit is forecastto follow the evolution of the headline deficit,falling from 7.4% in 2010 to 5.3% in 2011 and3.1% of GDP in 2012.

The pace of general government debt increase isprojected to slow considerably, supported by theliquidity management reform introduced in 2011and ambitious privatisation plans. After a sharpincrease from 47.1% of GDP in 2008 to 55.0% ofGDP in 2010, the debt ratio is projected to growmarginally to 55.4% in 2011 and fall back to55.1% in 2012. The projected debt figures are,however, subject to considerable uncertainty dueto high exchange rate volatility and the ensuingvaluation effects on the large foreign-denominatedpart of the debt.

Table II.20.1:Main features of country forecast - POLAND

2009 Annual percentage changebn PLN Curr. prices % GDP 92-06 2007 2008 2009 2010 2011 2012

GDP 1343.7 100.0 4.5 6.8 5.1 1.7 3.8 4.0 3.7Private consumption 820.7 61.1 4.3 4.9 5.7 2.0 3.2 3.3 3.7Public consumption 247.8 18.4 3.3 3.7 7.4 2.0 3.5 1.5 0.3Gross fixed capital formation 285.2 21.2 6.8 17.6 9.6 -1.1 -2.0 9.7 7.0of which : equipment 103.7 7.7 - 22.3 13.0 -9.1 -9.0 3.5 13.0Exports (goods and services) 530.3 39.5 11.0 9.1 7.1 -6.8 10.2 7.7 7.6Imports (goods and services) 529.3 39.4 11.6 13.7 8.0 -12.4 10.7 8.5 7.5GNI (GDP deflator) 1296.2 96.5 4.5 5.6 6.8 0.1 3.7 3.8 3.5Contribution to GDP growth : Domestic demand 4.6 7.2 6.9 1.4 2.2 4.2 3.8

Inventories 0.1 1.7 -1.1 -2.5 1.8 0.2 0.0Net exports -0.3 -2.1 -0.6 2.7 -0.2 -0.4 -0.1

Employment - 4.4 3.8 0.3 0.4 1.1 1.0Unemployment rate (a) 15.1 9.6 7.1 8.2 9.6 9.3 8.8Compensation of employees/head 16.9 4.9 8.9 2.9 4.7 5.9 6.3Unit labour costs whole economy - 2.6 7.5 1.6 1.3 2.9 3.6Real unit labour costs - -1.3 4.3 -2.0 0.0 -0.3 0.3Savings rate of households (b) - 8.5 3.7 9.9 10.7 8.2 7.5GDP deflator 12.9 4.0 3.1 3.6 1.3 3.3 3.3Harmonised index of consumer prices - 2.6 4.2 4.0 2.7 3.8 3.2Terms of trade of goods 0.2 2.0 -2.1 4.4 -1.7 -1.5 0.4Trade balance (c) -2.9 -4.0 -4.9 -1.0 -1.4 -2.2 -2.0Current-account balance (c) -1.9 -5.1 -4.8 -2.2 -3.1 -4.1 -4.1Net lending(+) or borrowing(-) vis-à-vis ROW (c) -1.3 -4.1 -4.1 -1.0 -1.1 -1.0 -1.3General government balance (c) - -1.9 -3.7 -7.3 -7.9 -5.8 -3.6Cyclically-adjusted budget balance (c) - -2.9 -4.6 -7.1 -7.4 -5.3 -3.1Structural budget balance (c) - -2.9 -4.6 -7.4 -7.4 -5.3 -3.1General government gross debt (c) - 45.0 47.1 50.9 55.0 55.4 55.1


146

21. PORTUGALTimes of adjusting and rebalancing

147

Increasing market pressure triggered requestfor international financial assistance

On 7 April, Portugal requested internationalfinancial assistance from the European Union andthe International Monetary Fund (IMF).Negotiations between the Portuguese authoritiesand a joint mission of the Commission, the IMFand the ECB led on 3 May to an agreement on anEconomic Adjustment Programme for 2011-14.The Programme includes external financing fromthe European Union, the euro-area Member Statesand IMF of up to EUR 78 billion anda commitment by Portugal to embark on a three-pronged strategy of: (i) a credible and balancedfiscal consolidation strategy, supported bystructural fiscal measures and better fiscal controlover Public-Private-Partnerships and State-OwnedEnterprises, aimed at putting the gross public debt-to-GDP ratio on a firm downward path in themedium term; The authorities are committed toreducing the deficit to 3% of GDP by 2013;(ii) deep and frontloaded structural reforms in thelabour market, the judicial system, networkindustries and housing and services sectors, whichshould boost potential growth, create jobs, andimprove competitiveness (including through fiscaldevaluation); and (iii) efforts to safeguard thefinancial sector against disorderly deleveragingthrough market-based mechanisms supported byback-up facilities.

Prior to the request for assistance, unfavourabledevelopments in public finances and a bleakoutlook for economic growth had led toa deterioration of confidence and rising pressuresin sovereign bond markets. In parallel, the bankingsector, which is heavily dependent on externalfinancing, became increasingly cut off frommarket funding and resorted extensively to fundingfrom the Eurosystem. Failure to achieveparliamentary approval for the StabilityProgramme triggered the resignation of PMSócrates’s minority government on 24 March. Inthe wake of consecutive downgrades of Portuguesesovereign bonds, interest rates reached levels thatwere no longer compatible with long-term fiscalsustainability.

In 2010, Portugal's GDP grew a rate of 1.3%. Thispositive growth rate was, however, largely due toexceptional factors that boosted exports and

private consumption. The latter particularlybenefited from anticipatory effects of the VATincrease in July 2010 and January 2011.Notwithstanding the significant growthcontribution of external trade, Portugal lost 0.9%in export market share in 2010. Price and costdevelopments clearly indicated that Portugal wasnot gaining competitiveness at a sufficiently fastrate to redress its current account deficit, whichwas high at 10% of GDP last year. Similarly, fairlyrobust private consumption benefitted fromtemporary factors, such as relatively low inflationdue to falling energy prices. Moreover, at the endof last year, expectations of increases in indirecttaxes led to some front-loading of expenditures.The weak overall economy and the steep increasein unemployment spilled into large governmentdeficits, which exceeded 10% of GDP in 2009 and9% in 2010, up from 3.5% in 2008.

Adjustment recession underway

Economic indicators suggest that domestic demandhas declined significantly in the first quarter of2011 while industrial production has shown someresilience, presumably benefitting from thecontinued dynamism of exports. At the same time,amid a further tightening of bank-lendingconditions, private households and non-financialcorporations are expected to accelerate balancesheet repair. This process of deleveraging isexpected to extend over the forecast period.

Graph II.21.1: Portugal - GDP growth andcontributions

-8

-6

-4

-2

0

2

4

6

04 05 06 07 08 09 10 11 12

Domestic demand Net exports GDP (y-o-y%)

forecastpps.

The expected further deterioration inlabour-market conditions, significant cuts in publicsector wages, a temporary acceleration inconsumer prices on the back of a VAT increaseand a limited supply of bank credit for householdsare expected to weigh heavily on household


consumption throughout the forecast period.Private consumption is therefore projected todecline by 4½% this year and by 4% in 2012. Asa result of intensified fiscal consolidation efforts,government consumption is set to shrink by 6%and 4½% in 2011 and 2012, respectively, whilepublic investment is projected to decrease bya cumulative 25% during the forecast period. Thelarge fall in domestic consumption will take its tollon private investment, which is expected tocontinue its long lasting downward trend,shrinking by 10% in 2011 and 7½% in 2012. Asa result, domestic demand is forecast to contract by10% over the forecast horizon.

Exports are projected to increase by 6% per yearduring 2011-12 in line with expected growth offoreign demand. Imports should drop substantiallygiven the strong projected decline in domesticdemand components with a typically-high importcontent, such as durable consumer and investmentgoods. The cumulative decline in imports by 8% in2011-12 and the buoyancy of exports are expectedto contribute 7 pps. to GDP growth in the sameperiod. Since this will not compensate for the dropin domestic demand, the cumulative output loss isexpected to be 4% over the forecast horizon. Onthe other hand, the strong rebalancing of theeconomy from the domestic to the external sectorshould be reflected in a significant improvement inthe current account balance, which is projected todecline from -10% of GDP in 2010 to -7½% in2011 and -5% next year. However, due to theprojected rise in the primary income deficit, netforeign indebtedness is expected to peak in 2012.

Weak domestic demand dampens wage andprice pressure

The rebalancing of the economy is helped byshrinking unit labour costs. Employmentaccelerated its downward trend in the final quarterof 2010 and is expected to fall by 1.5% in 2011and 1% in 2012. Compensation per employee inthe whole economy is forecast to decline slightlythis year and to remain flat in 2012. Moreover,price mark-ups are expected to be compressed inthe recessionary environment and as a result ofstructural reforms. Accordingly, underlying HICPinflation is likely to be subdued over the forecastperiod. In 2011, headline inflation, boosted by theVAT rate hike and strong oil and commodity priceincreases is, however, set to reach an annualaverage rate of 3.4%. The reclassification of goods

in the VAT scheme is forecast to lift HICPinflation to 2% next year.

Risks to the economic outlook are broadlybalanced

There are upside and downside risks to theforecast. On the positive side, labour marketreforms – if enacted swiftly – could lead to a morerapid improvement in labour market conditionsand trigger a swifter recovery of domestic demand.On the negative side, further increases in interestrates or a faster-than-expected deleveraging in thebanking sector could weigh more heavily onprivate consumption and investment.

Tight fiscal consolidation

The coming years are expected to be marked byvery sizeable efforts to reduce the governmentdeficit and bring the public debt-to-GDP ratio ona downward path. After a notified outturn of 9.1%of GDP in 2010, the government deficit isexpected to be 5.9% of GDP in 2011 and 4.5% ofGDP in 2012.

The deficit outcome in 2010 turned out to be muchworse than the targeted 7.3% of GDP. That wasmostly due to the statistical reclassification byEurostat and the National Statistical Institute ofsome State-Owned Enterprises and Public-PrivatePartnerships within the general government, whicheach added about ½% of GDP to the deficit as wellas of the costs related to the rescue of two banks inlate 2008 representing 1¼% of GDP (the latter twooperations involving a temporary impact in thedeficit). In addition, the 2010 budgetary executionwas also marked by large one-off deficit-reducingoperations, namely the transfer of a pension fundto the government worth around 1½% of GDP.

The plans for 2011 rely on a consolidation packageamounting to about 5¾% of GDP as defined in the2011 Budget, as well as on some additionalconsolidation measures taken more recently.

The consolidation effort is broad-based andsupported by a wide range of measures to reducespending and to increase revenue. Measures on theexpenditure side include an average cut of 5% ingovernment wages, reductions in governmentpayroll lists, cuts in social transfers (such asunemployment benefits and family allowances),and a freeze of all other social outlays. Additionalmeasures are targeted at reining in spending in

148

Member States, Portugal

a number of other areas, including, for instance,the health sector, and transfers to State-OwnedEnterprises or public investment. Consolidationefforts on the revenue side consist mainly of anadditional rise of 2 percentage points of thestandard VAT rate on 1 January 2011. In addition,revenue proceeds will reflect the carry-over effectof the tax hikes of mid-2010. A number of smallermeasures are foreseen, notably to broaden the basisfor social contributions and especially to increasenon-tax revenues, both by charging higher pricesand fees and by selling assets, the latter being moretemporary in nature.

Graph II.21.2: Portugal - Government revenue andexpenditure and GDP

0

10

20

30

40

50

04 05 06 07 08 09 10 11 12

% of GDP

0

2

4

6

8% of GDP

Revenue (excl. one-offs, lhs)Primary expenditure (excl. one-offs, lhs)Interest expenditure (rhs)

forecast

In 2012, Portugal is expected to undertakeadditional consolidation efforts worth about 3% of

GDP. Measures on the expenditure side includefurther resources rationalisation in the publicadministration, savings in the areas of health andeducation, a lowering of costs at state-ownedenterprises, further cuts in the public sector wagebill, reductions in pensions, a freeze of cashtransfers, and cuts in capital expenditure. On therevenue side, the programme foresees a furtherbroadening of various tax bases. At the level ofcorporate and personal income, this will beachieved by reducing tax deductions and specialregimes, and by the convergence of deductionsapplied to pension income to those for labourincome. In addition, the structure of VAT rateswill change, with more goods and service taxed atthe standard and intermediate rates and someexcise taxes will increase. Finally, temporaryexemptions at the level of property taxation will besubstantially reduced.

Government debt is projected to reach 102% ofGDP in 2011 and 107% in 2012. It is expected tostabilise by 2013 and to fall thereafter. The risingdebt levels should lead to a rapid increase ininterest payments, which is expected to be thefastest-growing spending item over these years anda major force hampering a faster pace of deficitreduction.

Table II.21.1:Main features of country forecast - PORTUGAL


GDP 168.6 100.0 2.2 2.4 0.0 -2.5 1.3 -2.2 -1.8Private consumption 110.9 65.8 2.4 2.5 1.3 -1.1 2.2 -4.4 -3.8Public consumption 36.8 21.8 2.4 0.5 0.4 3.7 1.8 -6.1 -4.6Gross fixed capital formation 33.6 19.9 2.0 2.6 -0.3 -11.2 -5.0 -9.9 -7.4of which : equipment 10.9 6.4 3.4 7.9 6.9 -13.1 -4.5 -13.6 -9.3Exports (goods and services) 47.1 28.0 5.9 7.6 -0.1 -11.6 8.8 6.2 5.9Imports (goods and services) 59.8 35.5 6.0 5.5 2.3 -10.6 5.2 -5.3 -2.8GNI (GDP deflator) 161.8 96.0 2.0 2.2 -0.4 -2.9 2.0 -2.6 -2.2Contribution to GDP growth : Domestic demand 2.6 2.3 0.9 -2.5 0.8 -6.1 -4.8

Inventories 0.2 -0.1 0.0 -0.6 -0.1 0.0 -0.1Net exports -0.6 0.2 -1.0 0.7 0.6 4.0 3.1

Employment 0.5 0.0 0.5 -2.5 -1.5 -1.5 -0.9Unemployment rate (a) 5.9 8.1 7.7 9.6 11.0 12.3 13.0Compensation of employees/head 6.0 3.6 3.0 3.3 1.5 -0.3 0.1Unit labour costs whole economy 4.2 1.2 3.5 3.3 -1.4 0.5 0.9Real unit labour costs 0.1 -2.0 1.9 2.7 -2.3 -0.6 -0.3Savings rate of households (b) - 7.0 7.1 10.9 9.8 10.5 11.5GDP deflator 4.1 3.2 1.6 0.5 1.0 1.1 1.2Harmonised index of consumer prices 3.6 2.4 2.7 -0.9 1.4 3.4 2.0Terms of trade of goods 0.4 0.3 -3.1 5.1 0.2 -2.6 -0.9Trade balance (c) -10.3 -10.9 -12.9 -10.1 -10.0 -8.0 -5.9Current-account balance (c) -7.8 -10.2 -12.6 -10.7 -9.8 -7.5 -5.2Net lending(+) or borrowing(-) vis-à-vis ROW (c) -5.6 -8.9 -11.4 -9.7 -8.5 -6.0 -3.7General government balance (c) -3.9 -3.1 -3.5 -10.1 -9.1 -5.9 -4.5Cyclically-adjusted budget balance (c) -4.0 -3.4 -3.5 -9.1 -8.8 -4.9 -3.1Structural budget balance (c) - -3.6 -3.5 -8.8 -9.2 -5.4 -3.1General government gross debt (c) 55.2 68.3 71.6 83.0 93.0 101.7 107.4


149

22. ROMANIASigns of recovery after a long recession

150

Weak domestic demand prolonged recession

In 2010, real economic activity declined by -1.3%,after -7.1% in 2009. The long duration of therecessionary period was a result of a sharpdownward adjustment in domestic demand, whichin the run-up to the crisis had been fuelled byexpansionary fiscal policy and a boom in creditgrowth, mostly in foreign currencies. With theonset of the crisis, new fiscal measures wereimplemented to rein in government expenditure tobring down the government deficit. Most of thesemeasures were implemented in the second half of2010, thus prolonging the economic downturnwhile most of the euro area was alreadyrecovering.

Progress in the implementation of measuresrequired by the EUR 20 bn multilateral financialassistance programme of the EU, the IMF and theWorld Bank has helped to restore confidenceamong investors in the country. The CDS spreadscontinued to come down in the first quarter of2011, bringing them well below levels observed in2009 during the peak of the crisis. The exchangerate has also strengthened in the first quarter of2011.

Key economic reforms that can improve theeconomic outlook and strengthen confidence havebeen implemented in recent months. A newpension law has increased the retirement age andcontains more effective checks against abusiveearly retirement. A new unified wage law forpublic sector employees provides a stable structureof career progression and reduces the scope forexcessive spending on bonuses.

Signs of a moderate economic recovery emergedin the last quarter of 2010 and the economyregistered a 0.1% quarter-on-quarter growth. Thiswas mainly due to strong export growth anda recovery in investment helped by a massiveincrease in industrial value added. However,private consumption growth was still in negativeterritory as real wages in the economy were beingeroded by high inflation, while lower wages andlayoffs in the public sector resulted in lowergovernment consumption.

Gradual recovery underpinned by strongerinvestment in 2011…

There are positive signals that economic growthwill improve more convincingly in the first quarterof 2011. Industrial production and exportscontinued to increase, while also retail tradeshowed signs of recovery. Confidence hasimproved across the board, including amongconsumers, which may reflect a general sentimentthat the worst is over. Economic sentiment amongmanufacturing companies is already above itshistorical average.

Real GDP in 2011 is forecast to grow by 1.5%.The main drivers of growth are expected to behigher gross fixed capital formation and a modestrecovery in private consumption; both componentshad declined sharply during the recession. Privatesector investment will be sustained on the back ofrobust industrial production and new orders.Continued strong external demand, coupled witheven higher capacity utilisation rates, will inducecompanies to invest in new equipment. Publicinvestment expenditure is also expected to pick upas new infrastructure projects, mostly financed byEU funds, get implemented at a faster pace.

Graph II.22.1: Romania - GDP growth andcontributions

-15

-10

-5

0

5

10

15

20

05 06 07 08 09 10 11 12

pps.


forecast

Household consumption is expected to strengthenthis year, albeit to a lesser extent than investmentbecause of still weak household balance sheets.Many households are still adjusting to the higherdebt-service-to-income ratios that have resultedfrom high interest rates and lower incomes, leavinglittle margin for more consumption. In fact,non-performing loans increased further during thefirst quarter of 2011. Moreover, persistently high

Member States, Romania

inflation held back purchasing power ofhouseholds. Nevertheless, the improvement inconsumer confidence and a slight recovery inemployment are expected to push up consumptionin 2011.

… and by strengthening consumption growthin 2012

GDP growth is expected to reach 3.7% in 2012,above its estimated rate of potential growth of2½-3%. Growth will become more broadly basedon the back of stronger domestic demand. Privateconsumption is expected to recover due tosomewhat higher wage increases. Labourproductivity increases in the past years in theprivate sector – only partially attributable to labourshedding – can be expected to translate into higherwages and, as demand strengthens, additionalemployment opportunities.

Government consumption is expected to increasesomewhat but will be limited due to continuedfiscal consolidation. Besides private households'consumption, investment will continue to be a keygrowth driver in 2012 as the country continues tomodernise its infrastructure and companiesrespond to both external and internal demand.

Further current-account adjustment hamperedby lack of structural reforms

Following a sharp improvement, the current-account balance remained in negative territory in2009 and 2010 despite a steep decline in domesticdemand and sizeable depreciation of the exchangerate. The external balance is not expected toimprove in 2011 and 2012 as structural reformsnecessary to enhance export capacities andcompetitiveness have been insufficient so far.Thus, the current-account deficit is expected toremain stable at around 4½% of GDP in 2011.Data for the first months of 2011 show that thetrade deficit has narrowed somewhat; however thisis expected to reverse in the second half of 2011 onthe back of stronger consumption and investmentand a slightly worsening services balance. Thecurrent-account deficit is expected to widensomewhat in 2012 due to a stronger pick-up inprivate consumption.

High inflation continues to pose challenges tomonetary policy

The end-year inflation target of 3% for 2011 willprobably be missed by a significant margin, asinflation is expected to be above 5%. Thehigher-than-expected inflation is mainly due tosubstantial food and commodity price increasesand the impact of the VAT increase in July 2010,which will be only partially counter-balanced byappreciation of the currency in the first months of2011. With a projected annual average inflationrate of 6.7% in 2011, there is little scope forlowering the policy rate. Inflation shoulddecelerate considerably in 2012 as the impact ofenergy and food price hikes fade. However, theexpected price deregulation in the energy sector,for which the plans and timetable are not yet fullyestablished, pose an upside risk to inflation.

Graph II.22.2: Romania - Public finances

-10

-8

-6

-4

-2

0

2

4

6

05 06 07 08 09 10 11 12

% of GDP

0

5

10

15

20

25

30

35

40% of GDP

General government balance (lhs)General government debt (rhs)

forecast

Public Finances(81)

As a result of the implementation of ambitiousfiscal consolidation measures in mid-2010 –including an increase in the VAT rate from 19% to24%, a temporary 25% reduction in public wagesand a 15% reduction in social spending excludingpensions – the budget deficit in 2010 decreased to6.4% of GDP, better than originally expected. Asa result of the consolidation measures, revenuefrom VAT increased, whereas compensation ofemployees decreased and income from currenttaxes on income and wealth and social securitycontributions fell reflecting negative labour marketdevelopments. The presence of arrears at the level

(81) The forecast for public finances is based on the figuresnotified by the Romanian authorities in their EDPnotification of April 2011. However, Eurostat hasexpressed reservations as to the quality of the RomanianEDP figures. Therefore the public finances forecast mayhave to be revised as new information becomes available.

151


Table II.22.1:Main features of country forecast - ROMANIA

2009 Annual percentage changebn RON Curr. prices % GDP 92-06 2007 2008 2009 2010 2011 2012

GDP 498.0 100.0 2.5 6.3 7.3 -7.1 -1.3 1.5 3.7Private consumption 311.5 62.5 5.0 11.9 9.0 -10.2 -1.7 0.6 3.1Public consumption 90.8 18.2 0.6 -0.1 7.2 1.6 -3.6 -1.5 1.5Gross fixed capital formation 130.6 26.2 8.2 30.3 15.6 -25.2 -13.1 3.5 5.9of which : equipment 50.2 10.1 9.3 28.3 10.9 -32.7 -2.0 8.2 7.3Exports (goods and services) 153.3 30.8 11.3 7.8 8.3 -5.3 13.1 8.4 7.3Imports (goods and services) 183.6 36.9 13.0 27.3 7.9 -20.9 11.6 6.6 8.1GNI (GDP deflator) 491.2 98.6 2.3 6.1 8.1 -5.6 -1.1 0.9 3.7Contribution to GDP growth : Domestic demand 5.9 15.9 11.9 -14.4 -5.1 0.9 3.6

Inventories -1.6 0.0 -3.5 -0.1 4.1 0.3 0.8Net exports -1.6 -9.6 -1.0 7.5 -0.2 0.3 -0.8

Employment -2.6 0.4 0.0 -1.8 -1.8 0.1 0.6Unemployment rate (a) 6.6 6.4 5.8 6.9 7.3 7.2 6.8Compensation of employees/head 64.7 22.0 31.9 -6.6 1.3 2.2 6.0Unit labour costs whole economy 56.5 15.2 22.9 -1.3 0.8 0.8 2.9Real unit labour costs -1.4 1.5 6.6 -5.2 -3.5 -3.5 -1.2Savings rate of households (b) - -11.5 -1.1 - - - -GDP deflator 58.7 13.5 15.3 4.1 4.5 4.4 4.2Harmonised index of consumer prices - 4.9 7.9 5.6 6.1 6.7 4.0Terms of trade of goods 0.9 10.6 3.2 0.1 2.4 -1.3 0.5Trade balance (c) -6.9 -14.3 -13.6 -5.8 -4.8 -4.9 -5.1Current-account balance (c) - -13.6 -11.4 -4.2 -4.2 -4.4 -4.8Net lending(+) or borrowing(-) vis-à-vis ROW (c) -4.9 -13.0 -11.0 -3.6 -4.0 -4.2 -4.6General government balance (c) - -2.6 -5.7 -8.5 -6.4 -4.7 -3.6Cyclically-adjusted budget balance (c) - -4.9 -8.7 -8.3 -5.2 -3.3 -2.8Structural budget balance (c) - -4.9 -8.2 -8.8 -5.5 -3.3 -2.8General government gross debt (c) - 12.6 13.4 23.6 30.8 33.7 34.8


152

of state-owned enterprises (SOEs) remains animportant contingent liability for the budget, andparticularly so for enterprises that risk beingreclassified in the general government sector inline with ESA95 requirements. The authorities arecurrently working on structural measures to reducethe stock of SOE arrears and to prevent theirre-accumulation.

The budget deficit is projected to decrease to 4.7%of GDP in 2011. On the revenue side, the forecastassumes that all major taxes remain unchanged.However, revenue from social securitycontributions is expected to increase, partly due to

the introduction of health insurance contributionsfor pensioners with pensions higher than RON 740per month. On the expenditure side, fiscalconsolidation measures taken in 2010 will carryover into the first half of 2011. Further expenditurerestraint, as well as a non-reversal of existingmeasures, should also contribute positively.Measures that should lead to further expenditurerestraint include the continued freeze of pensions,a reduction of heating subsidies and theperpetuation of public sector hiring limits. In 2012,the budget deficit is forecast to decrease to 3.6% ofGDP under a no-policy-change assumption.

23. SLOVENIAMomentum slow to build after particularly pronounced downturn

153

Moderate rebound in 2010

After a much more abrupt fall in real GDP in 2009than in the euro area as a whole, Slovenia is nowexperiencing a relatively muted export-ledrecovery. Prospects for exports are subdued bycost competitiveness losses accumulated beforeand during the crisis and by the geographicalorientation of exports, which are centred on EUand Western Balkan trade partners with a weakpresence in high-growth emerging markets.Another factor holding back growth is thesustained slump in construction following theboom. Finally, the flow of credit to the realeconomy has dwindled as banks and non-financialcorporations struggle to repair their balance sheets.Against this background, Slovenia's economiccatching-up process has yet to resume.

The export-led recovery, underway since the thirdquarter of 2009, has been muted, both in the euro-area perspective and considering that real GDP fellby almost 10% in the three preceding quarters(largely driven by collapsing investment). In 2010real GDP is estimated to have grown by 1.2% dueto net exports and the turning of the inventorycycle. However, gross fixed capital formation,particularly construction, continued to subtractfrom growth. A weak labour market, highcorporate indebtedness and adverse banking sectordevelopments have all contained domesticdemand.

The labour market reacted to the recession witha considerable lag in 2010 and employmentcontinued to trend downwards, depressinghousehold consumption. Whereas job losses camefrom the non-renewal of temporary contracts in thedownturn, 2010 saw increased redundanciesmainly from manufacturing and construction.Unemployment continued to rise in 2010, endingthe year at 8% of the labour force. Labour costpressures continued in 2010 with a large one-offincrease in the minimum wage and somecomposition effects from job losses.

The difficulties of the banking sector and over-indebtedness of parts of the non-financialcorporate sector may have held back recovery ingross fixed capital formation, as the delayedeffects of the downturn on loan portfoliosmaterialised. Slovenia's two largest banks have

required recapitalisation. Banks, whose capitaladequacy remains low, even followingrecapitalisations amounting to over 1% of GDP,are particularly exposed to over-indebtedconstruction companies and leveraged buy-outholding companies.

Subdued outlook

Over the forecast horizon real GDP growth isdriven by the continuation of the export-ledrecovery. Net exports are expected to account forhalf of real GDP growth in 2011. In 2012, therecovery is expected to strengthen somewhat, witha weakening contribution from net exports morethan compensated by strengthening contributionsfrom domestic demand.

Export growth is forecast to outstrip import growthin volume terms over the forecast horizon, albeitby a diminishing margin as import growthaccelerates in 2012. The growth rate ofmerchandise exports, which was boosted byrecovering world trade in 2010, is expected to easein 2011 and 2012, while services exports, whichcontinued to decline in 2010, are projected to postaccelerating growth.

The external deficit is projected to deteriorate overthe forecast horizon due partly to projectedincreased interest payments and partly to adverseterms of trade developments. This may particularlysqueeze margins for Slovenian manufacturersgiven the high energy intensity of the Slovenianeconomy relative to the euro area.

Domestic demand, which contracted by 1.2% in2010, is forecast to return to positive territory andincrease over the forecast horizon on the back ofresumed growth in construction output andstrengthening household consumption. Mutedhousehold consumption growth is forecast in 2011due to still-deteriorating labour market conditionsand incomes remaining static after the boost fromthe 2010 minimum wage increase. In 2012,improving labour-market conditions and risinghousehold incomes are expected to lead to fasterhousehold consumption growth.

The substantial decrease in gross fixed capitalformation in 2010 was driven by fallingconstruction output. This drag from construction is


expected to dissipate in 2011-12, permittinga return to modest growth of overall investment in2011. However, investment growth rates areexpected to remain significantly below theirpre-crisis trend, falling a long way short ofreversing the falls in 2009-10. This reflectsongoing adjustment in the construction sector,decelerating export growth, continued low banklending and the limited scope for financinginvestments out of retained earnings given the highindebtedness of parts of the non-financialcorporate sector. Together with domestic banks'needs to refinance a large part of their funding inthe next two years, these factors representdownside risks to the near-term outlook.

Graph II.23.1: Slovenia - Gross fixed capitalformation

-30-25-20-15-10

-505

10152025

04 05 06 07 08 09 10 11 12

y-o-y%

Non-residential constructionDwellingsEquipment

forecast

Employment still falling in 2011

Employment is forecast to fall significantly againin 2011, due partly to carry-over from 2010, and tostart improving only in 2012. Over the forecasthorizon, increased output is initially expected toraise labour productivity, with employment growthoccurring with a lag. This represents the reversalof the employment dynamics witnessed in thedownturn. Moreover, ongoing employment lossesin construction, many of them affecting foreignworkers, are unlikely to be completely reversed if,as expected, the sector's share in gross value addedsettles at a lower, more sustainable level.

Nominal wage growth is expected to moderatesomewhat in 2011 as the temporary factors whichboosted compensation of employees per head in2010 recede, but is expected to pick up again in2012 as the economic recovery gathers pace. Theseproductivity and wage developments are projectedto contain unit labour costs in 2011, but asemployment and nominal wages recover in 2012,unit labour costs are expected to rebound.

Throughout the crisis and the recovery, unit labourcosts have risen by markedly more than ineuro-area trading partners, suggesting thatcompetitiveness vis-à-vis the euro area hasdeteriorated.

Inflation is forecast to rise to around 2½% in 2011under the impact of world commodity pricedevelopments and to stay over 2% in 2012 asnominal wage increases pass through to consumerprices.

Graph II.23.2: Slovenia - Labour market

-10

-5

0

5

10

15

04 05 06 07 08 09 10 11 12

y-o-y%

Total employment (national)Compensation of employeesGVA per person employed

forecast

Expenditure-based consolidation

The general government deficit narrowed to 5.6%of GDP in 2010, from 6.0% in 2009, reflecting thereturn to economic growth and the first steps madein expenditure-based fiscal consolidation. Taxrevenue returned to positive – albeit weak –growth, with the impact of increases in excise dutyrates offset by new direct tax allowances and thefinal reduction in the corporate income tax rate.

Total expenditure growth was kept to 1.8%, downfrom 5.4% in 2009. The public sector wage billwas contained through the non-payment of variousbonuses, the halving of indexation and thepostponement of agreed public sector wageincreases. However, these savings were more thanoffset by an unbudgeted expansion of employmentin the public sector. The usual indexation of socialbenefit rates to inflation and of pensions to wagegrowth was halved, but social transfers other thanin kind still increased by 4¾%, due largely toincreased numbers of recipients. Capitalexpenditures were sharply cut during the year tomeet the overall deficit target.

For 2011, the general government deficit isforecast to widen to 5.8% of GDP, including the

154

Member States, Slovenia

Table II.23.1:Main features of country forecast - SLOVENIA


GDP 35.4 100.0 3.5 6.9 3.7 -8.1 1.2 1.9 2.5Private consumption 19.6 55.4 3.7 6.7 2.9 -0.8 0.5 0.7 1.3Public consumption 7.2 20.3 3.0 0.7 6.2 3.0 0.8 0.0 0.5Gross fixed capital formation 8.5 23.9 6.7 12.8 8.5 -21.6 -6.7 0.8 3.9of which : equipment 2.9 8.3 9.8 8.2 4.9 -26.2 7.1 6.2 6.2Exports (goods and services) 20.6 58.1 4.8 13.7 3.3 -17.7 7.8 6.7 6.9Imports (goods and services) 20.1 56.8 6.5 16.7 3.8 -19.7 6.6 5.2 6.1GNI (GDP deflator) 34.7 97.9 3.4 5.9 3.1 -7.4 1.6 1.5 2.1Contribution to GDP growth : Domestic demand 4.1 7.1 5.0 -6.1 -1.2 0.6 1.7

Inventories 0.4 1.9 -0.8 -4.0 1.6 0.4 0.2Net exports -1.0 -2.0 -0.4 2.0 0.8 1.0 0.5

Employment - 3.0 2.8 -1.9 -2.2 -1.3 0.3Unemployment rate (a) - 4.9 4.4 5.9 7.3 8.2 8.0Compensation of employees/head - 6.4 7.0 1.6 4.1 2.4 3.6Unit labour costs whole economy - 2.6 5.9 8.5 0.6 -0.8 1.4Real unit labour costs - -1.5 1.8 5.1 -0.1 -1.8 -0.4Savings rate of households (b) - 15.7 15.5 15.9 15.3 14.5 14.6GDP deflator 18.2 4.2 4.0 3.2 0.7 1.0 1.8Harmonised index of consumer prices - 3.8 5.5 0.9 2.1 2.6 2.1Terms of trade of goods 0.8 0.6 -1.8 4.7 -3.2 -2.2 -0.3Trade balance (c) -2.8 -4.9 -7.2 -2.1 -2.8 -3.4 -3.3Current-account balance (c) -0.2 -4.5 -6.8 -1.3 -1.1 -1.4 -1.9Net lending(+) or borrowing(-) vis-à-vis ROW (c) -0.4 -4.7 -6.7 -1.4 -1.1 -2.0 -1.3General government balance (c) - -0.1 -1.8 -6.0 -5.6 -5.8 -5.0Cyclically-adjusted budget balance (c) - -2.9 -4.6 -3.6 -3.0 -3.5 -3.3Structural budget balance (c) - -2.9 -4.6 -3.5 -3.0 -2.9 -3.3General government gross debt (c) - 23.1 21.9 35.2 38.0 42.8 46.0


155

deficit-increasing one-off of 0.7% of GDP relatedto the government recapitalisation of Slovenia'slargest bank. Excluding one-offs, the deficitnarrows to just above 5% of GDP. Tax revenuegrowth is expected to recover further due todevelopments in domestic demand and wageswhile no revenue-enhancing measures areexpected beyond the 1 April and 1 Octoberincreases in excise duties on tobacco. Tax revenuesare lowered by the policy of moderating theinflationary impact of high world oil pricesthrough reductions in excise duty rates on mineraloils.

Total expenditure growth is forecast to stabilise at1¾% (without the recapitalisation). Measuresrestraining primary expenditure growth have beenreinforced. Public sector promotions have beenfrozen. A further halving of indexation formulaemeans public sector wages and social benefits willincrease by only ¼ of inflation and pensions willincrease by only ¼ of wage growth. Public sectoremployment is projected to fall marginally. For thethird year in a row, interest expenditures are set to

increase by 15%, in line with higher debt. Capitalexpenditures are expected to grow by less thanbudgeted due to a cautious assumption onimplementation of plans.

In 2012, the deficit is projected to narrow to 5% ofGDP on a no-policy-change basis. Increaseddomestic demand and incomes are expected tosupport revenue growth, while the rising interestburden and the usual no-policy change assumptionimply a return to stronger expenditure growth ataround 3½%. Notably, for 2012 this forecastassumes no further measures to contain primarycurrent expenditure dynamics, as the initiativescurrently under consideration are largely to bespecified and agreed.

The gross government debt ratio is forecast to riseto close to 43% of GDP in 2011, up from 38% in2010, driven by the primary deficit and theincreasing interest burden. The debt ratio isprojected to grow further, reaching 46% in 2012,mainly as a result of persisting primary deficits.

24. SLOVAKIAAn externally-driven recovery continues

156

Growth returned to the black in 2010, spurredby strong export performance

Slovakia's recovery in 2010 was driven by thestrong global acceleration in trade of durablemanufacturing goods. On the back of a better-than-expected rebound in economic activity inSlovakia's main trading partners – especiallyGermany – the Slovak export sector recoveredswiftly. After an unprecedented slump in 2009,investment grew by 3.6% in 2010, partly inresponse to the need to replace fixed capital in thewake of the crisis, but also as a result of a return tohigher corporate profitability and a gradualimprovement in access to credit. The strengtheningof firms' investment and acceleration of industrialproduction led to real GDP growth of 4% for theyear as a whole. The labour market, however,further deteriorated as jobs continued to be shedduring the recovery and the unemployment ratesurged to almost 14½% in 2010, one of the highestlevels in the EU. Due to the rapid worsening oflabour market conditions and with wagesincreasing only moderately, private consumptiongrowth stalled. Inflation decelerated further to0.7%.

Slightly decelerating economic activity in 2011expected to pick-up in 2012

External demand is expected to drive economicactivity in Slovakia in 2011. Output growth isforecast to slightly decelerate to 3.5% on accountof the negative impact of a sizeable governmentconsolidation package on private consumption andpublic investment. In 2012, the main contributionis expected to come from domestic demand: realGDP is forecast to grow at an annual rate above4%, sustained by the pick-up in privateconsumption and in a resumption in largeinfrastructural investment financed with the EUfunds. The trend improvement in the trade balance,which started in the second half of the last decadeand is not expected to reverse its course, isassumed to bolster such developments.

Household consumption expenditure is projectedto remain somewhat subdued in 2011. The labourmarket did not show signs of recovery throughout2010 and registered unemployment reached a six-year high in February 2011. At the same time,stronger-than-expected inflation in the first quarter

of 2011 is eroding the margins for real wagegrowth. Moreover, the negative impact ondisposable income, savings and consumption ofmany of the consolidation measures adopted (e.g.increase of the standard rate of VAT by 1 pp.,broadening of tax bases for income tax and socialsecurity contributions, reduction of housingsubsidies, increases in some excise duties,reduction of the wage bill in the public sector, etc.)is also foreseen to weigh on householdconsumption in 2011. Consumer confidence andretail sales, which have not significantly improvedto date, should recover gradually in the course of2011 as real wages respond with a lag to themarked post-crisis increase in labour productivityand on the assumption of a mild deceleration ofinflation by the end of the year. After havingaveraged less than ½% in the previous three years,private consumption growth is forecast to rise in2012, as the labour market situation is expected toimprove in parallel with expanding economicactivity.

Private investment is projected to increase by 4.6%in 2011 on account of continuing improvement inprofitability and the implementation of some of theprivate investment put on hold during the crisis.Public investment is however likely to bedepressed by delays in launching publicinfrastructure projects and generalised cuts inexpenditure. In 2012, overall investment isexpected to rise by 6½% under the assumption ofan acceleration in drawing of EU funds and theimplementation of postponed motorway projects.

Graph II.24.1: Slovakia - GDP growth andcontributions

-10

-5

0

5

10

15

04 05 06 07 08 09 10 11 12

pps.


forecast

Turning to the external side, in 2011 both exportand import growth are expected to continue

Member States, Slovakia

expanding, though more slowly, with imports setto be outpaced by exports also as a result ofsubdued private consumption. As FDIs that havereached the production phase before the crisis arefully utilised and more recent investment reachesthe production phase, Slovakia is expected tocontinue to gain export market shares also in2011-12 and a positive trade balance is expected towiden further under the assumption of a strong andsustained external demand and continuedreplacement of foreign by local suppliers. Thelatter development is signalled by the gradualdecrease of import content of exports in theautomotive sector and the rapid development ofelectronic equipment industries.

The baseline scenario is subject to a number ofrisks on both sides. Better-than-expecteddevelopments in the pace of recovery of Slovakia'smain trading partners may result in a strongerexport performance. At the same time, the externalposition is subject to negative risks depending onfuture trends in import, particularly the importintensity of exports. On the domestic demand side,higher absorption capacity of EU funds resulting inacceleration of motorway construction represent apositive risk to the 2011 forecast. On the otherhand, a stronger-than-expected impact ofconsolidation measures in 2011, mainly onhouseholds' consumption, could have negativeimplications for growth.

Sluggish response from the labour market

In the wake of the crisis, employment fell byapproximately 150,000 from peak-to-through.Nearly three-quarters of the jobs shed were in themanufacturing sector. Following a 5 pps. increasein 2009-10, the unemployment rate is set togradually decline over the forecast horizon, but toremain far above pre-crisis levels. In 2011, it isexpected to decrease only to 14% in view ofimproving, albeit low, labour demand, announcedredundancies in state-owned companies(e.g. railway companies) and a reduction in thenumber of public sector employees at the centralgovernment level. The labour market is expectedto pick up progressively in the course of 2011 asthe recovery continues and to improve further in2012 on the back of stronger growth. Moresubstantial progress is hence foreseen in 2012.However a number of structural issues couldhamper the adjustment, as the Slovak labourmarket features one of the highest pass-throughrates to long-term unemployment and the highest

rate of long-term unemployed in the EU. Both arepartly associated with persistent structuralproblems: very large and widening regionaldisparities, low labour mobility within the countryand skill mismatches.

HICP inflation driven by energy prices

In the wake of the crisis, HICP inflation fell toa historically low level below 1% in 2009-10.During the first months of 2011, however, thespike in oil and food prices coupled with theincrease in indirect and excise taxes (as part of theconsolidation package) and the adjustment inregulated prices has driven inflation up. Headlineinflation is forecast slightly above 3½% in 2011,whereas core inflation is expected to remain lower,stabilising at 2%. Subject to positive risks onfuture developments in energy prices, inflation isforecast to gradually decelerate in 2012 as theeffects of the consolidation measures wear off anddomestic demand pressures on prices remain low.

Consolidation measures expected to improveposition of public finances

Falling tax revenues, the full operation of theautomatic stabilisers, several anti-crisis measures(e.g. car scrapping scheme) and several ad hocmeasures (i.e. capital transfers to loss-makingrailway companies and hospitals) in 2009, led toa rapid deterioration of the headline deficit byalmost 6 pps. to 8% of GDP.

Graph II.24.2: Slovakia - Public finances

-9

-6

-3

0

3

6

9

04 05 06 07 08 09 10 11 12

% of GDP

20

25

30

35

40

45

50% of GDP

General government balance (lhs)General government gross debt (rhs)

forecast

In 2010, the general government deficit improvedonly marginally to 7.9% of GDP. On the revenueside, two opposing factors were at play. First, taxreceipts fell short of expectations by 1% of GDP,mainly due to the underperformance of VAT andexcise duty revenue in view of falling householdconsumption. This was partly compensated by

157


Table II.24.1:Main features of country forecast - SLOVAKIA


GDP 63.1 100.0 - 10.5 5.8 -4.8 4.0 3.5 4.4Private consumption 38.4 60.9 - 6.8 6.2 0.3 -0.3 1.3 3.6Public consumption 12.6 20.0 - 0.1 6.1 5.6 0.1 -2.2 1.0Gross fixed capital formation 13.0 20.6 - 9.1 1.0 -19.9 3.6 4.5 6.5of which : equipment 4.9 7.8 - 4.3 1.7 -27.8 7.9 7.0 6.0Exports (goods and services) 44.5 70.6 - 14.3 3.1 -15.9 16.4 8.5 8.2Imports (goods and services) 44.8 71.0 - 9.2 3.1 -18.6 14.9 5.9 7.3GNI (GDP deflator) 62.1 98.4 - 10.5 6.3 -3.7 4.5 3.3 4.2Contribution to GDP growth : Domestic demand - 6.3 4.8 -3.8 0.6 1.3 3.6

Inventories - 0.3 1.1 -3.6 1.8 0.2 0.0Net exports - 3.9 0.0 2.6 1.0 2.0 0.8

Employment - 2.1 2.9 -2.5 -1.4 0.6 0.9Unemployment rate (a) - 11.1 9.5 12.0 14.4 14.0 13.3Compensation of employees/head - 8.4 6.9 5.0 2.7 3.9 5.1Unit labour costs whole economy - 0.2 4.0 7.5 -2.7 0.9 1.6Real unit labour costs - -0.9 1.1 8.8 -3.1 -0.6 -0.8Savings rate of households (b) - 7.5 6.6 8.1 9.5 8.6 8.2GDP deflator - 1.1 2.9 -1.2 0.5 1.6 2.4Harmonised index of consumer prices - 1.9 3.9 0.9 0.7 3.6 2.9Terms of trade of goods - -1.1 -1.9 -0.7 -2.3 -1.8 -0.2Trade balance (c) - -1.8 -1.6 1.5 0.0 0.6 1.2Current-account balance (c) - -5.6 -6.9 -3.2 -2.9 -2.8 -2.6Net lending(+) or borrowing(-) vis-à-vis ROW (c) - -5.2 -6.0 -2.4 -0.6 -0.7 -0.2General government balance (c) - -1.8 -2.1 -8.0 -7.9 -5.1 -4.6Cyclically-adjusted budget balance (c) - -3.6 -4.0 -7.4 -7.4 -4.8 -4.6Structural budget balance (c) - -3.6 -4.2 -7.5 -7.3 -4.8 -4.8General government gross debt (c) - 29.6 27.8 35.4 41.0 44.8 46.8


158

higher-than-budgeted dividends from publiccompanies. On the expenditure side, savings oninterest expenditure were exceeded by additionalnon-budgeted spending, chiefly again capitalinjections in state-owned railway companies andhospitals, as well as some unexpected expenditureto cover floods damages and concessionary PPPcontracts settlement. Local governments andremaining parts of the central government (e.g. theNational Property Fund, the Environmental Fund)contributed almost 1½ pps. of GDP to the increasein the headline deficit.

The government adopted a set of consolidationmeasures amounting to 2.5% of GDP in 2011 witha somewhat larger emphasis on the expenditureside. The plan envisages a sizeable reduction in thepublic wage bill, expenditure cuts on goods andservices and savings due to the increasedefficiency of the health sector. The measures onthe revenue side include a temporary increase inthe VAT rate by 1 pp. to 20%, rises in some exciseduties (i.e. tobacco, etc.), removing exemptions forpersonal income tax and social contributions andraising additional non-tax revenues (e.g. receiptsfrom the sale of emission allowance quotas, specialfees for electricity distributors, etc.).

The current forecast assumes a strong impact ofthe austerity measures on public finances, with the

general government deficit reaching 5.1% of GDPin 2011. This forecast takes into account anincrease in interest expenditure in 2011 comparedto the previous year, as the issuance of low-costshort-term paper in 2010 will need to be refinancedthrough longer-term issues at higher costs.However, based on the information available at thecut-off date for this forecast, the impact of theenvisaged cuts in the public wage bill andintermediate consumption expenditure is assumedto be slightly less than in the official projections.

In 2012, the government has proposed an array ofmeasures to continue consolidation, including afreeze of the public wage bill, further cuts in goodsand services and an increase in property tax. Theforecast is based on the customary no-policy-change assumption. The resulting headline deficitis thus projected to reach 4.6% of GDP in 2012.

The general government debt is expected toincrease further to 45% of GDP in 2011 and 47%in 2012.

25. FINLANDEconomic recovery on a firm path

159

Rapid rebound in economic activity after theglobal crisis

In 2009, the trough of the global economic crisis,the Finnish economy recorded one of the steepestfalls in GDP in the euro area – an unprecedented8.2% decline, driven by a sudden drop in exports.However, in line with the revival of globaldemand, the rebound has also been relativelyrapid, with GDP expanding by 3.1% in 2010. GDPgrowth was dampened in the first quarter of 2010by a strike closing major Finnish seaports for anextended period. It picked up pace in the latter partof 2010 however, already reaching 5% y-o-y in thefourth quarter. This will result in a strong carry-over effect into 2011, when the growth rate isexpected to exceed 5% y-o-y in the first quarter,but moderating in the following quarters as thebase effect fades. 2011 as a whole is forecast torecord GDP growth of 3.7%, well above theeuro-area average. The growth difference with theEU average is forecast to narrow in 2012, as GDPexpansion in Finland is set to moderate to ratescloser to its economic growth potential, which issuppressed by the adverse demographic trends.

The economic recovery is underpinned by the solidfundamentals of the Finnish economy, which wereoverall well preserved through the crisis. TheFinnish financial sector has remained strong, thelabour market has proved resilient and consumerconfidence has recovered rapidly to levels evenexceeding the pre-crisis peak. Domestic demand,especially household consumption and residentialconstruction, rebounded rapidly after a brief dipduring the crisis in 2009. Housing constructionvolumes (and real-estate prices) rebounded rapidlyto above the pre-crisis levels, driven by a relativelystrong financial position among households, someregional housing shortages and stimulus measuresto boost housing construction during the economiccrisis. Corporate investment has taken longer torecover, but is also poised for a rebound in 2011,according to industry investment surveys.

A solid contribution from external trade willsupport domestic demand

In the highly export-dependent Finnish economy,the prospects of domestic demand are closelylinked with the performance of the external sector.Judging from industry confidence surveys, the

main exporting industries are set to continue therecovery after losing about one fifth in exportvolume during the crisis. However, given theongoing structural changes within some of themain industries (notably electronics, shipbuildingand paper production), the recovery in exports isexpected to be gradual. Export volumes areforecast to reach pre-crisis levels only beyond theforecast horizon. The trade surplus of over 4% ofGDP recorded before the crisis decreased to below3% during the crisis and is forecast to remain atroughly the same level in 2011-12. Thecontribution to growth from foreign trade isforecast to be relatively moderate over the forecastperiod, as buoyant domestic demand also drivesrapid import growth. The long-term trend ofdeteriorating terms of trade is set to continue overthe forecast period.

Domestic demand is driven by favourable labourmarket developments, solid wage growth andstrong consumer confidence. Due to a peak ininflation, however, real wage growth is projectedto be negative in 2011. Household consumption isnevertheless forecast to show solid annual growthgiven the strong growth carry-over from theprevious year. Since in 2012 the carry-over effectis smaller, household consumption growth isforecast to moderate from the previous year, eventhough the expected moderation of inflation wouldturn real wages to growth. The expected rise ininterest rates would have a rapid pass-through toFinnish households, given that over 90% ofhousing loans are subject to variable interest rates.However, according to surveys, about a third ofnew loans are taken on a fixed monthly paymentscheme whereby the change in interest ratesinfluences loan maturity rather than monthlyrepayment. This should alleviate the impact onhousehold purchasing power from interest ratechanges. Household indebtedness has currentlyrisen to over 100% of annual disposable income.This is around the average for euro-area countries,but it is expected to continue to grow in Finlandover the medium term. House prices, which hadincreased rapidly to above pre-crisis levels,moderated in the last months of 2010 and in early2011. The rise in interest rates is expected to coolboth the housing market and the rise in householdindebtedness to some extent.


The main risk factor for Finland's economicprospects is the global economic and trade outlook.Adverse developments in the exporting industrieswould have a significant and immediate impact onthe domestic sectors, notably by affectingconsumer and corporate confidence.

Population ageing will gradually add tolabour-market frictions

The economic crisis has had a relatively limitedimpact on the labour market, as the unemploymentrate increased by only about 2 pps., peaking at8½% of the labour force in the course of 2010.However, as is usual in the Finnish labour market,the inactivity rate also rose since some populationgroups tend to exit the labour market duringperiods of weaker labour market prospects, optinginstead for studies or domestic work. These trendsare expected to reverse and the activity rate is setto increase in the forecast period. In the short term,this will offset the decline in the working agepopulation. However, in the medium term, thedecline in working age population will inevitablycut labour supply. Due to the retirement of a largebaby-boom generation, the working age populationis projected to decline by about 140 000 people in2010-20, representing over 5% of the currentlabour force. After 2020, this demographic shiftwill level off. Labour shortages and wagepressures will probably increase in some sectors,even though unemployment is expected to remainrelatively high due to existing labour marketmismatches.

Inflation to peak in 2011, but no pass-throughto wages

Inflation picked up considerably in the first monthsof 2011, largely driven by energy prices and to alesser extent by food prices. Due to the higherenergy intensity of the economy, the contributionto inflation from energy prices is higher in Finlandthan in the euro area on average. The increase inenergy taxes in the beginning of 2011 is projectedto add slightly less than ½ pp. to headline inflation.Moreover, the domestic electricity market wentthrough some supply disruptions which boostedelectricity prices in the short term. Assuming thatenergy prices (and global food prices) remain at anelevated level, the rate of HICP inflation isforecast to average 3½% in 2011, peaking at 4% inthe third quarter. As the base effects from theelevated commodity prices fade in 2012, the

inflation rate is projected to fall back to slightlyabove 2%.

Graph II.25.1: Finland - Inflation and itscomponents

-15

-10

-5

0

5

10

15

20

06 07 08 09 10 11 12HICP, all itemsCore inflation (excl. energy and unprocessed food)Unprocessed foodEnergy

forecasty-o-y%

The inflation peak in 2011 is not expected togenerate major second-round effects. Thepass-through to wage claims is expected to beminimal, given the forecast moderation of inflationin 2012 and the attempt to make up for theexcessive wage growth in the last few years. Thewage negotiation round in 2007, settled at the peakof the economic cycle, rigidly fixed exceptionallyrapid wage growth for the following 2-3 years.However, this unexpectedly coincided with theeconomic crisis and a sharp loss in production. Theongoing rounds of wage negotiations are set toremain relatively moderate, attempting tocompensate for the wage excesses during theeconomic crisis.

Public finances set to improve

Public finances have benefited from the economicrebound in 2010. In spite of a discretionary fiscalstimulus of about 1% of GDP in 2010, the headlinegeneral government deficit did not deteriorate fromthe previous year. The fiscal deficit stood at 2.5%of GDP in 2010.

Fiscal policy is set to turn mildly restrictive in2011 and 2012, as the government has decided toraise energy and some product taxes, whichamount to some 0.5% of GDP in 2011 and 0.1% ofGDP in 2012. Additionally, the government, incooperation with social partners, has alreadydecided to increase pension insurance contributionrates, which among other factors are estimated toimprove the general government balance by 0.2%of GDP in 2011 and 0.3% in 2012. The currentforecast does not include any potential policyinitiatives of the next government taking officeafter the 17 April elections.

160

Member States, Finland

Table II.25.1:Main features of country forecast - FINLAND


GDP 171.2 100.0 3.0 5.3 0.9 -8.2 3.1 3.7 2.6Private consumption 93.9 54.8 2.5 3.5 1.7 -2.1 2.6 2.3 2.0Public consumption 43.3 25.3 1.0 1.1 2.4 1.0 0.4 1.0 0.7Gross fixed capital formation 33.5 19.5 2.2 10.7 -0.4 -14.6 0.8 6.6 4.5of which : equipment 8.9 5.2 1.9 17.9 3.9 -13.4 -5.2 7.0 6.0Exports (goods and services) 64.2 37.5 9.0 8.2 6.3 -20.1 5.1 8.5 5.5Imports (goods and services) 60.2 35.2 7.0 7.0 6.5 -17.6 2.6 7.2 5.1GNI (GDP deflator) 174.5 101.9 3.3 4.4 1.4 -6.9 2.6 3.0 2.5Contribution to GDP growth : Domestic demand 1.9 4.2 1.3 -4.0 1.7 2.7 2.1

Inventories 0.3 0.3 -0.7 -1.7 0.7 0.3 0.2Net exports 1.0 0.9 0.3 -1.9 1.0 0.7 0.3

Employment 0.3 2.2 1.6 -2.7 -0.4 0.9 0.7Unemployment rate (a) 11.4 6.9 6.4 8.2 8.4 7.9 7.4Compensation of employees/head 2.9 3.7 5.1 1.7 2.0 2.8 3.4Unit labour costs whole economy 0.2 0.5 5.8 7.8 -1.5 0.1 1.5Real unit labour costs -1.3 -2.4 3.9 6.8 -3.5 -2.4 -1.0Savings rate of households (b) 9.5 7.2 7.9 11.5 11.6 9.3 8.7GDP deflator 1.5 3.0 1.8 1.0 2.1 2.5 2.4Harmonised index of consumer prices 1.6 1.6 3.9 1.6 1.7 3.6 2.2Terms of trade of goods -0.8 0.0 -3.3 -0.2 -1.3 -1.8 -0.3Trade balance (c) 7.9 5.1 3.7 2.0 1.9 1.6 1.7Current-account balance (c) 4.0 4.2 2.9 2.2 3.0 2.5 2.5Net lending(+) or borrowing(-) vis-à-vis ROW (c) 4.1 4.3 3.0 2.3 3.1 2.6 2.6General government balance (c) 0.0 5.2 4.2 -2.6 -2.5 -1.0 -0.7Cyclically-adjusted budget balance (c) 0.1 2.6 2.5 0.7 0.2 0.8 0.7Structural budget balance (c) - 2.6 2.5 0.7 0.3 0.8 0.7General government gross debt (c) 47.5 35.2 34.1 43.8 48.4 50.6 52.2


161

Expenditure growth is expected to abate to ratesbelow nominal GDP growth, so that theexpenditure-to-GDP ratio would decline. Some ofthe investment projects coming from the earlierstimulus package will come to an end and localgovernments (accounting for a third of generalgovernment expenditure) are likely to react tofinancing constraints by making savings in theirbudgets. Even though the general government debtlevel is currently increasing relatively quickly,

debt-servicing costs are being countered byexceptionally low effective interest rates onFinnish sovereign debt. The forecast projects anormalisation of interest costs in 2012 towards thelong-term average, adding to expenditure growth.Overall, the deficit is forecast to narrow to 1% ofGDP in 2011 and further to 0.7% of GDP in 2012.The debt ratio is forecast to climb from 48.5% ofGDP in 2010 to above 52% of GDP in 2012.

26. SWEDENStrong growth set to moderate as recovery matures

162

Strong rebound from recession

After the sharp recession of 2008-09, economicactivity rebounded strongly in 2010, with real GDPgrowing by 5.5%, the fastest pace of expansion infour decades. The strong growth rate reflects therapid turnaround in global trade, supportive fiscaland monetary policy and the resilience of privateconsumption. The rebuilding of inventories, whichhad been run down during the recession, providedan exceptional and temporary boost, contributingmore than 2 pps. to the annual growth figure. Allthe other domestic demand components alsoshowed strength, with investment picking upparticularly strongly.

Leading indicators generally point to continuedstrength in the first half of 2011. While businessand consumer confidence indicators seem to havelevelled off, both remain at elevated levels,pointing to a high degree of optimism amonghouseholds and within the corporate sector.Industrial production and exports are alsoexpanding, although new orders seem to becoming in at a somewhat slower pace in recentmonths. While data on retail sales also showcontinued growth, there has been somedeceleration compared to a few months ago.

Graph II.26.1: Sweden - GDP growth andcontributions

-6

-4

-2

0

2

4

6

04 05 06 07 08 09 10 11 12

Dom. demand, excl. inv. InventoriesNet exports GDP (y-o-y%)

forecastpps.

Pace of recovery to moderate

The recovery is expected to continue in 2011-12,albeit at a more moderate pace than during 2010.Household consumption should expand at arespectable pace, supported by employmentgrowth and a pick-up in real wage growth. High

business sentiment and improved profitabilityshould support continued investment growth.Residential investment is also expected toaccelerate, at least in 2011, against the backdrop ofstrong demand for housing and dynamic houseprices in 2010. A relatively strong public financesituation means that there is little need for fiscalconsolidation. This should help prevent fiscalpolicy from exerting a significant drag on growthover the forecast horizon.

levels of capacity utilisation together with strong

At the same time, a number of factors are

This forecast implies that the output gap is likely

Risks to growth appear broadly balanced

ntum

combining to dampen the pace of the recovery.First, the inventory cycle seems to have come to anend. Second, the ongoing normalisation of themonetary policy stance, with the Riksbankcontinuing to hike its key policy rate, is expectedto weigh on household consumption. It isenvisaged that interest rate hikes will have a largerimpact on the household budget than usual ashousehold debt stands at a historically high level,with about half of loans at flexible rates. Third, therecent hike in oil prices will reduce real disposableincome and dampen economic activity. Onbalance, annual real GDP growth is forecast toslightly exceed 4% in 2011 before slowing downto around 2½% in 2012.

to be closed by the end of the forecast horizon.Indicators such as the number of unfilledvacancies, which has risen fast across most sectors,point to emerging bottlenecks, despiteunemployment remaining at a relatively high level.This could indicate a heightening of matchingchallenges in the Swedish labour market, whichcould become a drag on growth over the forecastperiod. However, such adverse effects may havebeen counteracted by recent reforms to increaselabour supply, such as the in-work tax credit andreforms of the sickness insurance system.

It cannot be excluded that the current momein both domestic and external demand will provestronger than expected. While household optimismseems to have peaked, it remains at a very highlevel. Given the strong recovery of employmentand the still rather high household saving rate, thiscould translate into higher-than-expected consumerspending. In addition, with the rapid improvement

Member States, Sweden

in the cyclical position of the manufacturingsector, investment may expand faster thanenvisaged. On the other hand, Sweden's strongexport dependence makes it particularly vulnerableto any setback in global trade. The withdrawal ofboth fiscal and monetary policy stimuli in anumber of important trading partners poses a riskover the forecast horizon.

Another source of vulnerability stems from high

Although the exposure of the banking sector to the

Unemployment above pre-crisis level

r market

household indebtedness, which has now reached arecord level of more than 170% of disposableincome. Over the last decade, rising indebtednesshas gone hand in hand with rising house prices, asfalling interest rates and easily available credithave spurred demand for mortgage-financedhousing. While this trend seems to have sloweddown in recent months, mainly thanks to monetarypolicy tightening and a widening of mortgagespreads, household debt is likely to remain highover the forecast period.

mortgage market has increased, defaults onmortgages are extremely rare in Sweden. Thebanking sector relies strongly, however, on short-term market financing in foreign currency.Renewed global financial market turmoil couldthus quickly translate into rising financing costsfor Swedish banks.

The turnaround in the Swedish labouoccurred earlier and more vigorously this time thanin previous recessions. This was mainly due to therelatively swift recovery of global growth but wasalso supported by vigorous fiscal and monetarypolicy responses, which sustained domesticdemand. Unemployment, having climbed by over3 percentage points to more than 9% of the labourforce during the recession, has already fallen backto 7.7% in March 2011 (in seasonally-adjustedterms). Companies' hiring plans also bode well forcontinued employment growth over the forecasthorizon. The next collective bargaining round –covering large swathes of the Swedish work force– is due to start in the second half of 2011. Withunemployment remaining well above its pre-crisislevel, wage cost developments should generallyremain under control. However, strong corporateprofits and the rapidly improving employmentoutlook, coupled with the first signs of bottlenecksin some sectors, should lead to some wageacceleration in 2012. The unemployment rate is

expected to decrease gradually to average around7½% in 2011 and 7¼% in 2012.

Graph II.26.2: Sweden - Recovery ofemployment in last three recessions

(average employment over last 4 quarters)

95

100

105

110

-6 -5 -4 -3 -2 -1 0 1 2 3 4 5 6 7

quarters

2009 (2010Q1 = 100)2003 (2004Q4 = 100)1993 (1994Q2 = 100)

Inflation likely to remain below target

ecession

Current-account surplus to remain large

to fall

Inflation has been subdued in the post-rperiod, falling from 3.3% in 2008 to below 2% in2009 and 2010. Core inflation has been hovering ataround 1% since August 2010. Important factorsbehind this subdued underlying dynamic includelow resource utilisation, strong currencyappreciation and falling unit labour costs,stemming from a rebound in productivity andrecord-low wage increases. While HICP inflationis expected to remain relatively stable below the2% target over the forecast period, this masksimportant underlying trends. In 2011, the impact ofhigher energy and food prices is likely to bemoderated by lagged effects of the krona'sappreciation and still-significant spare capacity. In2012, underlying inflation is likely to pick up aseconomic output approaches its potential, wagesaccelerate with the new collective agreements andthe effects of previous currency appreciation fadeaway. On the other hand, for 2012 this is foreseento be offset by lower energy and food priceincreases given the stable commodity priceoutlook. Overall, annual HICP inflation is forecastto reach 1.7% in 2011 and 1.6% in 2012. Thegovernment's plan to cut VAT for restaurant andcatering services represents a downside risk to theinflation forecast for 2012.

The current-account surplus is expectedonly slightly over the forecast period to about 6%as a share of GDP. This reflects the specificsaving/investment characteristics of all sectors.While large public sector savings will continue to

163


Table II.26.1:Main features of country forecast - SWEDEN

2009 Annual percentage changebn SEK Curr. prices % GDP 92-06 2007 2008 2009 2010 2011 2012

GDP 3089.2 100.0 2.7 3.3 -0.6 -5.3 5.5 4.2 2.5Private consumption 1526.7 49.4 1.9 3.7 0.0 -0.4 3.5 3.0 2.3Public consumption 857.9 27.8 0.7 0.7 1.0 1.7 2.6 1.4 0.5Gross fixed capital formation 549.9 17.8 2.6 8.9 1.4 -16.3 6.3 9.8 5.1of which : equipment 203.2 6.6 5.4 12.9 5.5 -28.2 11.6 11.5 6.0Exports (goods and services) 1495.2 48.4 7.5 5.7 1.7 -13.4 10.7 7.6 5.1Imports (goods and services) 1293.8 41.9 5.7 9.0 3.5 -13.7 12.7 7.3 5.0GNI (GDP deflator) 3144.9 101.8 3.0 4.3 0.6 -6.9 5.6 4.3 2.5Contribution to GDP growth : Domestic demand 1.6 3.6 0.5 -3.0 3.6 3.6 2.2

Inventories 0.1 0.7 -0.5 -1.5 2.1 0.0 0.0Net exports 1.0 -1.0 -0.6 -0.8 -0.1 0.6 0.3

Employment -0.1 2.3 0.9 -2.0 1.1 1.9 1.1Unemployment rate (a) 7.6 6.1 6.2 8.3 8.4 7.6 7.2Compensation of employees/head 4.0 5.2 1.5 1.3 2.7 2.8 3.3Unit labour costs whole economy 1.2 4.2 3.1 4.8 -1.6 0.6 1.8Real unit labour costs -0.5 1.4 -0.1 2.9 -2.8 -0.3 0.8Savings rate of households (b) 9.0 11.6 13.9 15.5 13.5 13.8 13.8GDP deflator 1.6 2.8 3.1 1.8 1.3 0.9 1.0Harmonised index of consumer prices 1.8 1.7 3.3 1.9 1.9 1.7 1.6Terms of trade of goods -1.1 1.7 -1.2 1.9 -0.6 -1.0 -1.0Trade balance (c) 6.2 4.6 3.6 3.2 2.4 2.5 2.3Current-account balance (c) 4.2 8.6 8.9 6.8 6.2 6.2 5.9Net lending(+) or borrowing(-) vis-à-vis ROW (c) 3.9 8.5 8.7 6.6 6.1 6.1 5.8General government balance (c) -2.0 3.6 2.2 -0.7 0.0 0.9 2.0Cyclically-adjusted budget balance (c) -1.5 1.4 1.7 2.6 1.4 1.3 2.1Structural budget balance (c) - 1.4 1.4 2.6 1.4 1.3 2.1General government gross debt (c) 61.0 40.2 38.8 42.8 39.8 36.5 33.4


164

Fiscal balance back in surplus

nd from the

While the government has stated that a return to

With the continuation of the recovery and the

be underpinned by the 1% surplus target,households are likely to remain in surplus due toample pension savings. The corporate sectorshould also contribute to current-account surpluseswith a positive trade balance resting on acompetitive advantage and sizeable surpluses onthe income balance supported by extensive profitrepatriation. The substantial appreciation of thekrona in 2010 and early 2011 is not likely toundermine the competitiveness of Swedishexporters given negative unit labour cost growthand increased profitability in 2010, which providesroom for lower margins.

Thanks to the surprisingly strong rebourecession, Swedish public finances improved fasterthan expected in 2010, with the generalgovernment deficit disappearing. Given thepositive outlook for economic growth andemployment, public finances are expected to showrising surpluses once again over the forecastperiod. The surplus is expected to reach almost 1%in 2011 and, under a no-policy-change assumption,around 2% of GDP in 2012. The main explanationfor the improvement in the government balance isthe fact that expenditure is not projected to rise asfast as GDP. This is due to both temporarymeasures being phased out and the cyclical

recovery, which reduces expenditure on activelabour market policies and social assistance.

surpluses is the primary goal of fiscal policy at thecurrent juncture, the Spring Bill released in mid-April 2011 nevertheless indicated a number ofmeasures that could be included in the 2012Budget Bill, provided there is sufficient fiscalspace. Among the measures listed by thegovernment is a fifth step in the in-work tax creditfor wage-earners, a further rise in the threshold forpaying state income tax, lower VAT on restaurantservices and lower taxes on pensions. Should theseexpansionary measures be implemented, the fiscalbalance might not be as strong as currentlyprojected.

government balance returning to surplus, generalgovernment gross debt is foreseen to continue itsdownward path, after only a brief interruption dueto the recession. Planned privatisation receipts for2011 of about 0.8% of GDP have been taken intoaccount in this forecast. After diminishing to39.8% of GDP in 2010, the debt ratio is forecast tofall to below 34% in 2012.

27. THE UNITED KINGDOMNew growth sources to sustain the moderate recovery

165

The recovery moves into an uncertain phase

After strong performance in the first three quartersof 2010, the 0.5% contraction in the fourth quarterwas an unexpected bump in the UK's road torecovery. The first estimate for growth in the firstquarter of 2011 suggests that it only just reversedthe fourth quarter contraction, so that the twoquarters combined recorded zero growth overall.Higher-than-expected inflation and persistentlygloomy results from consumer surveys havecontributed further to a deterioration in the overalloutlook for the UK economy since the beginningof 2011. However, outside the consumer, retail andservices sectors, survey readings remain strong.Recent employment data have also surprised onthe upside, supporting the hypothesis that growthin the private sector can offset the upcoming publicsector job cuts. In sum, these indicators makecontinued modest growth in 2011 and 2012 themost likely outcome.

The prospects for 2011 are made more uncertainby the fact that the demand-side composition ofgrowth must shift fundamentally relative to 2010 ifgrowth is to be maintained. Stockbuilding and,private and government consumption accountedfor the vast majority of growth in 2010. With thestock cycle appearing to have peaked, governmentconsumption restrained by planned spending cutsand household spending depressed by falling realincomes, these demand components will contributelittle in 2011. This puts the emphasis on netexports and corporate investment. For both, theprospects are positive. Sterling's continuedweakness should help maintain strong exportgrowth while lower stockbuilding and weakconsumption should slow imports. Corporateequipment investment, which already showedsigns of recovery in 2010, should benefit from thelarge corporate sector surplus and the need for theeconomy to retool as output shifts towardstradeables. Thus, while the need for new growthdrivers does increase the uncertainty around the2011 forecast, continued growth still appearsprobable.

GDP more volatile than forecast

After catching up in the first quarter of 2011 someof the ground lost to weather effects in the finalquarter of 2010, quarterly UK GDP growth should

remain positive throughout 2011 and 2012.However, this is unlikely to match the rates seen inmid-2010, as the fiscal consolidation and stretchedhouseholds hold back domestic demand.

On the production side construction, whichaccounted for a third of total growth in the firstthree quarters of 2010 before falling off rapidly inthe fourth quarter and the first quarter of 2011,could be a source of further volatility. If theapparently large contraction in construction in thefirst-quarter GDP is confirmed, this could offsetstrong growth in equipment investment and thusreduce total gross fixed capital formation.Manufacturing should remain strong given its largeshare in export and equipment investment demand.Services are likely to be weaker, in line withsluggish domestic demand. In sum, this shouldyield successive improvements in annual growth,with a 1.7% expansion in 2011 followed by 2.1%in 2012.

Graph II.27.1: The United Kingdom - O utputgap and contributions to GDP growth

-8

-6

-4

-2

0

2

4

04 05 06 07 08 09 10 11 12

pps.

Output gapNet exportsInventoriesDom. demand, excl. inventoriesGDP (y-o-y%)

forecast

The growth forecast for 2012 is lower than thelatest official forecast published by the UK Officefor Budget Responsibility in March 2011 (2.1%compared to 2.5%). This is driven mainly bya lower forecast for household consumption. TheCommission's more pessimistic view is based onthe assumption that households will use a largerproportion of the expected real wage gains in 2012for savings, which they have so far deferred tosmooth the impact of negative real wage growth.The impact on GDP growth of this lowerconsumption is partially offset bya correspondingly lower forecast for importgrowth.


Net exports – finally the motor of recovery?

Ever since sterling's 25% depreciation in 2008-09,the stage has appeared set for a net export reboundin the UK. 2010 was a disappointment on thisfront, with the external sector subtracting 1 pp.from growth. While export growth was strong, at5.3%, import growth reached 8.5%.

Graph II.27.2: The United Kingdom - Netexports and the NEER

-4.5

-4.0

-3.5

-3.0

-2.5

-2.0

-1.5

07Q1 08Q1 09Q1 10Q1

70758085

9095100105

110

Net exports (lhs) Sterling NEER (inverted), (rhs)

% of GDP index, Jan. 2005=100

The factors driving this import surge includedrapid restocking (which tends to be import-intensive) and, in the fourth quarter, a surge inaircraft imports driven by a pre-announced taxchange. Neither is likely to be repeated in 2011 or2012. Thus, with household consumption weak inboth years, import growth should slowsignificantly, supported only by demand fromexporters for raw materials and intermediategoods. Export growth should remain strong withsolid growth in the US, the UK's largest singleexport destination, and a continuing recovery inmost of the EU. Although to date sterling'sweakness has led to higher margins for UKexporters rather than increasing market share, asthe currency remains at lower levels, moredomestic firms should start exploitingopportunities in foreign markets, driving upvolumes and keeping a lid on sterling exportprices.

Domestic demand weak outside privateinvestment

Domestic demand will grow slowly in 2011 and2012, with corporate investment the only rapidlygrowing component. Falling real incomes willprevent any substantial increases in householdconsumption in 2011, although this constraintshould be alleviated slightly in 2012 as wagegrowth picks up and inflation falls back. As shownin Graph II.27.3, the forecast is that consumers

will use this pick-up in real income growth mainlyto fund higher net saving with consumption growthstaying low.

There are significant risks to the privateconsumption outlook. In 2010, householdssmoothed the impact of weak real income growthon consumption by reducing savings. It is difficultto say how much leeway they retain to continuethis smoothing behaviour should real incomes fallfurther. However, data on household mortgageinterest cover ratios do not yet suggest that thesector is close to a financial crunch. As such, thesaving rate is expected to remain low in 2011 ashouseholds prioritise maintaining reservationlevels of consumption over restoring depletedsavings, before recovering in 2012. Nonetheless anearlier flight to prudence by households, whetherforced or discretionary, remains a risk. Increases inmortgage interest rates and persistent high inflationare further risks to the consumption outlook. Whilethe level of household indebtedness may moderateslightly, it is likely to remain well above the EUaverage. The stock cycle appears to be close to itspeak with a much larger-than-expectedcontribution from stockbuilding in 2010. Thisimplies that little or no growth will come fromstocks in 2011 or 2012.

Graph II.27.3: The United Kingdom - Real wagegrowth and consumption

-6

-4

-2

0

2

4

07Q1 08Q1 09Q1 10Q1 11Q1 12Q1

y-o-y%

Real wages (lhs) HH consumption (rhs)

forecast

Corporate investment began to recover in 2010after 2009's unprecedented collapse. However, ataround 14%, the investment-to-GDP ratio remainswell below its long-run average of 17%, itself lowby international standards. This leaves plenty ofroom for an investment rebound. Although creditavailability remains a constraint at least for smallerfirms, the large corporate sector surplus of 6% ofGDP would be adequate on its own to fund a majorinvestment revival. Survey data suggest that non-financial companies do not on average feel over-

166

Member States, The United Kingdom

leveraged, implying that they should soon startusing their surplus either for investment ordividends rather than continuing to pay down debt.If firms choose to return the cash to shareholdersin the form of dividends instead of investing, thiswould boost household incomes and, to a lesserextent, consumption. The main downside risks toinvestment are the above-mentioned dividendpayments, credit availability, uncertainty aboutdemand prospects and uncertainty over the extentto which firms need to invest in order to grow theiroutput.

Employment outlook uncertain but stable inthe central scenario

Unemployment in the UK has remained stable ataround 8% since the rapid rises of 2008 and 2009.If private sector employment followed a similarpath to that seen after previous recessions, it wouldmore than offset the 400 000 public sector job cutsexpected over the period to 2014-15.(82) However,in current circumstances this scenario looksoptimistic. At the micro level, there may well beskill mismatches between the people losing jobs inthe public sector and sectors with strongemployment growth such as manufacturing. Thereis also uncertainty as to the degree to which firmswill need to recruit – the twin crisis phenomena oflabour hoarding and forced shifts from full-time topart-time working are still unwinding. This willhold back new job creation to some extent. Afurther uncertainty is the degree to which fallinggovernment consumption will cause job lossesamong government's suppliers. Some estimate thatone job will be lost in the private sector for everyone lost in the public sector.

Notwithstanding these risks, the central scenariofor private sector job creation is broadly positive,with consistently strong readings fromemployment intentions surveys. Theunemployment rate is therefore forecast to remainbroadly stable, with a slight peak in 2011, as theprivate sector roughly offsets the upwardinfluences of government cuts and labour forcegrowth.

Strong monetary stimulus as credit growthremains weak

The Bank of England has provided a strongmonetary stimulus over the past two years with themain policy rate at 0.5% and GBP 200 bn (14% of

(82) The UK financial year runs from April to March

GDP) of quantitative easing. However, net lendingto non-financial corporations has remainednegative, contributing to weak overall growth inbroad money. Net lending should start to turnpositive over the coming two years, with UKbanks having committed to higher gross lendingand loan repayments likely to slow as the corporatesurplus is reduced to fund investment. However, ifbanks continue to deleverage in anticipation oftougher solvency standards or if the large peak inrollovers of UK bank debt in the fourth quarter of2011 is not smoothly refinanced, credit growthcould remain a check on overall economicperformance.

Inflation: upward influences from import pricesand VAT rises should finally dissipate in 2012

Inflation has consistently surprised on the upside,remaining above the 3% top end of the Bank ofEngland's target range throughout 2010. TheJanuary 2011 VAT increase and recent oil pricerises will keep inflation well above the 2% centraltarget throughout 2011. Although settlements datafrom early 2011 have suggested a slight uptick inwage growth, it remains well below inflationimplying that second-round effects from the UK'simport price- and VAT-driven inflation shock havenot yet materialised. As long as this remains thecase, it appears very likely that inflation will fallsharply in 2012 as these temporary factors fall outof the annual comparison. This would giveinflation of 4.1% in 2011 and 2.4% in 2012.

Government perseveres with planned fiscalconsolidation

The fiscal projections in the UK's 2011 budget,published in March, were slightly more pessimisticthan those published in June 2010, reflectinglower-than-expected growth and higher-than-expected inflation. The discretionary measuresannounced were fiscally neutral on aggregate. Thegovernment thus remains committed to a majorconsolidation focused largely on spending cuts.More detail on these spending cuts was set out inthe Spending Review of October 2010 which setspending limits for each government departmentcovering the four financial years to 2014-15.According to these plans, departmental budgetsexcluding health and overseas aid will be cut by anaverage of 19% in real terms over the four years.

The need for consolidation in the UK becameurgent as the deficit increased from 2.8% of GDP

167


in 2007-08 to 11.5% in 2009-10. The consolidationbegan in 2010 with an improvement in thecyclically-adjusted primary balance ofapproximately 1.5% of GDP. The pace ofimprovement in the structural primary balance isprojected to accelerate slightly over the next year.According to the official UK forecast, the plannedconsolidation would be sufficient to bring thedeficit below 3% of GDP by the deadline of2014-15 set in the UK's excessive deficitprocedure. As a result of the government'splanned spending cuts, government consumption isexpected to rise by only 0.8% in 2011 beforedeclining by 1% in 2012. Government capitalspending is set to fall sharply in both years; by12.1% in 2011 and 9.6% in 2012.

Table II.27.2:Main features of country forecast - THE UNITED KINGDOM

2009 Annual percentage changebn GBP Curr. prices % GDP 92-06 2007 2008 2009 2010 2011 2012

GDP 1395.0 100.0 2.8 2.7 -0.1 -4.9 1.3 1.7 2.1Private consumption 910.6 65.3 3.1 2.2 0.4 -3.1 0.6 0.3 0.8Public consumption 326.9 23.4 1.7 1.3 1.6 1.0 0.8 0.8 -1.0Gross fixed capital formation 203.6 14.6 3.9 7.8 -5.0 -15.4 3.0 0.1 4.0of which : equipment 68.4 4.9 5.0 12.3 -5.2 -22.0 8.6 6.8 5.4Exports (goods and services) 390.9 28.0 6.0 -2.6 1.0 -10.1 5.3 8.9 7.5Imports (goods and services) 420.6 30.1 6.8 -0.8 -1.2 -11.9 8.5 4.0 2.5GNI (GDP deflator) 1415.5 101.5 3.0 3.5 0.4 -5.2 2.0 2.2 1.1Contribution to GDP growth : Domestic demand 3.0 3.0 -0.3 -4.5 1.0 0.4 0.9

Inventories 0.1 0.1 -0.4 -1.1 1.4 0.0 -0.1Net exports -0.3 -0.5 0.6 0.9 -1.0 1.2 1.4

Employment 0.7 0.7 0.7 -1.6 0.2 0.4 0.5Unemployment rate (a) 6.7 5.3 5.6 7.6 7.8 8.0 7.8Compensation of employees/head 4.2 5.0 1.5 2.5 3.2 2.8 4.0Unit labour costs whole economy 2.1 3.0 2.3 6.1 2.1 1.5 2.4Real unit labour costs -0.4 0.0 -0.7 4.6 -0.8 -0.5 0.3Savings rate of households (b) 7.0 2.6 2.0 6.0 5.4 6.1 7.1GDP deflator 2.6 3.0 3.0 1.4 2.9 1.9 2.1Harmonised index of consumer prices 1.9 2.3 3.6 2.2 3.3 4.1 2.4Terms of trade of goods 0.1 1.3 -0.5 0.3 -0.1 0.3 1.6Trade balance (c) -3.2 -6.4 -6.4 -5.9 -6.7 -6.1 -4.7Current-account balance (c) -1.7 -2.6 -1.6 -1.7 -2.5 -1.2 -0.1Net lending(+) or borrowing(-) vis-à-vis ROW (c) -1.6 -2.4 -1.4 -1.5 -2.3 -1.0 0.1General government balance (c) -2.8 -2.7 -5.0 -11.4 -10.4 -8.6 -7.0Cyclically-adjusted budget balance (c) -3.2 -3.8 -5.3 -9.1 -8.2 -6.5 -5.3Structural budget balance (c) - -3.8 -4.8 -8.9 -8.2 -6.5 -5.3General government gross debt (c) 43.7 44.5 54.4 69.6 80.0 84.2 87.9


168

Table II.27.1:General government projections on a financial year basis

2008-09 2009-10 2010-11 2011-12 2012-13

General government balance1 -6.9 -11,5 -9.5 -8.1 -6.6Structural budget balance -5.8 -9.0 -7.4 -6.2 -4.9General government gross debt 55.8 71.2 78.1 84.3 87.6

Actual Forecast

The estimated nominal deficit for 2010-11 is 9.5%of GDP, slightly lower than in the autumn forecast,mainly reflecting lower-than-expected governmentspending. However, the forecast deficits for2011-12 and 2012-13, at 8.1% and 6.6% of GDPare slightly higher than predicted in autumn,reflecting lower growth forecasts and, for 2010-11,

higher inflation. Although higher inflation wouldtypically improve the fiscal balance by increasingnominal revenues, UK inflation is currently drivenmainly by rising VAT which is already accountedfor in the revenue estimation, and import inflationwhich contributes significantly less to revenuesthan domestically driven inflation which drivesnominal income growth. The ongoingimprovements in the fiscal balance will be drivenby the spending cuts, the January 2011 increase inthe VAT rate, GBP 2 bn extra taxation on NorthSea oil and gas extraction and a levy on bankliabilities estimated to raise GBP 2.5 bn (0.2% ofGDP). These will be only partly offset by a seriesof cuts in corporation tax, higher thresholds forincome tax and lower petrol duty.

General government debt will increase as apercentage of GDP in both forecast years as thedeficit remains at historically very high levels. It isforecast to reach 87.6% of GDP, above theEuropean average, by 2012-13. According to thelatest official UK forecasts, debt would continuerising until 2013-14, peaking at 87.2% of GDP.

Candidate Countries

28. CROATIASluggish growth in the run-up to EU accession

170

Still recession in 2010

Croatia's economy was still marked by recession in2010. Output contracted in three out of fourquarters and annual average GDP declined by1.2%. The labour-market conditions deterioratedmore sharply than in the preceding year.Employment fell by 4% and the unemploymentrate surged to an annual average of 11.8%. Thecurrent-account deficit narrowed to 1.4% of GDPas annual imports continued to decline whileexports started to benefit from the recovery in themain export markets. As wage growth stagnated innominal terms, annual average consumer priceinflation fell to 1.1%.

Graph II.28.1: Croatia - GDP growth andcontributions

-12

-8

-4

0

4

8

12

04 05 06 07 08 09 10 11 12

pps.

Net exports Private consumptionPublic consumption InvestmentGDP growth (y-o-y%)

forecast

Mixed signals from recent data

Recent GDP data do not give a clear picture aboutthe strength of the economy. Quarterly data appearto indicate a relapse in the fourth quarter of 2010(-0.6% y-o-y) following the improvement in thethird quarter, when real GDP expanded for the firsttime in two years (0.3%). However, the negativeGDP growth rate in the fourth quarter wasa consequence of stock adjustments and not offaltering final demand.

Consumer spending continued to increase year-on-year in the fourth quarter of 2010 (1.2%), butsomewhat less than in the preceding quarter. Fixedinvestment was still declining, but at a deceleratingrate (-8.0%). Net exports of goods and servicescontinued to rise as exports (10.8%) increasedmuch more than imports (1.1%). The decline inimport growth from 3.4% in the third quarter is

consistent with the softening of domestic demandincluding destocking.

In terms of contribution to GDP growth, the largestinput in the fourth quarter again came from netexports (3.4 pps.). The other main positivecontribution to GDP growth was privateconsumption (0.8 pp.). Fixed investment was againa major drag (-2.1 pps.) although somewhat lessthan in previous quarters. The largest negativecontribution came from stock adjustments(-3.0 pps.).

Monthly data indicate that subdued economicactivity has extended into the first quarter of 2011.The trend in industrial production has been flat toslightly down. In March the volume of industrialproduction was still 4.1% lower in annual terms.The year-on-year increase in retail sales volume,which started last July, has levelled off over thewinter months and registered 0.8% in February.Construction output was still down by 7.1% inannual terms in February, which is nevertheless arelative improvement compared to the double-digitrates of decline in 2010. The data on merchandisetrade show a decline in goods exports in the firstquarter in annual terms, but are heavily distortedby volatile ship exports. For all items other thanships, exports increased by 5.8% while growth ofimports increased at the lower rate of 2.8%. Theregistered unemployment rate in March was 0.9pp. higher year-on-year.

The upturn is likely to remain subdued

Although economic activity seems to havebottomed out, it is unlikely that the economy willreturn to pre-recession growth rates, at least in theshort term. The weak labour-market conditionscontinue to exert downward pressure on incomesand spending although last year's tax reduction hasallowed a moderate increase in nominal net wages(1.6% y-o-y in February). The high level ofindebtedness of households and companies andtheir need to deleverage are weighing on domesticdemand. Credit availability is likely to remainrelatively restricted. Investor confidence has takena severe beating during the recession and will takesome time to recover. Export performance isfalling short of growth in major export markets.Overall, these headwinds are bound to restrain therecovery.

Candidate Countries, Croatia

The banking sector has demonstrated resilienceduring the crisis and is well-capitalised andprofitable. Maintaining soundness in the financialsector will be crucial for a sustained recovery. Thequality of loan portfolios has continued to declinein 2010, reflecting in particular a strong rise innon-performing loans and continuing liquidityproblems in the non-financial corporate sector. Thegovernment's credit programmes through theCroatian Bank for Reconstruction andDevelopment have shown mixed results so far andmay not provide the hoped-for boost to overalllending to the corporate sector. The levels ofinterest rates in lending to households and firmsremain relatively high in view of financial marketconditions. Together with the general creditrestraint, this will continue to hold back businessand consumer spending.

The government has announced a set of publicinvestments projects, but they have not yet beenbudgeted for. Their eventual impact on overallinvestment activity remains uncertain, not least inview of the existing budgetary constraints. For thesame reason, the recovery is expected to get nosupport from government spending.

Net exports provided a significant offset tofaltering domestic demand during the recession.This was still evident in the annual GDP data for2010 when imports were slow to recover (seeGraph II.28.1). But given the structure of theeconomy, imports are bound to pick up soon as therecovery takes hold. Although export growth is setto continue, it will probably happen at lower ratethan in 2010, since import growth among tradingpartners is projected to soften compared to lastyear's post-recession jump. Furthermore, Croatiais currently losing market share and this is likely tocontinue over the next two years. Going forward,net exports are therefore projected to provide onlya modest contribution to GDP growth in 2011 andeven exert a slight drag on growth in 2012.

The recovery is projected to result in annualaverage growth rates of 1.1% in 2011 and 2.0% in2012. Private consumption and investment,including a renewed build-up of inventories, willemerge as the main drivers of this modest growthperformance. Upside risks to this forecast aremainly related to a faster-than-projected economicrecovery in the EU. The approaching accession tothe EU may also provide some additional impetusto the economy through, inter alia, stronger netFDI inflows. But more importantly, there are

significant downside risks related to the speed ofprivate sector deleveraging and dependence onexternal financing. Furthermore, a delay in fiscalconsolidation may hurt both investment andconsumption via higher borrowing costs.

Current-account deficit set to widen slightly

As a result of the recession, the high externaldeficits underwent severe adjustments. Reducedcapital inflows and sharply lower domesticdemand resulted in much lower trade andcurrent-account deficits. In 2010, the latter fell to1.4% of GDP, compared to more than 9% twoyears earlier. At this stage of the business cycle,the external balances are benefiting from stillsubdued import growth and from the earlierrecovery in main export markets. As exports areexpected to increase at a somewhat slower ratethan in 2010 while import growth is projected topick up, the current-account deficit widens to 2.2%of GDP in 2011 and to 2.5% in 2012. The risksaround this projection are significant. On the onehand, declining unit labour costs could improveinternational competitiveness to an extent which isnot factored into the projected export performance.On the other hand, the pent-up demand for foreigngoods and services could also lead to a stronger-than-expected increase in imports.

Inflation pressures to remain relatively low

The recession was associated with a disinflationaryprocess which lowered the monthly headlineinflation rate to less than 1% in mid-2010. Lastyear, disinflation was primarily driven by thegrowing slack in the use of resources transmittedto price- and wage-setting. Most prominently, thecompensation of employees declined slightly on anannual level. The rebound in energy prices andother commodity prices came too late tosignificantly raise consumer price inflation inannual average terms, which remained low at1.1%. It was, however, the main reason behind therise in the monthly headline inflation rate lastwinter. The year-on-year change of the CPIincreased from 1.2% in November 2010 to 2.6% inMarch 2011.

Inflation pressures are expected to remain low overthe forecast horizon in spite of the upturn ineconomic activity. Cost push pressures from thedomestic side should be insignificant as unit labourcosts continue to decline. There will be somepass-through from higher import prices,

171


Table II.28.1:Main features of country forecast - CROATIA

2009 Annual percentage changebn HRK Curr. prices % GDP 92-06 2007 2008 2009 2010 2011 2012

GDP 335.2 100.0 - 5.1 2.2 -6.0 -1.2 1.1 2.0Private consumption 185.7 55.4 - 6.5 0.9 -8.3 -0.9 0.8 1.2Public consumption 72.0 21.5 - 5.0 1.9 0.0 -0.8 -0.3 0.0Gross fixed capital formation 83.4 24.9 - 7.1 8.2 -11.8 -11.3 -0.5 5.0of which : equipment - - - - - - - - -Exports (goods and services) 118.7 35.4 - 3.7 2.2 -17.3 6.0 4.0 4.3Imports (goods and services) 131.9 39.4 - 6.2 3.3 -20.4 -1.3 2.5 4.2GNI (GDP deflator) 321.7 96.0 - 5.4 1.3 -6.6 -0.7 0.9 1.7Contribution to GDP growth : Domestic demand - 6.6 3.0 -8.1 -3.8 0.3 1.9

Inventories - 0.0 -0.1 -0.9 -0.4 0.4 0.3Net exports - -1.5 -0.7 3.0 3.0 0.4 -0.2

Employment - 3.5 1.1 -1.8 -4.0 -0.2 1.2Unemployment rate (a) - 9.6 8.4 9.1 11.8 11.3 9.8Compensation of employees/head - 5.7 9.0 2.2 -0.3 0.3 0.3Unit labour costs whole economy - 4.1 7.8 6.7 -3.1 -1.0 -0.5Real unit labour costs - 0.0 1.7 3.3 -4.1 -2.0 -2.6Savings rate of households (b) - - - - - - -GDP deflator - 4.1 6.1 3.3 1.0 1.1 2.1Harmonised index of consumer prices - 2.7 5.8 2.2 1.1 2.8 2.5Terms of trade of goods - - - - - - -Trade balance (c) - -21.7 -22.6 -16.2 -13.1 -14.0 -14.3Current-account balance (c) - -7.5 -9.1 -5.5 -1.4 -2.2 -2.5Net lending(+) or borrowing(-) vis-à-vis ROW (c) - -7.4 -9.0 -5.4 -1.4 -2.2 -2.5General government balance (c) - -2.4 -1.4 -4.1 -5.2 -6.0 -5.0Cyclically-adjusted budget balance (c) - - - - - - -Structural budget balance (c) - - - - - - -General government gross debt (c) - 32.5 29.0 35.2 40.1 45.2 48.4

(a) as % of total labour force. (b) gross saving divided by gross disposable income. (c) as a percentage of GDP.

172

particularly from energy and energy-related prices.Much of this will be transmitted via increases inadministratively-set prices. The recent rise inagricultural raw materials can also be expected tofind its way into the consumer basket. The forecastprojects an uptick in consumer price inflation tothe 2½ - 3% range over the next two years.The stability-oriented monetary policy frameworkshould help to prevent a significant re-accelerationof inflation over the medium term.

Labour market improving with a lag

The unemployment rate increased from an annualaverage of 9.1% in 2009 to 11.8% in 2010 andstood at 12.1% in the fourth quarter of 2010. Thelabour market is only expected to see a turnaroundtowards increasing employment in the second halfof the current year. However, as the labour force isprojected to decline even faster than employment,the unemployment rate will show a small decreaseto 11.3% in 2011. As the recovery takesa somewhat stronger hold in 2012, theunemployment rate should fall more significantly,to just below 10%. In spite of the high level ofunemployment, wages are likely to show somedownward "stickiness" – more so in the publicsector, less so in the private sector.

Some decline of the fiscal deficit in 2012

The recession put public finances under severepressures and necessitated adjustments to theoriginal budget plans in the course of 2009 and2010. Last year, a significant budget revision wasadopted in August, taking into account weaker-than-expected economic activity and providing forsome limited fiscal measures. As a result, theplanned general government deficit increased byalmost 2 pps. of GDP.

Preliminary data indicate that the budgetaryoutcome for general government in 2010 will beclose to the 5.2% deficit planned by thegovernment last autumn. In 2011, last year'schanges in the tax regime will result in lower taxrevenues. In spite of restraint on the expenditureside, this will lead to a further increase of thebudgetary gap which this forecast projects at 6.0%of GDP. In 2012, a moderate pick-up in taxrevenues in the context of slightly strongereconomic activity in combination with continuedspending restraint is forecast to result ina narrowing of the fiscal deficit to 5.0% of GDP.General government debt is set to increase from40% in 2010 to 49% in 2012.

29. THE FORMER YUGOSLAV REPUBLIC OF MACEDONIABetween post-crisis and catching-up

173

Subdued recovery in 2010

After a moderate output decline of 0.9% in 2009,the recovery in 2010 was weaker than expected,with GDP increasing by 0.7% instead of theexpected 1.3%. The main reasons for this lowergrowth dynamic were lower-than-expected publicconsumption and weaker gross capital formation.Economic activity gained momentum during theyear, in particular in the second half, when year-on-year growth was already 1.6% and 2.3%respectively. Important sources of growth wereexternal demand and private consumption. Grossfixed capital formation accelerated markedly in thefourth quarter. However, at the same time, privateconsumption declined, which raises doubts aboutthe underlying strength of the recovery.

The continued decline in public consumptionprobably largely reflects the government'sintentions to maintain low deficits, whileincreasing transfers and public capital spending.Capital inflows in the form of current privatetransfers remained high, which together withstrong external demand resulted in a significantdecline in the current-account deficit, from 6.7%of GDP in 2009 to 2.8% in 2010. Further supportfor growth came from declining interest rates andincreased bank lending.

Public finances were characterised by lower thanexpected revenues, which were howevercompensated for by lower than planned publicspending, in particular in the area of capitalinvestment. In order to adjust spending to lowerrevenues, the government adopted a supplementarybudget in June 2010.

Inflation accelerated markedly during the year,accelerating from close to zero percent at thebeginning of the year to 3.7% in December,leading to an annual average inflation rate of 1.6%in 2010, compared to -0.8% in 2011. Overall,average annual inflation accelerated, from -0.8% in2009 to 1.6% in 2010. The stronger price increasewas mainly due to higher prices for energyimports, but also for food.

Official labour-market data point to a continuedincrease in overall employment, despite significantjob losses in those industries primarily affected bythe global crisis. However, employment appears to

have increased markedly in agriculture and in thepublic sector, in particular at municipal level. Theformer is probably due to government incentives toregister so far unregistered employment.Unemployment continued to drop slightly, but stillremained at the high level of some third of thelabour force. However, youth unemploymentdeclined to some 52%, mainly due to a strongreduction in female unemployment in this agegroup.

Graph II.29.1: The former Yugoslav Republic ofMacedonia - Labour market

-5

-3

-1

1

3

5

7

04 05 06 07 08 09 10 11 12

y-o-y%

28

30

32

34

36

38

40

Unemployment rate (rhs) Employment growth (lhs)GDP growth (lhs)


The exchange rate of the Denar has remainedlargely unchanged against the euro at a level of61.5 MKD/EUR. The Central Bank intends tomaintain its current informal peg to the euro.

The speed of the recovery will largely dependon domestic factors

In 2011, the main shock of the global crisis isexpected to subside, which should allow theeconomy to expand by around 2½%. The mainsources for this recovery will be privateconsumption, benefiting from improved consumerconfidence and investment, which should recoverafter two years of strong declines. In 2012, theexpected recovery of export market growth shouldhelp to bring output growth to some 3¼%. Therecent increase in inflationary pressures howevercould erode households' purchasing power andthus slow down the recovery process.

In recent years, workers' remittances and otherprivate capital inflows have increased to close to20% of GDP. During the forecast period, theseinflows are to gradually return to previous levels of


some 18% of GDP. This source of income isexpected to remain at a very significant level.

During recent years, employment growth has beenrather high at some 3% annually. However,a significant share of those additional jobs area result of a stricter registration procedure and donot necessarily reflect newly created employment.In view of the probably still difficult internationalenvironment in 2011-12, the country's potential forcreating employment or raising real wages willremain limited. Wage growth is likely to remainsubdued, given the need to maintain competitiveon external markets. Improving the country'slabour income thus requires improvingproductivity by investing, so modernising anddeepening the capital stock.

Table II.29.1:Main features of country forecast - THE FORMER YUGOSLAV REPUBLIC OF MACEDONIA

2009 Annual percentage changebn MKD Curr. prices % GDP 92-06 2007 2008 2009 2010 2011 2012

GDP 409.1 100.0 0.7 6.1 5.0 -0.9 0.7 2.5 3.3Private consumption 312.0 76.3 - 7.5 7.4 -3.9 1.1 2.0 3.0Public consumption 78.5 19.2 - -0.3 10.6 -6.4 -3.0 0.5 1.0Gross fixed capital formation 81.9 20.0 - 17.1 5.4 0.9 -7.5 8.5 8.0of which : equipment 35.8 8.8 - 22.7 14.6 -12.6 -19.9 - -Exports (goods and services) 160.3 39.2 - 11.8 -6.3 -10.7 22.7 6.7 8.5Imports (goods and services) 248.8 60.8 - 16.1 0.8 -11.1 10.7 6.1 7.5GNI (GDP deflator) 405.5 99.1 - 1.7 8.6 -0.4 -0.6 2.7 3.3Contribution to GDP growth : Domestic demand - 8.6 7.9 -4.1 -1.2 3.2 4.0

Inventories - 1.8 0.3 0.1 -0.5 0.2 0.2Net exports - -4.9 -3.9 3.0 2.4 -0.8 -1.0

Employment - 3.5 3.2 3.4 1.3 2.0 2.5Unemployment rate (a) - 34.9 33.8 32.2 32.0 31.4 30.5Compensation of employees/head - - 12.9 -1.4 2.2 3.4 4.9Unit labour costs whole economy - - 11.0 2.9 2.8 2.9 4.1Real unit labour costs - - 3.3 2.7 -0.1 -2.4 -1.1Savings rate of households (b) - - - - - - -GDP deflator 46.7 7.4 7.5 0.3 2.9 5.4 5.3Harmonised index of consumer prices - 2.3 8.3 -0.8 1.6 4.3 3.8Terms of trade of goods - 8.9 -3.7 -9.1 2.6 0.0 0.0Trade balance (c) - -19.8 -26.2 -23.2 -21.3 -21.4 -21.4Current-account balance (c) - -7.1 -12.8 -6.7 -2.8 -3.1 -3.7Net lending(+) or borrowing(-) vis-à-vis ROW (c) - - - - - - -General government balance (c) - 0.6 -0.9 -2.7 -2.5 -2.5 -2.2Cyclically-adjusted budget balance (c) - - - - - - -Structural budget balance (c) - - - - - - -General government gross debt (c) - 22.7 20.7 23.9 25.3 27.7 29.6


174

The current-account deficit is likely to rise again in2011 and 2012 towards 4% of GDP, mainlyreflecting the expected marked increase ininvestment and the levelling-off of inflows ofcurrent transfers.

Public finances are likely to remain undercontrol

Based on the country's track-record of respectingfiscal targets, the forecast expects public sectordeficits to decline from 2½% of GDP in 2010 to

2¼% in 2012. The forecast expects that in case ofspending constraints, the authorities will reducecapital spending, as has happened in the past onsimilar occasions.

Graph II.29.2: The former Yugoslav Republic ofMacedonia - Public finances

-5-4

-3-2

-10

12

3

04 05 06 07 08 09 10 11 12

% of GDP

1020

3040

5060

7080

90

General government debt (rhs)General government deficit (lhs)

forecast

% of GDP

Protracted fiscal deficits and rather low nominalGDP growth will lead to a marked rise in publicsector debt, reaching some 30% of GDP by 2012.However, given the government's intentions tofinance a large part of its structural reform agendathrough foreign funds, a faster increase in publicindebtedness cannot be excluded.

30. ICELANDSlow recovery after long and severe recession

175

The recession has reached bottom butprospects for a strong recovery remainconstrained…

Following the collapse of its banking sector inOctober 2008, Iceland went into a long and deeprecession. Real GDP declined by 6.8% in 2009 andby a further 3.5% in 2010, driven by a strongadjustment in domestic demand. The recessionseemed to have bottomed out in the second half of2010, when the economy started to recover mildly,based on somewhat stronger consumption and astronger export performance of non-aluminiumand non-maritime products. However, following apositive quarterly growth rate of 2.2% in the thirdquarter of 2010 (in seasonally adjusted terms), realGDP dropped again by 1.5% in the last quarter, asstronger domestic demand was offset by anacceleration of imports. Consumer sentiment andexpectations have recently improved somewhat,but industrial production continued to fall in thefirst two months of 2011. Although the Icelandiceconomy seemed to be at a turning point, hard datado not yet provide evidence for a strong and robustrecovery.

…as disposable incomes will only slowlyrecover…

The outlook for private consumption growth mayhave improved somewhat compared to the autumnforecast. New frameworks for household debtrestructuring were approved in December 2010and are supposed to provide financial relief for alarge number of private households. However,households will still be left with a significant debtburden even after debt restructuring. The level ofunemployment, although declining, is projected tostay far above pre-crisis levels. Disposableincomes are unlikely to increase strongly over theshort term, although the recent wage settlement forthe private could lead to modest increases in realwages. At the same time, indirect tax increases andannounced cuts on social transfers and familysupport will continue to put a lid on disposableincomes. Some limited support for privateconsumption growth could result from furtherwithdrawals from individual pension savings, butthe liquidation of savings cannot go on for anindefinite period.

…and uncertainties persist with respect to firm'sinvestment plans.

The corporate sector is also suffering fromfinancial problems and many firms first need torepair their balance sheets before being able toplan and finance new investment projects.A programme for debt restructuring of SMEs wasset up last December to accelerate the process andcreate certainty among debtors and creditors. Thenew scheme is expected to become fullyoperational in May 2011 and to assist a largenumber of firms in financial distress. Oncecorporate debt restructuring starts gaining pace,investment activity is likely to unfold slowly.A boost to investment is expected to come fromlarge projects, such as the construction at theStraumsvik smelter, a silicon plant in Helguvik andrelated power projects. The forecast projects, thatprivate investment growth will pick up in thesecond half of 2011 at the earliest. At the sametime, public investments are projected to decline inthe context of the government's fiscalconsolidation programme.

The global outlook has improved somewhat.Stronger economic growth in Iceland's maintrading partner countries will improve theconditions for a strengthening of external demand.At the same time, the growth of a large share ofmerchandise exports will continue to be subject totechnical constraints (fishing quotas, capacity ofaluminium smelters). The growth of servicesexports is projected to benefit from somewhatstronger activities of the tourism industry asindicated by bookings and surveys.

Graph II.30.1: Iceland - GDP growth andcontributions

-25

-15

-5

5

15

25

04 05 06 07 08 09 10 11 12

pps.

Net exportsDom. demand, excl. invent.GDP (y-o-y%)

forecast


In sum, the forecast projects mild recovery, mostlydriven by domestic demand with strongerinvestment growth while net exports will add smallnegative contributions to growth.

Inflation risks remain balanced…

A process of disinflation continued through 2010,and average inflation came down to 5.4%,compared to 12% in 2009. During the first quarterof 2011, some mild inflationary pressuresemerged, as higher energy and food prices led toan increase in monthly inflation. As a result, theannual inflation rate (CPI) rose to 2.8% y-o-y inApril, up from 1.8% in January.

Inflation risks over the forecast horizon seembalanced. The lowering of inflation over the lasttwo years has led to a stabilisation of inflationexpectations. A modest recovery of growth anddisposable incomes should not exert significantinflationary pressures. On the other hand, someprice pressures could result from further taxincreases and higher energy prices as well as fromthe recent surge of commodity and food prices andthe slight krona deprecation during the first quarterof 2011. Although high unemployment and weakdemand may generally not lead to very strong realwage increases over the short term, demands forhigher wages are emerging in the context of thecurrent wage bargaining round. There is also a riskthat wage increases in the profitable tradeablesectors could subsequently spill-over into thenon-tradeable sector. Most importantly, theinflation outlook very much rests on the basicassumption of a continued exchange ratestabilisation, the prime focus of monetary policysince the outbreak of the crisis.

…and the trade balance will remain insurplus…

External deficits have shrunk markedly followingthe recession. The sharp contraction in domesticdemand and depreciation of the exchange rate(around 50% during the crisis) contributed toa substantial improvement in the trade balance.The forecast projects a slight reduction in the tradesurplus as of 2011, as even a slowly growingeconomy will imply growing imports due to thehigh dependency rate while export growth willremain constrained, reflecting the low degree ofdiversification. The current-account balance isdifficult to project, as net interest has appeared tobe rather volatile. A large part of the net interest

balance is accounted for by the banks inwinding-up proceedings. The forecast assumes thatrelated accrued interest on the debt of those bankswill be gradually reduced.

…but labour markets continue to struggle withrelatively high, though falling, unemployment

The crisis had led to a marked increase inunemployment and a sharp drop in the number ofemployed compared to pre-crisis levels, althoughelements of flexibility seem to have provideda degree of cushioning, such as reduced hoursworked, increased part-time work and real wageflexibility. Net emigration has also preventeda stronger increase in the jobless rate. Nonetheless,the recession continued to impact on labour marketperformance in 2010, when the level ofemployment continued to fall (by 0.6%) and theunemployment rate increased to 7.5% (from 7.2%in 2009).

The forecast projects that employment levels willrespond to an increase in economic activity in2011 and 2012 with some time lag. This will bringthe unemployment rate down to around 6% at theend of the forecast period. However, this is still farabove the average pre-crisis rate.

Public finance consolidation continues…

Public finances suffered a marked deterioration inthe wake of the October 2008 crisis. Followingbudget surpluses in earlier years, the generalgovernment balance turned into huge deficits in2008 and 2009, prompting the government tolaunch a series of fiscal adjustment measures in thecontext of the IMF programme which continuedinto 2010. The 2010 budget comprised a series ofrevenue enhancing measures (VAT, excise duties,energy taxes, social contributions) as well as cutsin current and capital spending, which helped toreduce the general government balance to -7.8% ofGDP (down from 10% a year before). However,the deficit turned out to be significantly larger thanthe planned 6% target specified in Iceland's firstPre-Accession Economic Programme. This wasmainly due to the activation of central governmentguarantees towards the end of 2010.

…but the 2011 budget is based on optimisticassumptions

The 2011 budget can be considered as anexpression of the government's commitment to

176

Candidate Countries, Iceland

Table II.30.1:Main features of country forecast - ICELAND

2009 Annual percentage changebn ISK Curr. prices % GDP 92-06 2007 2008 2009 2010 2011 2012

GDP 1495.3 100.0 3.4 6.0 1.4 -6.9 -3.5 1.5 2.5Private consumption 757.8 50.7 3.6 5.6 -7.9 -15.6 -0.2 2.3 2.7Public consumption 396.9 26.5 3.0 4.1 4.6 -1.7 -3.2 -3.5 -3.2Gross fixed capital formation 210.9 14.1 7.7 -11.1 -19.7 -50.9 -8.1 14.0 16.0of which : equipment 40.4 2.7 9.6 -28.3 -31.0 -59.1 33.5 16.0 18.0Exports (goods and services) 791.6 52.9 4.0 17.7 7.0 7.0 1.1 2.3 3.4Imports (goods and services) 662.6 44.3 6.7 -0.7 -18.4 -24.0 3.9 4.0 4.8GNI (GDP deflator) 1221.1 81.7 3.2 6.3 -15.8 -3.1 -2.9 4.3 4.2Contribution to GDP growth : Domestic demand 4.7 0.5 -9.0 -21.2 -2.1 1.9 2.8

Inventories 0.0 -0.3 -0.2 -0.1 -0.2 0.0 0.1Net exports -1.3 6.1 10.8 14.4 -1.2 -0.5 -0.4

Employment 1.4 4.5 0.8 -6.0 -0.3 0.6 1.1Unemployment rate (a) 3.4 2.3 3.0 7.2 7.5 6.9 6.2Compensation of employees/head 6.4 9.0 4.1 -3.7 3.9 4.0 4.0Unit labour costs whole economy 4.3 7.5 3.5 -2.8 7.3 3.1 2.5Real unit labour costs 0.5 1.7 -7.4 -10.2 0.6 0.2 -0.3Savings rate of households (b) - - - - 5.2 4.4 3.7GDP deflator 3.8 5.7 11.8 8.3 6.7 2.9 2.8Harmonised index of consumer prices - 3.6 12.8 16.3 7.5 3.0 2.7Terms of trade of goods -0.2 -0.6 -6.3 -12.1 8.4 -1.4 0.0Trade balance (c) -2.0 -6.9 -0.4 6.0 7.7 7.1 6.8Current-account balance (c) -5.6 -16.4 -24.5 -10.3 -7.8 -6.2 -5.5Net lending(+) or borrowing(-) vis-à-vis ROW (c) -5.6 -16.6 -24.6 -10.4 -7.9 -6.2 -5.5General government balance (c) - 5.4 -13.5 -9.9 -7.8 -4.9 -3.6Cyclically-adjusted budget balance (c) - - - - - - -Structural budget balance (c) - - - - - - -General government gross debt (c) - 28.5 70.5 87.8 93.3 94.3 93.0


177

continued fiscal consolidation. In order to achievea primary surplus, the budget contains fiscalmeasures which are equivalent to around 2.7%of GDP, including a freeze on nominal wages andbenefits as well as cuts in current and capitalspending which may, however, be difficult toimplement. Moreover, the budget is based onsomewhat optimistic growth and revenueassumptions. Against this background, and on the

basis of less optimistic growth assumptions, theforecast assumes a reduction of the fiscal balanceof around 3 pps. in 2011, assuming the realisationof budget savings equivalent to 2% of GDP andlower one-off expenditure related to governmentcalled guarantees. The general government debtratio is set to remain in the range of 90-95% ofGDP.

31. MONTENEGROA recovery of sorts

178

A recovery driven by external demand …

After a sharp contraction of 5.7% in 2009, theeconomy slowly recovered in 2010 from theeffects of the global crisis. The latest estimates for2010 point to a real expansion close to 1%. Thefirst signs of revitalisation appeared in the secondquarter of 2010, after 18 months of continuouscontraction. The turnaround of the global metalmarket gave an additional boost to the recentlyrestructured local industries, raising totalmanufacturing output. The recovery of industrycontributed to the increase of total merchandiseexports by 19% y-o-y (exports of aluminiumcontributing 37% of the increase). At the sametime, merchandise imports increased marginally by0.2% in 2010. As a result, the trade gap decreasedto 42% of GDP, from 46% a year earlier. After asuccessful tourism season, the surplus in servicesincreased by 16% y-o-y. These positivedevelopments brought down the current-accountdeficit to 25% of GDP, from 30% a year earlier.Net FDI reached 18% of GDP in 2010 despite thelack of major privatisation deals. The bankingsystem seems to have stabilised somewhat,although the financial intermediation role of banks,especially the largest ones, remained morose asthey consolidated their balance sheets.

Consumer prices remained subdued during 2010.The average price index averaged 0.5%, althoughthe recovery of domestic demand in the thirdquarter pushed inflation up to 0.7% by the end ofthe year.

Unemployment rates remained high in 2010, above19%, despite the construction industry expandingby 13% y-o-y and the rising number of workersemployed in this sector. The weak dynamics of thelabour market were reflected in the moderation ofdisposable income, which increased by 2.9% in2010. However, the one-off increase of socialsecurity contributions boosted average gross wagesby 8% over the year.

… expected to broaden progressively

In 2011, economic activity is expected to gainmomentum, benefitting not only from improvedconsumer confidence but also from export growth,as metal industries reach full capacity andaluminium prices are assumed to remain high in

line with global energy prices. Despite a weak firsthalf year, annual GDP growth could thus riseabove 2% in real terms in 2011.

Domestic demand is likely to further accelerate in2012, supported by the gradual recovery of banks'credit activity as the balance position of the majordomestic lenders is expected to stabilise during2011. A moderate increase of credit to domesticbusinesses and households, together with theacceleration of tourism and its related activitieslike transport, retail trade, catering and local foodproduction, would be among the key factorssupporting economic growth in 2012.

Although the present forecast does not take intoaccount large infrastructure projects not yetinitiated (e.g. highway, large hydropower plants),FDI inflows are expected to be rather high in 2011and could further accelerate during 2012 due to theimplementation of a number of investmentslaunched during 2011 (windmills, smallhydropower plants, ring-roads, waste treatmentplants, railways and some tourist resorts).However, given the narrowness of the domesticeconomy, the potential positive impact of GFCFon GDP growth would be largely offset by anincrease of imports, notably of equipment andconstruction material.

FDI inflows will have a positive impact onemployment. The stronger demand for labourinduced by foreign investment, as well as inflationexpectations, would amplify the pressure onwages, especially in 2011. The combined growthof both employment and wages will furthercontribute to the increase in real disposable incomeand hence domestic consumption. The discernableupward trend in inflation in 2011 is also likely tobe fed by the pass-through effect from global foodand energy prices into domestic ones, pushinginflation well above 3%. Yet, as long asinternational prices for energy and raw materialsmoderate in 2012, average inflation could declineto some 2%.

The contribution to exports growth from the metalindustries being constrained by capacity, services,and notably tourism, are expected to be the majorcontributors to exports. However, increasingimports, in line with stronger domestic demandsupported by rising disposable income, higher

Candidate Countries, Montenegro

credit, and also investments and tourists'consumption, will result in a deterioration of thetrade and current-account balances, driving thelatter deficit above 30% of GDP in 2012.

Graph II.31.1: Montenegro - Exports of goodsand services

0

200

400

600

800

04 05 06 07 08 09 10 11 12GoodsServices

forecast

EUR million

Table II.31.1:Main features of country forecast - MONTENEGRO


GDP 2981.0 100.0 - 10.7 6.9 -5.7 1.2 2.4 4.0Private consumption 2503.7 84.0 - - - - 3.1 4.7 6.1Public consumption 661.4 22.2 - - - - -2.3 -1.9 -1.6Gross fixed capital formation 797.6 26.8 - - - - 3.9 7.1 12.1of which : equipment - - - - - - - - -Exports (goods and services) 957.5 32.1 - - - - - - -Imports (goods and services) 1950.1 65.4 - - - - - - -GNI (GDP deflator) 2986.3 100.2 - - - - 0.4 2.4 4.1Contribution to GDP growth : Domestic demand - - 19.6 -23.2 3.1 5.3 8.2

Inventories - - 1.5 -2.1 -0.4 0.0 0.0Net exports - - -14.1 19.6 -1.5 -2.9 -4.1

Employment - 19.3 4.5 -3.8 0.6 0.7 2.5Unemployment rate (a) - 19.4 16.8 19.1 19.3 19.4 17.9Compensation of employees/head - - 17.9 -2.9 1.8 5.1 3.8Unit labour costs whole economy - - 15.3 -1.0 1.2 3.4 2.3Real unit labour costs - - 7.0 -3.3 -2.5 1.2 2.1Savings rate of households (b) - - - - 19.7 17.5 15.5GDP deflator - 12.7 7.7 2.4 3.8 2.3 0.2General index of consumer prices - 4.2 8.5 3.4 0.5 3.7 2.2Terms of trade of goods - - - - - - -Trade balance (c) - -58.7 -67.5 -46.2 -42.0 -45.0 -49.6Current-account balance (c) - -39.6 -50.7 -30.1 -24.8 -27.3 -31.0Net lending(+) or borrowing(-) vis-à-vis ROW (c) - - - - -13.0 -10.5 -14.8General government balance (c) - - -0.4 -4.4 -3.9 -3.1 -0.1Cyclically-adjusted budget balance (c) - - - - - - -Structural budget balance (c) - - - - - - -General government gross debt (c) - 27.5 29.0 38.2 41.7 44.7 42.7


179

An expenditure-based consolidation of publicfinances

The general government deficit is expected todecline from 4% of GDP in 2010 to 3% in 2011with the budget reaching equilibrium in 2012. Theexpenditure-based adjustment will take placeprogressively. While no increase in tax rates thatcould threaten the incipient recovery is planned,

fiscal revenues will benefit from the acceleratingdomestic demand and the subsequent inflow ofindirect taxes revenue, notably from VAT onimports. Expenditures will decrease in real terms.In case of underperforming revenues, theauthorities will reduce capital spending as wasdone in the past. Overall, the quality of publicspending should remain stable, as many publicinfrastructure projects are not exclusively financedthrough the budget, but also through multilateralsources with concessionary interest rates.

General government debt should peak in 2011 at45% of GDP and decrease afterwards thanks tobudget consolidation as well as stronger nominalGDP growth. Although the government debtstructure has shifted since 2009 fromconcessionary towards more expensive borrowingfrom financial markets with higher interest rates,the recourse to external budget financing shouldgradually decrease as the budget performanceimproves with the expected expansion of theeconomy.

32. TURKEYRobust growth driven by private sector demand

180

The economy remains buoyant

GDP growth came out at 9% in 2010, helped – inparticular in the first half of the year – by strongbase effects, and in spite of low exports growthdue to a more gradual recovery in Turkey's chiefexport markets. Monthly data point to acontinuation of robust economic expansion in thefirst quarter of 2011. Industrial output rose atdouble digit rates in the first months of the year,the unemployment rate continued to fall andimports remained particularly buoyant. Theeconomy shows some signs of overheating:external imbalances are widening rapidly andinflationary pressures are intensifying, in part dueto a significant rise in energy prices and adeteriorating outlook for Turkish exports, whichmay be affected by the political turmoil in theMiddle-East and Africa Region, the destination ofover 20% of the country's exports. In the secondhalf of 2011 and in 2012, growth is expected tomoderate to a more sustainable pace as a result of amore restrictive monetary and fiscal policy mix.

Graph II.32.1: Turkey - GDP, consumption andinvestment growth

-20

-10

0

10

20

30

07 08 09 10 11 12

y-o-y %

-6

-3

0

3

6

9y-o-y %

GDP growth (rhs) Private consumption (lhs)Gov. consumption (lhs) Investment (lhs)

forecast

Strong base effects are expected to graduallyfade away in 2011

The trough of the current cycle came in the firstquarter of 2009, when GDP tumbled by 14.5%y-o-y. While fixed investment boomed andrecouped the losses of previous years, allcomponents of domestic demand showed strongpositive year-on-year growth in 2010 (in part dueto strong base effects). Similar patterns can beexpected to continue to drive growth, though at a

more moderate pace, as base effects gradually fadeaway over the forecasting period.

Consumption and investment as the drivingforces behind the continuation of strong growth

Labour market developments, credit growth,capacity utilisation, and consumer and businessconfidence point to continued strong growth in2011. The jobless rate fell to 11% in late 2010from a high of 14% in 2009. Disposable incomebenefited substantially. Consumer and businessconfidence indices, as well as credit growth seemto confirm the strong growth in consumption.

Graph II.32.2: Turkey - Labour market

-6-4-202

468

10

04 05 06 07 08 09 10 11 12

y-o-y%

-9-6-303

691215

Unemployment rate (rhs) Employment growth (lhs)GDP growth (lhs)

% of labour force

forecast

Credit growth started to increase in the fourthquarter of 2009, albeit from very low levels, andreached 30% in 2010. The banking data indicatethat business lending is growing slightly fasterthan consumer lending, pointing to stronginvestment growth. Investment is thereforeexpected to remain stronger than the otherexpenditure categories.

Industrial production trends and Turkey’sPurchasing Managers’ Index (PMI) confirm thepositive picture. Industrial production surprised onthe upside in 2010, when it rose by 13%. In 2011,the most recent PMI increases indicate a markedimprovement in business conditions andsignificant growth in new orders in the Turkishmanufacturing sector. Aside from the structuralboosts to growth, activity is still being supportedby a not-too-tight monetary and fiscal policy mix,and any move on the latter is unlikely until theJune 2011 general election.

Candidate Countries, Turkey

Fiscal rebalancing may be challenging…

Turkey’s fiscal consolidation in the past decade isan impressive success story. In the wake of the2001 financial crisis, the government managed tocut the public debt-to-GDP ratio from 75% toabout 40% today. As a result of expansionaryfiscal policy, public finances deteriorated in 2009but improved in 2010, and continue to improve inearly 2011. The general government budget deficitincreased to 5½% of GDP from 2⅓% in 2008,while the public debt stock rose from 39½% ofGDP to 45½%. The main contributors to thedeterioration of the deficit were the acceleration inpublic spending, in particular in transfers to socialsecurity institutions, which recorded a deficit of3% of GDP, and the impact of the various stimuluspackages.

Graph II.32.3: Turkey - Public finances

-6

-4

-2

0

2

4

6

8

05 06 07 08 09 10 11 12

% of GDP

-60

-40

-20

0

20

40

60

80

General government debt (rhs)General government deficit (lhs)

forecast

% of GDP

But by the end of 2010, these stimulus measureshave been withdrawn. In addition, thestrengthening economy has been positivelyaffecting budget revenues. In 2010, the budgetdeficit narrowed to 3½% of GDP and is forecast togradually narrow further to around 2⅓% by 2012.However, only a credible, strong and binding fiscalrule may lead to the forecast fiscal outcome.

Downside risks may also stem from increasedexpenditure. The government’s Pre-accessionEconomic Programme for 2011-13 points to realexpenditure remaining high even as growthreturns. A specific concern is that the governmentmight ramp up spending ahead of the 2011parliamentary and the 2012 presidential electionsin a bid to shore up support. Such a ramp-up maypressure interest rates and dent investorconfidence, thereby slowing or even underminingthe recovery.

… while monetary policy may affect therecovery prospects

The conduct of Turkey’s monetary policy iscomplicated by strong capital inflows from themuch slower-growing developed economies. Withthe current-account deficit widening markedly, thecentral bank is reluctant to place further upwardpressure on the exchange rate by raising interestrates. At the same time, it has been actively usinghikes in commercial bank reserve requirements tocurb credit.

While core inflation remained relatively subdued,below 4% by March 2011, energy and food priceinflation constitutes a major risk factor. Inflation isexpected to be close to 8½% by December 2011,exceeding the central bank's inflationary end-yeartarget of 5½%. A key question is how theinflationary developments will be reflected inmonetary policy. In addition, any major cutback ininvestors’ appetite for Turkey's – and emergingmarket – assets may negatively affect Turkey’srecovery prospects.

External imbalances widening rapidly

The correction in external accounts represented thesilver lining of the recession. The positiveterms-of-trade shock resulting from collapsing oilprices combined with the decline in domesticdemand and imports led to a major contraction inthe trade and current-account deficits, from 5¾%in 2008 to 2¼% in 2009.

The current-account deficit rose dramatically to6½% of GDP in 2010 due to stronger domesticdemand and higher energy prices. Thecurrent-account deficit is likely to widen further in2011-12. At the same time, the outlook for exportsremains somewhat mixed. Exports declined by 5%in 2009 and increased by 3.5% in 2010. Ofparticular importance is the automotive sector,Turkey’s top export earner. Roughly three-quartersof vehicles manufactured in Turkey are exported toEurope. Special schemes supporting car sales inEU markets, which have now expired, broughtforward future sales in 2009 and 2010.

181


Table II.32.1:Main features of country forecast - TURKEY

2009 Annual percentage changebn TRY Curr. prices % GDP 92-06 2007 2008 2009 2010 2011 2012

GDP 914.6 100.0 4.4 4.7 0.7 -4.8 8.9 6.1 5.5Private consumption 656.7 71.8 4.3 5.5 -0.3 -2.3 6.6 5.1 4.3Public consumption 121.9 13.3 4.1 6.5 1.7 7.8 2.1 4.2 1.0Gross fixed capital formation 188.8 20.6 6.0 3.1 -6.2 -19.0 44.0 15.0 5.1of which : equipment 98.4 10.8 - 1.2 -5.6 -22.2 36.0 13.0 4.5Exports (goods and services) 212.5 23.2 9.3 7.3 2.7 -5.0 2.6 6.7 7.1Imports (goods and services) 225.6 24.7 10.4 10.7 -4.1 -14.3 14.7 6.3 5.0GNI (GDP deflator) 904.5 98.9 4.4 4.8 0.6 -5.0 8.6 7.2 5.5Contribution to GDP growth : Domestic demand 4.9 5.4 -1.6 -5.5 15.1 8.6 4.9

Inventories 0.0 0.6 0.3 -2.1 1.8 -0.3 0.9Net exports -0.5 -1.3 1.9 2.8 -3.7 -0.4 0.1

Employment 0.8 1.1 2.2 2.0 6.2 0.9 1.4Unemployment rate (a) 7.8 8.8 9.7 12.5 10.7 10.2 9.8Compensation of employees/head - - - - - - -Unit labour costs whole economy - - - - - - -Real unit labour costs - - - - - - -Savings rate of households (b) - - - - - - -GDP deflator 50.8 6.2 12.0 5.3 9.9 5.8 4.6Harmonised index of consumer prices - 8.8 10.4 6.3 8.6 6.5 5.5Terms of trade of goods - - - - - - -Trade balance (c) -5.0 -7.3 -6.8 -3.8 -9.5 -10.3 -10.4Current-account balance (c) -1.6 -5.9 -5.7 -2.3 -6.7 -7.7 -8.1Net lending(+) or borrowing(-) vis-à-vis ROW (c) - - - - - - -General government balance (c) - - -2.2 -6.7 -3.7 -2.8 -2.2Cyclically-adjusted budget balance (c) - - - - - - -Structural budget balance (c) - - - - - - -General government gross debt (c) - 39.4 39.5 43.8 41.6 40.1 38.5


182

Other non-EU Countries

33. THE UNITED STATES OF AMERICAA subdued recovery after the financial crisis

184

Domestic demand finally took the baton

Economic activity in the US rebounded by 2.9% in2010 from a 2.6% contraction in 2009. During2010, the recovery accelerated from 0.4% q-o-q inthe second quarter to 0.8% in the fourth, butgrowth fell back to 0.4% in the first quarter of thisyear. During 2010, the recovery was mostly drivenby private consumption and inventory rebuilding,which contributed 1.2 pps. and 1.4 pps. to GDPgrowth, respectively. After the inventory boostaround the turn of the year, domestic demand tookthe baton from the second quarter of 2010onwards.

Private consumption growth accelerated to 1% inthe last quarter of 2010 and 0.7% in the first of2011. The gradual improvement in the labourmarket, the lower household debt burden and therally in the equity market all underpinnedconsumption. Investment in equipment andsoftware recovered forcefully, supported byimproved profitability and the low cost of capital.The negative growth contribution of residentialinvestment shrank in 2010 compared to 2009.Activity in the housing market started to bottomout by spring 2011, but prices continued to decline,due to the large supply of existing houses.

The growth contribution of net exports wasvolatile during 2010, ranging from -0.8 pp. in thesecond quarter to 0.8 pp. in the fourth. Exportshave been growing at a healthy pace, supported bystrong external demand and a weak dollar, whileimports accelerated with final demand. As a result,net exports subtracted 0.5 pp. from annual growthin 2010. The current-account deficit widened froman average of 2.7% of GDP in 2009 to 3.4% in thethird quarter of 2010, before shrinking again to3.1% in the fourth. The annual average current-account deficit for 2010 was 3.3% of GDP.

The labour market has been recovering graduallysince the end of 2010. Initial unemploymentinsurance claims have declined significantly sincethe peak in 2009. The unemployment rate declinedfrom 9.8% in November 2010 to 8.8% in March2011. Inflation had bottomed out in the second halfof 2010 and rose strongly in recent months, mostlydue to rising food and energy prices. Annualheadline inflation rose from 1.1% in November2010 to 2.7% in March 2011. Core inflation also

increased in recent months. In annual terms, thecore index rose from 0.6% in October to 1.2% inMarch. Stronger growth has led to a smallimprovement in the general government deficit,which declined from 11.3% of GDP on average in2009, to 10.3% in the fourth quarter of 2010. Theannual average government deficit for 2010 was10.6% of GDP.

Graph II.33.1: US - Initial jobless claims

250

300

350

400

450

500

550

600

650

07 08 09 10 11

thousands

Commodity prices and the housing market arelimiting growth prospects, …

Faster headline inflation due to high commodityprices reduces real disposable income (ceterisparibus), and puts downward pressure on profitmargins. As a result, growth in consumption andinvestment are at risk. The housing market isanother factor which is slowing down consumptiongrowth, as the household balance-sheet repaireffort is to some extent hampered by the ongoingdecline in house prices.

… but policies are still supportive of growth

Private demand is still supported byaccommodative monetary and fiscal policies. Thekey question is whether private demand will besufficiently strong to support the recovery oncepolicy measures are withdrawn. So far tighterfiscal and monetary policies are not in the cards.

On the monetary side, the Federal Reserve haskept monetary policy very accommodative, due tothe high unemployment rate (by US standards) andlow core inflation. While, recently, unemploymentdeclined and core inflation increased, their valuesare not yet consistent with the Fed's double

Other non-EU Countries, The United States of America

mandate. The Fed has kept its policy rate near zerosince December 2008 and has provided additionalmonetary accommodation through quantitativeeasing (purchasing longer-term securities on theopen market). Under its latest round of quantitativeeasing, the Fed is expected to complete theannounced purchases of USD 600 bn Treasuries byJune 2011. Afterwards, the central bank is likely tomaintain the size of its expanded balance sheet forsome time to prevent upward pressure on long-term yields.

The growth momentum is also supported by thebroader- and larger-than-expected fiscal packagewhich was agreed in December 2010. However,under the no-policy-change assumption, some ofthese measures (the expanded federal joblessbenefits program and the reduced payroll tax) willexpire at the end of 2011 and will not beprolonged. This is the main explanation behind theabsence of a growth acceleration in 2012. Theforecast assumes a resolution of the debt limitissue through an agreement on spending cutswhich would not change the fiscal or growthoutlook significantly due to their limited size andscope. At the same time, a credible medium-termplan for fiscal consolidation is still lacking. Itsabsence is the main downside risk to the outlook.

A subdued recovery after the financial crisis

Real GDP growth is expected to decelerate slightlyin average annual growth terms, from 2.9% in2010 to 2.6% in 2011 and 2.7% in 2012. Thisillustrates a slow recovery following the financialcrisis. In 2011, the growth contribution frominventory building is projected to turn slightlynegative. At the same time, domestic demandgrowth will accelerate from 2% in 2010 to 2¾% in2011 and almost 3% in 2012. In all forecast years,net exports will subtract somewhat from growth.

Average annual private consumption growth isexpected to jump from 1.7% in 2010 to 2.9% in2011 (2.7% in 2012). However, carry-over effectsplay a large role in this increase (in Q4-over-Q4terms, consumption growth is close to identical inthe three years). The improved household balancesheet and labour market situation are expected tosupport consumption growth during the forecastperiod. Employment is projected to grow by 0.8%in 2011 and 1.3% in 2012. The fast decline in theunemployment rate in the months up to March2011 is partly due to a decline in labour forceparticipation, as unemployed workers stopped

looking for work (discouraged-worker effect). Thislimits the scope for further decreases in theunemployment rate when unemployed workersstart seeking work again. As a result, theunemployment rate will decline only gradually, to8.6% in 2011 and 8.1% in 2012.

Gross fixed capital formation will accelerate from3½% in 2010 to 4¾% in 2011 and 6% in 2012.Construction will shrink less in 2011 (than in2010) and grow again in 2012. Growth inequipment investment will decelerate from abuoyant 14% in 2010, to 10½% in 2011 and 7½%in 2012, hindered by higher commodity prices andan increased cost of capital.

The growth contribution of net exports willimprove in 2011 as exports outpace imports. In2012, the contribution would worsen again (-0.3pp. after -0.1 pp. in 2010). While the weak dollarand healthy global demand will support exportgrowth, import growth is underpinned by fairlyrobust domestic demand. The current-accountdeficit will widen from 3.3% of GDP in 2010 to4% in 2011, due to the strength in imports and,even more so, to the terms-of-trade shock. Due tothe combined effect of commodity-price andexchange-rate developments, the import deflator isprojected to grow by 8¾% in 2011. Technicalassumptions imply that the terms of trade would bestable in 2012 and the current-account deficit isforeseen to remain at 4% of GDP.

Inflation above 2% in 2011; very little progresson the fiscal side

As a result of the technical assumptions oncommodity prices and exchange rates, headlineinflation is expected to peak in the current quarterat 2.8%, before decelerating to 2.3% in the fourthquarter (to a 2.5% annual average this year). Giventhe ongoing weakness in the labour market, therisk of second-round effects through higher wagesseems low. In 2012, the remaining slack in theeconomy will drag inflation back down, to 1.5%.In view of the acceleration in core inflation toabove 1% in February 2011, the downside risks toprice stability have become negligible.

Due to the fiscal package agreed in December2010, the decline in the general government deficitwill be small this year. The deficit will shrink fromabout 11% of GDP in 2010 to 10% in 2011. Underthe no-policy-change assumption, some measureswill not be prolonged at the end of 2011 and this

185


helps to bring the deficit down to about 8½% ofGDP, which still is very high by internationalstandards.

Risks are tilted to the downside

On the upside, stronger-than-expected externaldemand could give additional support to growth.Moreover, there is a small chance that a genuinegrowth-friendly fiscal consolidation is agreedbefore the Presidential elections of November2012. Such agreement would boost overallconfidence.

As a result of the still-large deficits and subduednominal growth of GDP, gross government debt isprojected to rise rapidly from about 92% of GDPin 2010 to 98% in 2011. Gross government debt isforecast to exceed GDP in 2012, which is farabove the projected levels for most EU MemberStates (EU average of 82% in 2012). But risks are clearly tilted to the downside.

The three main downside risks to the growthoutlook stem from the housing market, a furtherrise in oil prices and the fiscal situation. Houseprices have not yet bottomed out and coulddecrease further and during a longer period thanexpected. This would prolong the householdbalance-sheet repair process. The same would betrue for a possible downward correction in equityprices, due to geopolitical events. Higher-than-expected commodity prices could curbconsumption and investment growth. Finally, thelack of a credible medium-term plan for fiscalconsolidation creates an upward risk for US long-term interest rates (in the light of a possiblereassessment of risks by investors).

Graph II.33.2: US - House prices

100

120

140

160

180

200

00 01 02 03 04 05 06 07 08 09 10 11

US house prices S&P Case-Shiller, Composite-20 index

Jan. '00=100

Table II.33.1:Main features of country forecast - THE UNITED STATES

2009 Annual percentage changebn USD Curr. prices % GDP 92-06 2007 2008 2009 2010 2011 2012

GDP 14119.0 100.0 3.3 1.9 0.0 -2.7 2.9 2.6 2.7Private consumption 10001.3 70.8 3.6 2.4 -0.3 -1.2 1.7 2.9 2.7Public consumption 2411.5 17.1 1.5 1.4 2.9 1.9 1.0 -0.3 0.4Gross fixed capital formation 2219.8 15.7 5.4 -1.4 -5.1 -15.5 3.5 4.7 5.9of which : equipment 1099.6 7.8 7.4 3.3 -3.8 -18.6 13.9 10.6 7.6Exports (goods and services) 1578.3 11.2 5.5 9.3 6.0 -9.5 11.9 7.8 9.3Imports (goods and services) 1964.7 13.9 8.1 2.7 -2.6 -13.8 12.7 6.7 9.3GNI (GDP deflator) 14265.3 101.0 3.5 0.5 -0.5 -3.2 3.1 2.6 2.9Contribution to GDP growth : Domestic demand 3.7 1.6 -0.7 -3.3 2.0 2.8 2.9

Inventories 0.1 -0.2 -0.5 -0.6 1.4 -0.1 0.0Net exports -0.5 0.6 1.2 1.2 -0.5 -0.1 -0.3

Employment (*) 1.4 0.9 -0.7 -5.0 -0.6 0.8 1.3Unemployment rate (a) 5.4 4.6 5.8 9.3 9.6 8.7 8.1Compensation of employees/head 3.8 3.9 3.1 2.2 2.9 2.4 1.4Unit labour costs whole economy 1.8 2.9 2.4 -0.2 -0.5 0.6 0.1Real unit labour costs -0.3 -0.1 0.2 -1.1 -1.5 -0.7 -1.3Savings rate of households (b) 8.3 6.8 8.7 10.5 8.5 7.8 7.4GDP deflator 2.2 2.9 2.2 0.9 1.0 1.3 1.5General index of consumer prices - 2.8 3.8 -0.4 1.6 2.5 1.5Terms of trade of goods -0.3 0.2 -5.8 6.3 -2.0 -3.5 0.4Trade balance (c) -3.8 -6.0 -6.0 -3.7 -4.6 -5.3 -5.6Current-account balance (c) -3.2 -5.1 -4.7 -2.7 -3.3 -4.0 -4.0Net lending(+) or borrowing(-) vis-à-vis ROW (c) -3.1 -5.3 -5.6 -4.0 -3.3 -4.0 -4.0General government balance (c) -2.5 -2.8 -6.2 -11.2 -11.2 -10.0 -8.6Cyclically-adjusted budget balance (c) - - - - - - -Structural budget balance (c) - - - - - - -General government gross debt (c) 64.4 62.4 71.5 84.7 92.0 98.3 102.4

(a) as % of total labour force. (b) gross saving divided by gross disposable income. (c) as a percentage of GDP.(*) Employment data from the BLS household survey.

186

34. JAPANDarkened outlook after the earthquake

187

Improving growth prospects followed bydisaster …

Japan's GDP grew by 3.9% in 2010, more stronglythan in most other advanced economies. This wasdue to robust growth in the first three quarters, onthe back of stimulus measures that supportedgrowth until September 2010, and to somestatistical revisions. The subsequent removal ofsome of these measures contributed to thecontraction in the final quarter of 2010, when theJapanese economy declined by 0.3% q-o-q. Thisdrop was of a temporary nature andhigh-frequency indicators from Novemberonwards were upbeat again. The weakness in thefinal quarter of 2010 was mainly due to a 0.8%q-o-q drop in private consumption, whichcontributed -0.5 pp. to growth. This decline wasmostly due to special purchasing incentives fordurable goods being phased out in September2010. The weak consumption was notcompensated by strengths in other growthcomponents. The negative contribution fromexports in the final quarter of 2010 was an outlier.

Graph II.34.1: Japan - GDP components'contribution to growth

-6

-3

0

3

05 06 07 08 09 10

Net ExportsHH ConsumptionPrivate NR InvestmentGDP growth (q-o-q%)

pps.

Growth in 2010 was driven by net exports, whichcontributed 1.8 pps. Private consumptioncontributed 1.1 pps. and non-residential privateinvestment 0.3 pp. However, only slightly morethan half of the GDP lost during the slump fromthe first quarter of 2008 to the first quarter of 2009had been recouped by the end of 2010.

The fiscal situation deteriorated further during thecrisis and the debt-to-GDP ratio stood at 223% atthe end of 2010. In the months preceding the

earthquake of March 2011 the fiscal situation wasseen as even less sustainable than before, becausethe underlying balance had not improvednoticeably and because a political stalemateprevented any decisive consolidation measuresfrom being adopted. Interest rates inched up in linewith world interest rates, but the debt crisis in partsof Europe as well as the worsening debt indicatorsincreased nervousness about interest rate spikesresulting from a possible reassessment of risks byinvestors.

Until 11 March, prospects were bright

Until the Sendai earthquake on 11 March theJapanese economy was set for moderate growth ofaround 2% in 2011. Recent high-frequencyindicators which are now available up to February2011 suggested a return to positive growth in thefirst quarter of 2011. The April survey of short-term corporate expectations (Tankan), which weregiven until 11 March, showed that businesssentiment had improved markedly since December2010.

In 2011, private investments were expected todrive growth. Consumption was expected to growin line with long-term trends (about 1%) and netexports were expected to contribute moderately togrowth. The unemployment rate had improved to4.6% in February from 4.9% in January 2011, thestrongest showing in the recovery, owing tohealthy company profits. Core inflation was ontrack to enter positive territory as of April 2011,but deflation was seen to reappear again in August.Prices were still being held back by a significantoutput gap, a flexible labour market and capacityutilisation ratio hovering around 70%.

After the earthquake, the outlook darkened

Taking into account the information available onemonth after the disaster, it appears likely that thegrowth outcome for 2011 will be at least 1 pp.below the baseline scenario. Supply-chaindisruptions and production cuts resulting fromdamages and power outages, and the drop inconsumer and investor confidence heightened byradiation fears are factors which are expected toreduce growth this year. As a result, exports andprivate consumption in 2011 will likely besignificantly lower than earlier foreseen.


Initial economic data available after the earthquakeindicate that the short-term economic impact issevere. The Purchasing Managers' Index (PMI,headline seasonally adjusted Markit/JMMA index)fell from 52.9 to 46.4 in March, the largest m-o-mdecline in the series' history (since 2001) and thelowest index reading in almost two years (below50 signals contraction). New orders intake alsodecreased sharply in March. Pre-productioninventories fell at the second-fastest rate sinceMarch 2002. Export data for the last 10 days ofMarch 2011 signalled a steep drop.

It is still unclear what the final evaluation of thedamage caused by the Sendai earthquake, thetsunami, and the nuclear crisis will be. Firstofficial estimates, shared by many other observers,put the damage at between 3 and 5 points ofJapan's GDP, which is twice as high as the Kobeearthquake. However, at this early stage, the rangeof uncertainty surrounding the estimates is wide.

Supply-chain disruptions could be more severethan assumed. In addition to potentially causing asteep fall of industrial production in March andApril, these disruptions could also undermine thecompetitive position of Japanese companies insome fields, where competition is strong andwhere foreign competitors might seize theopportunity to replace their Japanese rivals. Somemedium-term costs due to a forced reorganisationof companies' supply-and-inventory policiescannot be ruled out.

The impact from any extended power shortage orrationing could also be more lasting than assumed.Although the situation should gradually improve,some shortages are to be expected in the remainderof 2011. Given the widespread use of air-conditioning, a hot summer in Tokyo would be anadditional challenge for electricity supply. Inaddition, for historical reasons there are technicallimitations to supplying the most affected regionwith electricity from other regions in Japan. In theweeks after 11 March, electricity supply in theTokyo area was around 15% short of demand.

Consumption in Japan could be negativelyimpacted in 2011 for several reasons. First, thepsychological impact of the extent of the damageson consumers and investors might be severe.Second, the likelihood of higher taxes in the nearterm might also have increased. Third, an expectedprice rise for energy and food items in the short-term could curtail consumption. Japanese

consumers have proven to be sensitive to suchunexpected price rises in the past. In addition,reduced operating hours for restaurants or reducedair-conditioning in shopping malls could limitconsumption in the coming months. The share ofdiscretionary expenses, defined as expenses notbeing made for buying necessities or recurrentexpenses, is relatively high in Japan. Thereforehouseholds are able to cut expenses at will, even inthe short term.

Private investments are crucial to the recoveryfrom the disaster. On a positive note, severalfactors should drive up investments. Investmentslagged behind in the early phase of the recoveryand have some way to go from their low in2008-09. Private investments were expected todrive 2011 growth before the disaster struck.Profits of companies have recovered. Companieshave ample cash at hand and financing conditionsfor enterprises are generally supportive. The needto repair damages and rebuild should give a boostto investment. However, investments requireplanning and even scheduled investments might bedelayed as power outages and other factorscomplicate the situation. Uncertainty about theeconomic outlook and profit prospects could holdback investments. Companies could find it difficultto pass on rising input costs to consumers in thesecond half of the year.

Public investments are likely to increase to repairand rebuild the damaged streets, facilities andhouses. Based on the assessment by thegovernment, statements by officials and on thepost-Kobe earthquake in 1995, severalsupplementary budgets are likely to be passed andimplemented in the remaining months of 2011.These packages, which could surpass 2% of GDP,could be financed by delaying planned expenses orby issuing new debt. Although the furtherweakening of public finances due to recent eventsincreases the risk of a sudden spike in yields, thedent in consumption will facilitate the domesticfinancing of additional debt in the short term.

The urge to put together the means for additionalspending has increased due to the earthquake.(83)

However, the political window of opportunity maybe too short to introduce serious fiscal reforms andimplement longer-term consolidation efforts.

(83) The first supplementary budget totalling 4.05 trillion yenwas passed by the Diet on 2 May but was not taken intoaccount in the forecast, on the day of the cut-off date,which did not allow enough time to incorporate the details.

188

Other non-EU Countries, Japan

Given the reconstruction needs, additionalexpansionary measures are likely to be taken in thecoming months to avoid another dip in economicactivity and to rebuild damaged areas. Thesupplementary budget of JPY 4 trillion approvedby the government on 23 April and approved bythe Diet on 2 May is only a first step. Improvingthe debt situation is becoming an even morechallenging and pressing task.

Monetary policy remains supportive

On 14 March, the Bank of Japan (BoJ) injecteda record amount of cash into the financial systemand doubled the size of the asset-purchase plan toshield the economy from the effects of the nation’sstrongest earthquake on record. The BoJ then keptadding liquidity to the financial system inconsecutive operations. The monetary baseexpanded by 10% m-o-m in March 2011. The BoJmade clear that it will take further measures ifneeded in order to help the reconstruction process.

-12

-10

-8

-6

-4

-2

0

2

4

85 90 95 00 05 100

50

100

150

200

250

Fiscal deficit (lhs) Outstanding debt (rhs)

Graph II.34.2: Japan - Outstanding debt andfiscal deficit

% of GDP % of GDP

forecast

For the year 2012, upside risks dominate.Consumption could rebound more strongly thanexpected as consumers might regain confidenceand a higher saving rate in 2011 might allow forhigher spending. Investments, after being delayedup to the later quarters of 2011 could accelerate.Exports could also recover more strongly than iscurrently expected.

Table II.34.1:Main features of country forecast - JAPAN

2009 Annual percentage changebn JPY Curr. prices % GDP 92-06 2007 2008 2009 2010 2011 2012

GDP 470936.6 100.0 1.1 2.4 -1.2 -6.3 3.9 0.5 1.6Private consumption 279909.6 59.4 1.3 1.6 -0.7 -1.9 1.8 -0.3 1.0Public consumption 94477.3 20.1 2.5 1.5 0.5 3.0 2.3 2.1 1.2Gross fixed capital formation 99625.6 21.2 -0.7 -1.2 -3.6 -11.7 0.0 0.5 3.6of which : equipment - - - - - - - - -Exports (goods and services) 59506.0 12.6 5.3 8.4 1.6 -23.9 24.2 1.0 3.8Imports (goods and services) 58087.0 12.3 4.1 1.6 0.4 -15.3 9.3 4.5 3.7GNI (GDP deflator) 483855.7 102.7 1.3 2.9 -1.2 -6.8 3.8 0.4 1.7Contribution to GDP growth : Domestic demand 0.9 0.9 -1.1 -3.2 1.5 0.4 1.5

Inventories 0.0 0.3 -0.2 -1.4 0.6 0.3 0.0Net exports 0.2 1.1 0.2 -1.5 2.2 -0.3 0.2

Employment -0.1 0.4 -0.3 -1.6 -0.6 -0.2 0.1Unemployment rate (a) 4.0 3.9 4.0 5.1 5.1 4.9 4.8Compensation of employees/head 0.1 -1.3 0.0 -3.1 0.8 1.1 1.2Unit labour costs whole economy -1.1 -3.2 0.9 1.7 -3.6 0.3 -0.4Real unit labour costs -0.5 -2.5 1.9 2.1 -1.5 2.3 -0.6Savings rate of households (b) 15.3 9.2 8.9 11.3 11.9 13.6 13.7GDP deflator -0.6 -0.7 -1.0 -0.4 -2.1 -2.0 0.2General index of consumer prices - 0.0 1.4 -1.4 -0.7 0.2 0.3Terms of trade of goods -1.6 -4.3 -11.3 15.8 -6.2 -9.7 -1.7Trade balance (c) 2.5 2.4 0.8 0.9 1.8 0.2 -0.1Current-account balance (c) 2.8 4.8 3.2 2.8 3.6 1.4 1.1Net lending(+) or borrowing(-) vis-à-vis ROW (c) 2.7 4.7 3.1 2.7 3.5 1.3 1.0General government balance (c) -5.3 -2.4 -2.2 -8.7 -9.3 -9.7 -9.8Cyclically-adjusted budget balance (c) - - - - - - -Structural budget balance (c) - - - - - - -General government gross debt (c) 131.5 187.7 195.0 217.6 223.1 236.1 242.1


189

35. CHINAA soft landing?

190

Strong but imbalanced growth in 2010

Following a slight deceleration from 11.9% in thefirst quarter to 9.6% in the third quarter of 2010,China's GDP rose by 9.8% in the fourth quarter inannualised terms. This brought growth for 2010 asa whole to 10.3% in real terms compared to 9.1%in 2009.

In 2010, growth was primarily driven byinvestment and private consumption, with the GDPcontribution of net exports diminishing comparedto the previous year (China publishes a real figurefor overall GDP and no nominal or real figures forGDP components). In the first quarter of 2011,China's GDP pursued rapid growth, as GDP roseby 9.7% y-o-y(84).

Investment continues to be the largest contributorto growth, as real estate enjoys an ongoing boom.In 2010, investment in fixed assets rose by 19.5%in real terms and in the first quarter of 2011,investment in fixed assets (excluding ruralhouseholds) further accelerated to 25% y-o-y.Investment in real estate rose by 33.2% in 2010.As investment in real estate continues to surge(34.1% in the first quarter of 2011), there isrenewed concern about a bubble scenario in thismarket. However, the PMI (CFLP index) edgeddown at the beginning of this year, reflectingsoftening momentum. Surging inflation, monetarytightening, stricter property controls and theending of some economic stimuli cast someuncertainty onto the outlook for investment in2011.

The share of consumption in GDP pales incomparison, notwithstanding robust growth. In2010, nominal retail sales increased by around15% in real terms. The share of total retail sales ofconsumer goods in overall GDP reached 39.4% in2010(85), below the shares registered by other EastAsian nations at a similar stage of development inthe past. In the short term, inflation is likely to put

(84) The National Bureau of Statistics (NBS) published for thefirst time a quarterly growth rate, showing 8.6% q-o-q(seasonally adjusted annualised rate).

(85) The total retail sales of consumer goods figure is only anapproximation for total household consumption as forinstance it includes government's purchases from retailersas well as an (unknown) share of wholesale activity. Thisexplains why its share in GDP is higher than theconsumption share.

a lid on private consumption this year by dentingconsumers' purchasing power.

The external sector lends solid support to growth.In 2010, exports rose by 31.3% y-o-y, whileimports rose by 38.7% (in value terms). China'strade surplus declined by 6.4% to reach USD 183.1bn or 3.1% of GDP, compared to 3.9% of GDP in2009. In the first quarter of 2011, China's tradecontinued to expand rapidly, with imports (up by32.6% y-o-y) outpacing exports (up by 26.5% onthe year), and driven by the recent strong rise incommodity prices. As a consequence, Chinaposted an overall trade deficit in the order of USD1 bn for the first quarter of 2011.

In 2011, export growth appears set to remainsteady, especially as demand from advancedeconomies continues to recover gradually in thefirst months of 2011. Import growth is likely tocontinue to slow down as domestic demandmoderates. Imports, of which a substantial share isused as intermediary components for processingtrade, are being affected by measures targeted atreining in over-investment. The impact of theJapanese earthquake on China’s economy willaffect destocking and slow down exports, whichmay reduce growth in the first half of 2011, butwhich could already be offset by the second half ofthe year.

In March 2011, China's holdings of foreignexchange reserves reached USD 3.04 trillioncompared to USD 2.45 trn in March 2010. AsChina experienced a trade deficit in the firstquarter of 2011, the pace of reserve accumulationtends to indicate continued inflows of hot capital inthe expectation of RMB appreciation. However, sofar the RMB has appreciated only moderatelyagainst the US dollar. From June to October 2010,the RMB has even depreciated on a nominaleffective basis. Since then, it has started toappreciate again, albeit at a slow pace, beforereaching almost the same level in March as in theend of November. By contrast, on a nominal basis,the RMB has depreciated against the euro duringthe first quarter of 2011 by around 9%.

China's current-account surplus continued to risein nominal terms from USD 297.1 in 2009 to USD306.2 in 2010, but declined from 5.9% of GDP in2009 to 5.1% of GDP in 2010. The nominal

Other non-EU Countries, China

current-account surplus is likely to experience aslight rise in 2011 in nominal terms, which – givenongoing high nominal GDP growth – wouldtranslate into a further decline in the current-account surplus in terms of GDP (around 4.4% ofGDP).

The high (nominal) current-account surplusreflects imbalances in the savings and investmentcomposition of Chinese growth, where investmentfuels export-led growth and where the rate ofnational savings is high. This is due to Chinesehouseholds trying to compensate for the country'sthin social safety net, limited options to financemajor expenditure such as education, and fewinvestment options other than bank deposits.Savings by the corporate sector and in particularby many state-owned enterprises (SOEs) are alsohigh, due to the lack of coherent taxation as well asof SOEs' dividends payments strategy.

Inflationary pressures on the rise

Developments on the price front are not in linewith central bank targets. Due primarily todevelopments in food(86) and commodity prices,inflation reached 3.3% in 2010, higher than theofficial target of 3% for that year. In the firstquarter of 2011, the increase in China's consumerprice index reached 5% y-o-y. Breaching the 4%target for consumer price inflation in 2011 istherefore a substantial risk.

Graph II.35.1: China - Inflation

90

95

100

105

110

05 06 07 08 09 10 11

Index,01/01/2005 = 100

Loose monetary policy dominated in 2009(monetary supply has increased by 27.7% on theyear), and the year 2010 was marked by relativelyless accommodative monetary policy. SinceNovember 2010, the PBoC (Chinese central bank)has increased banks' reserve requirement ratio(RRR) seven times to 20.5% for the big banks. On

(86) Food prices went up by 7.2% in 2010.

26 December the PBoC raised its main officialpolicy instrument, the one-year lending rate, from5.56% to 5.81%, the first increase since thecollapse of Lehman Brothers. This rate was raisedtwice by 25 basis points until April, reaching6.31%. These measures took place against thebackground of the shift in China's monetary policystance from "appropriately loose" to "prudent".

As loose monetary policies in a number ofadvanced economies (e.g. US and UK) combinedwith ongoing strong growth performance in Chinaare inducing hot capital inflows into China, thePBoC faces a considerable challenge: whileincreasing price pressures demand tightermonetary tightening, further interest rate hikescould induce even stronger inflows of hotspeculative capital.

A moderate growth deceleration is forecast in2011-12

In the period from 2007 to 2012, China'scontribution to global GDP growth is likely to bethe highest in the world. In 2011 and 2012, China'sGDP growth is likely to moderate somewhat. Thefading of the stimulus measures as well as theinflationary pressures will limit China's growth.The moderate monetary tightening initiated by thePBoC will further soften China's domesticdemand. On the other hand, private consumption islikely to benefit from growing incomes thanks towage increases. China's GDP growth rate is nowlikely to reach 9.3% in 2011, down from 10.3% in2010 and to pursue its moderate deceleration toaround 9% in 2012.

On the fiscal side, the general government deficitin 2010 (2½% of GDP) was lower than the officialtarget of 2.8% of GDP. In the current year, thecombined deficit (central government andprovinces) is targeted to decline to around 2% ofGDP. A downside risk is that the financing ofmany crisis measures via the banking systemmight cause the ratio of non-performing loans(NPLs) to rise in the medium-term and require abail-out of banks by the central government. Localgovernments might also end up with fiscalproblems, if projects yield less than what wasanticipated when loans were granted as supportmeasures during the crisis.

Another domestic downside risk is a potentialbursting of the housing bubble in some cities,(although on the basis of public Chinese statistics

191


this risk is hard to quantify). Externaldevelopments such as hot capital inflows orweaker-than-expected demand in some importantadvanced economies could negatively impactChina's economic performance.

The twelfth five-year plan aims at rebalancinggrowth but its implementation is uncertain

Table II.35.2:Main features of country forecast - CHINA

2009 Annual percentage changebn CNY Curr. prices % GDP 92-06 2007 2008 2009 2010 2011 2012

GDP 34090.3 100.0 10.3 14.2 9.6 9.1 10.3 9.3 9.0Private consumption 12113.0 35.5 14.8 16.5 15.7 9.5 - - -Public consumption 4439.7 13.0 16.1 17.6 16.3 6.3 - - -Gross fixed capital formation 164463.5 48.2 18.6 19.4 24.7 18.9 - - -of which : equipment - - - - - - - - -

Change in stocks as % of GDP - - - - - - - - -Exports (goods and services) 12016.1 35.2 16.7 36.0 5.9 -11.5 18.0 12.4 11.2Final demand - - - - - - - - -Imports (goods and services) 10059.2 29.5 17.7 10.3 7.1 1.4 19.4 12.3 12.0GNI (GDP deflator) - - - - - - - - -Contribution to GDP growth : Domestic demand - - - - - - -

Stockbuilding - - - - - - -Foreign balance - - - - - - -

Employment 1.1 0.8 0.6 0.7 - - -Unemployment (a) 3.3 4.0 4.2 4.3 4.1 - -Compensation of employees/head - - - - - - -Unit labour costs - - - - - - -Real unit labour costs - - - - - - -Savings rate of households - - - - - - -GDP deflator 5.7 4.8 8.0 0.4 6.8 5.9 4.0Private consumption deflator - - - - - - -Index of consumer prices (c) 5.3 4.8 5.9 -0.7 3.3 - -Trade balance (b) 2.7 9.0 8.0 4.9 2.8 1.0 1.0Current-account balance (b) 2.1 10.6 9.6 5.9 5.1 4.4 4.4Net lending(+) or borrowing(-) vis-à-vis ROW (b) - - - - - - -General government balance (b) -1.5 0.6 -0.4 -2.3 -1.6 - -General government gross debt (b) - - - - - - -

(a) urban unemployment, as % of labour force. (b) as a percentage of GDP. (c) national indicator.

192

Rebalancing from an export- and investment-ledgrowth to a model allowing domestic demand andconsumption to play a greater role is one of themain challenges that China faces in the mediumterm. The twelfth five-year plan (FYP) that waspublished during the 2011 session of the NationalPeople's Congress in March 2011 aims atachieving a more balanced growth.

The plan targets annual average GDP growth rateof 7% as a floor during the next five years.Rebalancing growth is expected to be achievedthrough several channels. More inclusive growth isexpected as a result of the improvement in basichealth and pension systems. China's governmentis also committed to align gains in real wages withlabour's marginal productivity contribution,increase minimum wages and establish"harmonious labour relations". A new housingpolicy completes this focus on improving people'swelfare. The accelerated development of the

services sector – the services share of GDP isexpected to grow by 4 pps. during the next fiveyears – and the pursuit of urbanisation are intendedto participate to China's growth rebalancing.Finally, achieving a greener growth is plannedthrough the development of renewable energy, thereduction of energy consumption and intensity.

7.5% 11.2% 7%

2% 1.7% 2.2%

-20% -19.1% -16%257 357

Energy consumption 4

1) Annual average 2) % of GDP3) Million people 4) per unit of GDP

Table II.35.1:

11th FYP(objectives)

2010(results)

12th FYP(objectives)

Examples of 11th and 12th FYP indicators

GDP growth1

R&D spending 2

Basic urban pensionsystem coverage 3 223

However, the most challenging issue is theimplementation of these objectives, whereguidance by the central government needs to beimplemented at sub-central level. As sub-nationalgovernments at the provincial, municipal, countyand township levels account for more than 80% ofnational budgetary expenditures and areresponsible for most public services, they representkey actors in the plan's implementation. Yet, thecurrent responsibility system created to monitorlocal policy action so far has limited capacity togive incentives towards a shift from quantitative toqualitative growth targets.

36. EFTAWell beyond the crisis

193

The EFTA countries(87) have recovered well fromthe recession. Fiscal packages are to be unwoundduring the forecast years, albeit at a different pacein the two countries. Government spending in theEFTA states is expected to be more restrained anddomestic demand should, therefore, be moreprominently driven by the private sector. Whilehigher household spending is expected in Norway,rising domestic demand in Switzerland would bedriven by higher investment.

For both economies, the traditionally positivecontribution to growth from external trade is likelyto resume. Growth in exports and imports isprojected to continue its rebound from the crisisdip – particularly in the case of Switzerland – therecent developments in external trade have beensignificant. The relatively high unemploymentrates are slowly coming down but will continue tobe the common challenge. Although remainingwell below EU levels, unemployment is likely toremain significantly above pre-crisis levels in theforecast years. The outlook for the forecast periodshows moderate to solid growth in bothSwitzerland and Norway. Risks to the forecast aremainly in the area of prices. While the Norwegianforecast depends strongly on the price of oil,Switzerland's outlook is strongly related to theprice of the Swiss franc.

GDP growth on the back of householdconsumption in Norway

Real GDP contracted by 1.4% in 2009, withdomestic demand shrinking except for governmentspending and external trade also contributing to thecontraction. The return to growth in 2010 wasrather hesitant with an increase of only 0.4% ofGDP. The challenge for Norway is set to create agrowth momentum as the fiscal stimulus fadesaway towards the end of the forecast period. Theexpansionary fiscal policy seen during the crisis isexpected to become more restrained in the comingyears. From 2011, the fiscal stance is expected toturn less expansionary as the fiscal stimuluspackage is envisaged to be halved as compared to2010. GDP growth is likely to acceleratesignificantly in 2011, to 2.7% and decelerate

(87) Norway and Switzerland, are covered in this section,Switzerland's outlook includes Liechtenstein. Iceland'soutlook can be found in the section on candidate countries.

slightly to 2.5% in 2012. The growth rebound ismostly driven by domestic demand, even thoughalso external trade is expected to continue tocontribute to growth, albeit to a limited extend.The decline in investments in Norwegian mainlandindustries, which started in 2009, worsened in2010. However, investment in the mainlandindustries is set to rebound to growth in 2011 andonwards, without, however, matching the pre-crisislevel of 2008.

Export growth should be driven by services andtraditional goods, such as wood products,industrial machinery and transport equipmentrather than Norway's oil exports. Oil production isexpected to slightly decrease in the forecast period.As this decrease is more than offset by the exportof traditional goods, exports are likely to grow byaround 1.9% both this year as well as in 2012.However, as import growth is expected to outpacethe growth of exports in 2010, the external netcontribution to GDP growth should be decreasing,to rebound again towards the end of the forecastperiod. External net contribution to GDP growthshould remain (slightly) positive during bothforecast years.

Graph II.36.1: EFTA vs EU GDP growth

-6

-4

-2

0

2

4

6

04 05 06 07 08 09 10 11 12

y-o-y %

Switzerland Norway EU

forecast

Households continue to spend

Household consumption, which accounts foraround 55% of GDP in mainland Norway, is likelyto grow again in the forecast period. Low interestrates, rising income, increased wealth and betterprospects all contributed to stabilise householdconsumption in 2009, after having declined for ayear. The return to growth of consumer spending


was strong at 3.7% in 2010 and growth shouldremain above 2% throughout the forecast period,despite planned higher policy interest rates.However, the relatively highly indebtedNorwegian households could pose a downside riskto household spending. Taken together, the vastmajority of the loans depending on flexible interestrates in combination with the gradual withdrawalof fiscal stimulus measures; these factors couldnegatively impact consumer's spending capacityand limit consumer spending.

Norway's housing market remains strong

House prices are expected to continue to increasein 2011 and 2012. The improvement in the housingmarket is expected to contribute to increasedinvestments, in particular in residentialconstruction, thus turning the decline of the pasttwo years into a possible upswing in the twoforecast years.

Inflation remains moderate...

Consumer inflation declined to an annual averageof 2.3% in 2009 and remained on that level in2010. Strengthening of the NOK is expected tocontribute to putting a lid on inflation, resulting ininflation rates of around 1.9% this year. In theremainder of the forecast period the inflation ratewill likely remain slightly below 2%. Therecession period in the Norwegian economy ispartly responsible for a fall in wage growth. Wagegrowth is expected to slow down slightly further inthe forecast period, which should help to limit thepressure from the labour market on prices.

…while unemployment remains low

Unemployment in Norway is relatively low ascompared to the EU. However in 2010, it reached3.5% of the total work force – on the high side byNorwegian standards. In the next two yearsunemployment should ease to 3.3% by the end of2012.

Current account remains positive

Norway’s current account should remain well inthe positive throughout the forecast period.Although the trade surplus narrowed in 2010, it islikely to widen again this year, partly due to higheroil prices. In 2012, the current account shouldfurther benefit from this development, alsosupported by a surplus in the services balance.

However, the balance of primary incomes hasshown a deficit in 2009 which remained, albeitnarrow, in 2010. For 2011 this income balance islikely to approach a neutral status and in 2012 asmall surplus is expected. All in all the current-account balance should remain around 12% ofGDP for the duration of the two forecast years.

Graph II.36.2: EFTA vs EU Net lendingGeneral Government

-10

-5

0

5

10

15

20

04 05 06 07 08 09 10 11 12

% GDP

Switzerland Norway EU

forecast

Switzerland's economy is rebounding

Switzerland's economy has recovered from itsworst recession in over three decades with theglobal economic slump hitting its exporters hard.While the economy contracted by 1.9% in 2009 itpicked up strongly in 2010 with GDP growth of2.6%. However, growth is expected to decelerateto 1.9% in 2011, partly due to decreasing growthin government spending. GDP growth shouldcontinue to decelerate somewhat in 2012 to 1.7%.External trade made a positive net contribution in2010. In 2010 exports of goods reboundedstrongly at 10.5% while imports of goods grew at aslightly lower rate by 6.7%.However, the externalsector is foreseen to post a (slight) negativecontribution to growth again in 2011 and 2012,with import growth outperforming export growthin 2011. With increasing saving rates and lowconsumer confidence, household consumptiondropped in 2009, but resumed moderately in 2010.Growth is likely to be continued, albeit at a modestpace of just over 1% per year in 2011 and 2012.Growth in public investment is also expected to bemodest in the forecast years, despite increasedgovernment focus on infrastructure investments.

194

Other non-EU Countries, EFTA

Table II.36.1:Main features of country forecast - EFTA

Iceland Norway Switzerland(Annual percentage change) 2010 2011 2012 2010 2011 2012 2010 2011 2012GDP -3.5 1.5 2.5 0.4 2.7 2.5 2.6 1.9 1.7Private consumption -0.2 2.3 2.7 3.6 2.9 2.4 1.7 1.3 1.2Public consumption -3.2 -3.5 -3.2 2.2 2.3 1.5 -1.6 0.6 -0.3Gross fixed capital formation -8.1 14.0 16.0 -8.9 4.2 3.3 4.6 1.9 1.9of which : equipment 33.5 16.0 18.0 -7.8 5.1 3.7 4.6 1.9 1.8

Exports (goods and services) 1.1 2.3 3.4 -1.3 1.9 1.9 9.3 3.5 5.1Imports (goods and services) 3.9 4.0 4.8 8.7 2.4 1.0 6.7 6.4 5.1GNI (GDP deflator) -2.9 4.3 4.2 1.5 1.0 2.5 4.3 -1.3 1.7Contribution to GDP growth : Domestic demand -2.1 1.9 2.8 0.1 2.6 2.0 1.7 1.2 1.0

Inventories -0.2 0.0 0.1 3.5 0.0 0.0 -1.3 1.5 0.0Net exports -1.2 -0.5 -0.4 -2.9 0.1 0.5 2.1 -0.8 0.7

Employment -0.3 0.6 1.1 -0.2 0.5 0.8 2.2 2.2 2.1Unemployment rate (a) 7.5 6.9 6.2 3.5 3.5 3.3 2.8 2.8 2.6Compensation of employees/head 3.9 4.0 4.0 3.8 3.5 2.7 -1.1 4.1 2.4Unit labour costs whole economy 7.3 3.1 2.5 3.1 1.3 1.0 -1.5 4.4 2.8Real unit labour costs 0.6 0.2 -0.3 -1.5 -2.4 -1.2 -1.0 0.9 0.9Savings rate of households (b) 5.2 4.4 3.7 12.2 12.1 12.5 20.1 20.6 20.5GDP deflator 6.7 2.9 2.8 4.7 3.8 2.2 -0.5 3.5 1.9Harmonised index of consumer prices 7.5 3.0 2.7 2.3 1.9 1.8 0.6 1.0 1.2Terms of trade of goods 8.4 -1.4 0.0 9.2 3.9 -0.4 -0.9 5.2 0.2Trade balance (c) 7.7 7.1 6.8 12.8 13.2 13.0 3.3 3.9 3.7Current-account balance (c) -7.8 -6.2 -5.5 13.1 12.2 12.1 16.6 8.0 8.7Net lending(+) or borrowing(-) vis-à-vis ROW (c) -7.9 -6.2 -5.5 13.0 12.2 12.1 12.2 4.0 4.6General government balance (c) -7.8 -4.9 -3.6 10.7 9.7 9.7 0.5 -0.1 -0.1Cyclically-adjusted budget balance (c) - - - - - - - - -Structural budget balance (c) - - - - - - - - -General government gross debt (c) 93.3 94.3 93.0 44.7 41.6 38.9 38.6 37.0 36.1


195

External sector

Exports rebounded strongly in 2010, mostly due tostrong growth in pharmaceutical and machineriesexports to Asia, where Switzerland's exports arelikely to continue to gain in market shares. Realgrowth in exports of goods and services isexpected to continue, more moderately, however,in 2011-12. The Swiss have successfully beenriding their image of high-quality products. Still,the strong, or even further appreciating, Swissfranc may negatively impact this outlook and thereis a latent downside risk to the services sector inrelation to the eroding bank secrecy. Overall,import growth will be outperformed by exports in2011 but is likely to catch up in 2012.

Swiss inflation

The Swiss National Bank is expected to maintainits course of expansionary monetary policy in 2011and 2012. On a no-policy-change assumption, thekey interest rate – the three-month Swiss-francLibor – would remain low, supporting domesticdemand. Recent robust domestic credit growth hassupported consumption of the households, whichare not burdened by particularly high debt levels.For the forecast years inflation is expected toremain low.

In 2009 and 2010, Switzerland intervened heavilyin the currency markets, buying up large amountsof euros. However, the interventions merelyslowed down the appreciation of the franc. Acontinuing strong franc may prompt the NationalBank to maintain its current policies, using allavailable means, including additional currencyinterventions.

Low unemployment

The unemployment rate stood at 2.8% by the endof 2010, which is high for Switzerland. For 2011and 2012 unemployment is expected to slow toaround 2.6%. Wage growth is expected todecelerate in the same period, thus acceleratingpressure on inflation, turning in a slight increasetowards the end of the forecast period.

Current account

The current-account surplus increased to 12.2% ofGDP in 2010. The trade and services balancesshould continue to record decreasingly largesurpluses during the forecast years. The currentaccount is forecast to remain significantly positive,albeit decreasing as a percentage of GDP, at 10.5%of GDP in 2011 and 11% in 2012.

37. RUSSIAN FEDERATIONV-shaped recovery continues

196

The Russian economy grew by 4% in 2010, aftercontracting by -7.9% in 2009. Russia's recovery isV-shaped, with growth rebounding to an expected4.5% in 2011 and to 4.2% in 2012. Economicgrowth has been increasingly supported byrecovering domestic demand (consumption andinvestment). Because of higher external demand,export growth accelerated as well, but to a lesserdegree than imports, resulting in a negativecontribution from net exports in 2010. Growth in2011 is likely to be negatively affected by sluggishgrowth in the advanced economies, Russia's maintrading partners. Looking ahead, with Russia beingone of the largest oil and gas exporters in theworld, the pace of the recovery is likely to dependon commodity price developments.

-10

-5

0

5

10

15

00 01 02 03 04 05 06 07 08 09 10 11 12

Graph II.37.1: Russia - GDP growth

forecast

y-o-y%

Growth continues to improve

The expansion of domestic demand was a majorfactor of economic growth in 2010. Growth inconsumer spending and investment activityincreased in 2010 and both are foreseen tocontinue increasing further.

Despite strongly increasing imports of goods dueto strengthening domestic demand, Russia's tradesurplus increased compared to 2009, as it grew by24.7% in 2010. The strong increase in exports,supported by higher oil prices, and increasingexternal demand, resulted in a rise in the current-account surplus from 4% of GDP in 2009 to 5.8%in 2010 (around USD 71.1 bn). Expected highenergy prices are the main reason behind the largecurrent-account surplus throughout the forecast

horizon. Oil and gas account for two thirds ofRussia's export receipts. However, export volumegrowth of the oil and gas sector is limited bysluggish productivity and lack of furtherinvestments in maintenance. According toestimates from the Central Bank of Russia (CBR),the current-account surplus fell to USD 33.8 bn,increasing 4.5% y-o-y in the first quarter of 2011.Overall, the current-account surplus is foreseen toincrease to around 7.4% of GDP in 2011 and to7.8% of GDP in 2012, mainly on the back of highoil prices.

The labour market has continued to improve.The unemployment rate, which shot up from 5.8%in August 2008 to 9.4% in February 2009, hasbeen coming down rapidly. In 2010, the totalnumber of unemployed declined to 7.2% of theeconomically active population from 8.2% as ofthe end of 2009. After a crisis-induced decline inreal wages in 2009, real wage growth has resumed.Wage and pension increases contributed 4.3% togrowth in household real disposable income.

A large output gap, temporarily falling food pricesuntil July 2010, and continuous roubleappreciation, have kept a lid on inflation, whichfell for twelve consecutive months, from 12% inJuly 2009 to a post-Soviet-era low of 5.5% a yearlater. Inflation edged up to 9.5% in March 2011,largely driven by higher food prices, as a result ofthe summer 2010 heat wave, while growth in non-food goods prices slowed from 9.7% in 2009 to5% in 2010.(88)

Accommodative monetary policy has beentightened

The Central Bank of Russia manages the roubleagainst a dollar/euro basket, in which the dollarweighs 55% and the euro 45%. In 2010, as theexchange rate stabilised, the CBR scaled back itsintervention in currency markets and startedreplenishing foreign exchange reserves. In March2011 the CBR intervened again, with monthly FXpurchases still well below the levels seen in spring2010. The rouble now lies within the central bank'srange of 33.4-36.4 against the basket.(89) As of

(88) Food prices represent about 40% of the CPI basket inRussia.

(89) The value of the bi-currency basket stood at 34.6525roubles as of February 2011.

Other non-EU Countries, Russian Federation

end-March 2010, Russia's foreign-exchangereserves reached USD 465.5 bn.

0

100

200

300

400

500

600

700

00 01 02 03 04 05 06 07 08 09 10 11

Graph II.37.2: Russia - Foreign-exchange reserves

bn. USD

After ten interest rate cuts in the last seven monthsof 2009, the CBR further reduced its refinancingrate four times in 2010, from 8.75% in February toa record-low 7.75% in June. Since then, theovernight rate has been kept unchanged and theCBR signalled that it had put an end to monetaryeasing. On 25 February 2011, in the light of highinflationary expectations and rising oil prices, theCBR increased the refinancing rate to 8%. Reserverequirements were also increased on 1 April 2011to reach 5.5% for liabilities of credit institutions.Due to high inflationary risks, the refinancing ratewill be increased to 8.25% as of 3 May 2011.

Spurred by aggressive monetary easing during thefirst half of 2010, domestic credit to the privatesector started to recover in 2010. Non-performingbank loans rose during the crisis, but appeared tohave peaked in the summer and declined to 6% bythe end of 2010. The Russian banking sector seemsto be in a relatively sound position to manage thesenon-performing loans, as the average capitaladequacy ratio rose from around 13% in mid-2008to around 18% by March 2011. The recent increasein inflation has pushed real interest rates intonegative territory, which may slow down thegrowth in bank deposits, and thereby constrainbank lending.

Inflationary pressures are growing

The strengthening of the rouble, along with lowimport prices and sluggish demand, were the mainreasons behind inflation tapering off until July2010, when consumer prices stood at a record lowof 5.5% (y-o-y). However, inflation picked upstrongly afterwards, to 9.6% in January 2011. Foodinflation remains the main factor pushing up

inflation in Russia. Prices rose by 14.1% y-o-y asof March 2011 (after an increase by 6.9% onaverage in 2010). On top of elevated food prices,high oil and gas prices, budgetary expenditures andrapid growth of the money supply have alsounderpinned inflationary pressures. The overallinflation rate stood at 9.5% in March 2011. Therecent upturn in inflation is expected to betemporary as the spillover from food prices to therest of the CPI basket has been limited and aremaining substantial output gap is containing thetransmission. Annual average inflation is forecastto increase to a yearly average of around 9.4% in2011 and 8.2% in 2012, overshooting the CBR'sinflation target.

Growth will remain below pre-crisis levels

GDP growth is expected to reach 4.2% towards theend of the forecast period and to remain wellbelow the rates achieved before the crisis.

The economy’s high (and increasing) dependenceon the hydrocarbon sector will negatively impactthe outlook. Energy-related output growth willremain sluggish, despite high energy prices, asexisting fields are depleting and extractionbecomes more complicated and more expensive.The assessment of risks remains highly correlatedto changes in oil prices.

Investment recovery is mild and not strong enoughto meet Russia’s large investment needs to supporthigher potential growth. With a contribution toGDP in 2010 of around 20%, Russian investmentsremain well below many other emergingeconomies.

Over the forecast horizon, the strengthening of thelabour market coupled with revived bank lendingis expected to spur domestic demand. Whileunemployment is foreseen to decline to below 8%again towards the end of the forecast period, somerisks remain.

Risks are tilted to the downside

Regional governments had stimulated employmentduring the crisis (under pressure from the centralgovernment) by keeping industrial workers on thepayroll. However, they may lose the ability tocontinue supporting the labour market in theforecast years. Federal resources allocated last yearto support regional governments are depleting andthere will be fewer incentives for local businesses

197


Table II.37.1:Main features of country forecast - RUSSIA

2009 Annual percentage changebn RUB Curr. prices % GDP 92-06 2007 2008 2009 2010 2011 2012

GDP 39100.7 100.0 - 8.5 5.2 -7.9 4.0 4.5 4.2Private consumption 21319.5 54.5 - 14.2 10.7 -7.7 2.7 3.0 3.6Public consumption 7871.3 20.1 - 2.7 2.8 2.0 0.7 2.3 2.1Gross fixed capital formation 8075.9 20.7 - 21.1 9.5 -16.1 3.5 4.3 7.7of which : equipment 3024.2 7.7 - - - - 3.5 0.9 8.0Exports (goods and services) 10844.0 27.7 - 6.3 0.6 -4.7 11.8 7.6 4.5Imports (goods and services) 7964.0 20.4 - 26.2 14.8 -30.4 11.7 7.8 7.1GNI (GDP deflator) 37862.3 96.8 - 9.2 4.6 -8.1 3.6 4.8 4.1Contribution to GDP growth : Domestic demand - 11.2 7.7 -6.9 2.3 2.9 3.7

Inventories - 0.8 0.6 -6.0 1.0 0.3 0.4Net exports - -3.4 -3.0 5.2 0.9 0.7 0.0

Employment - 2.4 -0.3 -1.8 -0.8 1.9 2.9Unemployment rate (a) - 5.7 7.0 8.2 8.0 7.7 7.5Compensation of employees/head - - - - - - -Unit labour costs whole economy - - - - - - -Real unit labour costs - - - - - - -Savings rate of households (b) - 12.7 11.5 - - - -GDP deflator - 13.8 18.4 2.5 9.5 8.6 4.9Harmonised index of consumer prices - 9.0 14.1 11.7 6.9 9.4 8.2Terms of trade of goods - 2.8 15.3 -32.6 8.0 4.9 4.9Trade balance (c) - 10.1 10.7 9.0 10.7 11.7 12.2Current-account balance (c) - 6.0 6.1 4.0 5.8 7.4 7.8Net lending(+) or borrowing(-) vis-à-vis ROW (c) 8.0 5.2 6.1 3.0 5.0 6.7 7.1General government balance (c) - - - - -4.6 -3.2 -2.6Cyclically-adjusted budget balance (c) - - - - - - -Structural budget balance (c) - - - - - - -General government gross debt (c) - - - - 9.9 9.2 9.8


198

to continue paying for an excessive supply ofworkers.

Under the recently revised budget proposals for2011-13, the federal budget deficit is set to shrinkto 3.6% of GDP in 2011 and to less than 3% ofGDP by 2013. This is more optimistic than theforecast here: a deficit of 4.6% and 3.2% of GDPin 2011 and 2012, respectively are projected.Despite improved fiscal rules and continuousbudgetary surpluses in the years preceding thecrisis, the gradual pace of consolidation poses therisk that fiscal policy could become pro-cyclical.The key challenge will be to withdraw the largefiscal stimulus and avoid excessive exchange ratevolatility and high inflation. According to theMedium Term Expenditure Framework, the budgetis expected to return to balance by 2015.

The Reserve Fund, which was set up to save part

of the oil windfall and to reduce the vulnerabilityof the budget against oil-price volatility, is beingdepleted. As a result, 2011-12 budget deficits willincreasingly be financed through issuing domesticdebt.

The rouble is being given somewhat higherexchange rate flexibility against the basket. TheCBR scaled down interventions on the exchangemarket and increased the role of the policy rate inslowing inflation. Wage growth is expected tocontinue but to remain moderate and definitelyslower than before 2009. Additional fiscalspending associated with the election cycle willremain in 2011 and 2012, creating an upside riskon inflation. However, should upward pressures onthe rouble intensify, there is a risk that prioritymight again be given to exchange rateconsiderations.

ACKNOWLEDGEMENTS

199

This report was prepared in the Directorate-General for Economic and Financial Affairs under thedirection of Marco Buti, Director-General, Servaas Deroose, Deputy Director General, and Elena Flores,Director of the "Policy strategy and coordination".

Executive responsibilities were attached to Reinhard Felke, Head of Unit for "Forecasts and economicsituation", Moisés Orellana Head of Sector "Macro-economic forecasts and short-term economicdevelopments" and the forecast coordinators Laura González Cabanillas and Michał Narożny.

The Overview was prepared by Moisés Orellana.

Chapter 1 on "European recovery maintains momentum amid new risks" was prepared by OliverDieckmann under the responsibility of Elena Flores, Director of the "Policy strategy and coordination"and Reinhard Felke, Head of Unit for "Forecasts and economic situation". This chapter benefited fromcontributions by Chris Bosma, Björn Döhring, Angela D'Elia, Gertjan Driessen, Stefan Kramer, BarbaraStearns-Bläsing, Valérie Rouxel-Laxton.

Chapter 2 on "Macroeconomic impact of higher sovereign risk" was prepared by Michael Thiel andStaffan Linden under the responsibility of John Berrigan, Director of the "Financial stability andmonetary affairs" and Peter Grasmann, Head of Unit for "Economic analysis of financial markets andfinancial stability". Contributions by Olivier Biau, Anna Grochowska, Jan in 't Veld, MagdalenaLewandowska, Werner Röger, Eric Ruscher, Ralph Setzer, Triantafila Stratakis, Adamo Uboldi, LukasVogel and Alexandru Zeana are gratefully acknowledged.

Chapter 3 on "Developments in and prospects for saving and investment trends across the EuropeanUnion and the euro area" was prepared by Zdeněk Čech, Michelle Hassine, Alexandr Hobza, DarioPaternoster, Vito Ernesto Reitano, Valérie Rouxel-Laxton, Ewa Sdrakas, Thomas Springbett, GuerganaStanoeva, Barbara Stearns-Bläsing and Norbert Wunner under the responsibility of Mary McCarthy,advisor to the Director of the "Economies of Member States I".

Chapter 2 and 3 have been edited by Karl Pichelman, Adviser in Directorate for "Structural reforms andcompetitiveness".

The sections on "Member States" were prepared under the supervision of Jürgen Kröger, Matthias Morsand István Pál Székely, Directors for the "Economies of the Member States". These sections benefitedfrom contributions by Lourdes Acedo Montoya, Jean-Luc Annaert, Pasquale D'Apice, Narcissa Balta,Paolo Battaglia, Barbara Bernardi, Piotr Bogumił, Reuben Borg, Mateo Capó Servera, Pedro Cardoso,Samuel de Lemos Peixoto, Fotini Dionyssopoulou, Anna Dimitríjevics, Christophe Doin, Gatis Eglitis,Polyvios Eliofotou, Shane Enright, Carsten Eppendorfer, Leila Fernandez Stembridge, Olivia Galgau,Oana Simona Garjoi, Julien Genet, Agne Geniusaite, Oskar Grevesmühl, Zoltán Gyenes, MartinHradisky, László Jankovics, Javier Jareño Morago, Mitja Košmrl, Bozhil Kostov, Radoslav Krastev,Bettina Kromen, Stefan Kuhnert, Baudouin Lamine, Karolina Leib, Milan Lisický, Davide Lombardo,Natalie Lubenets, Mart Maivali, Petr Maleček, Janis Malzubris, Anton Mangov, Dan Matei, FabrizioMelcarne, Olivia Mollen, Marco Montanari, Daniel Monteiro, Magdalena Morgese Borys, GeorgeMoschovis, Per Wagner Nielsen, Manuel Palazuelos Martínez, Presyian Petkov, Alexandra Pizzuto,Bartosz Przywara, An Renckens, Vito Ernesto Reitano, Julien Rousselon, Monika Sherwood, LouiseSkouby, Vladimir Solanic, Erik Sonntag, Thomas Springbett, Harald Stieber, Ingrid Toming, MarianaTomova, Tsvetan Tsalinski, Thomas Usher, Jonathan van der Heijden, Henk Van Noten and PavlínaŽáková.

The sections on "Candidate Countries" and "Other non-EU countries" were prepared under thesupervision of Peter Bekx, Director of the "International economic and financial relations, global

200

governance". These sections, and forecasts for all other non-EU economies, benefited from contributionsby Nicolaas Beinema, Bernhard Böhm, Hans Feddersen, Martina Hornikova, Barbara Khayat, StefanKramer, Guy Lejeune, Eulalia Ortiz Aguilar, Valérie Rouxel-Laxton, Antonio Sanchez Pareja, UweStamm, and Dirk Verbeken.

Editorial support by Sophie Bland and Chris Maxwell is gratefully acknowledged. Support on thecommunication and publication of this report by Johan Verhaeven, Roman Schoenwiesner, Robert Gangl,Jens Matthiessen, Irena Novakova, Dominique Marchalant, Sarka Novotna, and Yasmina Quertinmont isgratefully acknowledged. IT support was provided by Marius Bold, Françoise Demarliere, Rudy Druine,Jeanette Fokkens and Frédéric Petre.

Follow-up calculations were performed by Francesca d'Auria, Cecile Denis, Karel Havik, Kieran McMorrow, Rafał Raciborski and Werner Röger. Forecast assumptions were prepared by Sara Tägtström andGertjan Driessen. Statistical and layout assistance was provided by Antoine Avdoulos, Yves Bouquiaux,Myrle Claessens, Eulalia Claros Gimeno, Justyna Gniadzik, Oscar Gomez Lacalle, Philippe Derveaux,Noel Doyle, Andrzej Erdmann, Julien Genet, Michel Gerday, Johann Korner, Fabrizio Melcarne,Christiaan Muller, Daniela Porubská, Mariola Przygoda, Anders Lindqvist, Ewa Sdrakas, Chris Smyth,Jacek Szelożyński, Carmela Zammit, and Christos Zavos.

Valuable comments and suggestions by Laura Bardone, Moreno Bertoldi, Laura Bisio, Georg Busch,Oliver Dieckmann, Małgorzata Galar, Carole Garnier, Gabriele Giudice, Laura González Cabanillas,Peter Grasmann, Heinz Jansen, Barbara Kauffmann, Joost Kuhlmann, Paul Kutos, Sven Langedijk,Martin Larch, Guy Lejeune, Mary McCarthy, Michał Narożny, Joâo Nogueira Martins, Moisés Orellana,Christophe Pavret de la Rochefordière, Lucio Pench, Karl Pichelmann, Elena Reitano, Valérie Rouxel-Laxton, Massimo Suardi, Jan in 't Veld, Vesa Vihriälä, Christian Weise, Ann-Louise Winther and JavierYaniz Igal are gratefully acknowledged.

Secretarial support for the finalisation of this report was provided by Anita Janicka.

Comments on the report would be gratefully received and should be sent to:Directorate-General for Economic and Financial AffairsUnit A4: Forecast and Economic SituationEuropean CommissionB-1049 BrusselsE-mail: [email protected]

Statistical AnnexEuropean Economic Forecast – Spring 2011

Contents

202

Output : GDP and its components1. Gross domestic product 2042. Profiles (q-o-q) of quarterly GDP 2043. Profiles (y-o-y) of quarterly GDP 2054. GDP per capita 2055. Final domestic demand 2066. Final demand 2067. Private consumption expenditure 2078. Government consumption expenditure 2079. Total investment 20810. Investment in construction 20811. Investment in equipment 20912. Public investment 20913. Output gap relative to potential GDP 210

Prices14. Deflator of GDP 21015. Deflator of private consumption 21116. Consumer prices index 21117. Consumer prices quarterly profiles 21218. Deflator of exports of goods 21219. Deflator of imports of goods 21320. Terms of trade of goods 213

Wages, population and labour market21. Total population 21422. Total employment 21423. Unemployment rate 21524. Compensation of employees per head 21525. Real compensation of employees per head 21626. Labour productivity 21627. Unit labour costs, whole economy 21728. Real unit labour costs 217

Exchange rates29. Nominal bilateral exchange rates 21830. Nominal effective exchange rates 21831. Relative unit labour costs 21932. Real effective exchange rates 219

General Government33. Total expenditure 220

Statistical Annex

34. Total revenue 22035. Net lending (+) or net borrowing (-) 22136. Interest expenditure 22137. Primary balance 22238. Cyclically adjusted net lending (+) or net borrowing (-) 22239. Cyclically adjusted primary balance 22340. Gross debt 223

Saving41. Gross national saving 22442. Gross saving of the private sector 22443. Saving rate of households 22544. Gross saving of general government 225

Trade and international payments45. Exports of goods and services 22646. Imports of goods and services 22647. Merchandise trade balance (% of GDP) 22748. Current account balance (% of GDP) 22749. Net lending (+) or net borrowing (-) 22850. Current account balance (bn EUR) 22851. Export markets (goods and services) 22952. Export performance (goods and services) 229

World economy53. World GDP 23054. World exports of goods and services 23155. Export shares (goods) in EU trade 23156. World imports of goods and services 23257. Import shares (goods) in EU trade 23258. World merchandise trade balances (bn USD) 23359. World current account balances (bn USD) 23360. Primary commodity prices 233

203


TABLE 1 : Gross domestic product, volume (percentage change on preceding year, 1992-2012) 2.5.20115-year Spring 2011 Autumn 2010

averages forecast forecast1992-96 1997-01 2002-06 2006 2007 2008 2009 2010 2011 2012 2011 2012

Belgium 1.5 2.7 2.0 2.7 2.9 1.0 -2.8 2.2 2.4 2.2 1.8 2.0Germany 1.4 2.1 1.0 3.4 2.7 1.0 -4.7 3.6 2.6 1.9 2.2 2.0Estonia : 7.0 8.5 10.6 6.9 -5.1 -13.9 3.1 4.9 4.0 4.4 3.5Ireland 5.8 9.2 5.4 5.3 5.6 -3.5 -7.6 -1.0 0.6 1.9 0.9 1.9Greece 1.1 3.8 4.2 5.2 4.3 1.0 -2.0 -4.5 -3.5 1.1 -3.0 1.1Spain 1.5 4.4 3.3 4.0 3.6 0.9 -3.7 -0.1 0.8 1.5 0.7 1.7France 1.2 3.0 1.7 2.2 2.4 0.2 -2.6 1.6 1.8 2.0 1.6 1.8Italy 1.2 2.0 0.9 2.0 1.5 -1.3 -5.2 1.3 1.0 1.3 1.1 1.4Cyprus 5.5 4.2 3.3 4.1 5.1 3.6 -1.7 1.0 1.5 2.4 1.5 2.2Luxembourg 2.6 6.3 4.1 5.0 6.6 1.4 -3.6 3.5 3.4 3.8 2.8 3.2Malta 5.0 3.4 2.0 2.1 4.4 5.3 -3.4 3.7 2.0 2.2 2.0 2.2Netherlands 2.5 3.7 1.6 3.4 3.9 1.9 -3.9 1.8 1.9 1.7 1.5 1.7Austria 1.8 2.6 2.2 3.6 3.7 2.2 -3.9 2.0 2.4 2.0 1.7 2.1Portugal 2.0 3.9 0.7 1.4 2.4 0.0 -2.5 1.3 -2.2 -1.8 -1.0 0.8Slovenia 2.0 4.2 4.3 5.9 6.9 3.7 -8.1 1.2 1.9 2.5 1.9 2.6Slovakia : 2.7 5.9 8.5 10.5 5.8 -4.8 4.0 3.5 4.4 3.0 3.9Finland 1.3 4.5 3.0 4.4 5.3 0.9 -8.2 3.1 3.7 2.6 2.9 2.3Euro area 1.5 2.8 1.7 3.1 2.9 0.4 -4.1 1.8 1.6 1.8 1.5 1.8Bulgaria -2.8 2.5 6.0 6.5 6.4 6.2 -5.5 0.2 2.8 3.7 2.6 3.8Czech Republic 2.3 1.2 4.6 6.8 6.1 2.5 -4.1 2.3 2.0 2.9 2.3 3.1Denmark 2.6 2.4 1.8 3.4 1.6 -1.1 -5.2 2.1 1.7 1.5 1.9 1.8Latvia -8.8 6.3 9.0 12.2 10.0 -4.2 -18.0 -0.3 3.3 4.0 3.3 4.0Lithuania -8.3 4.7 8.0 7.8 9.8 2.9 -14.7 1.3 5.0 4.7 2.8 3.2Hungary 0.5 4.3 3.9 3.6 0.8 0.8 -6.7 1.2 2.7 2.6 2.8 3.2Poland 4.9 4.4 4.1 6.2 6.8 5.1 1.7 3.8 4.0 3.7 3.9 4.2Romania 1.3 0.1 6.2 7.9 6.3 7.3 -7.1 -1.3 1.5 3.7 1.5 3.8Sweden 1.2 3.4 3.3 4.3 3.3 -0.6 -5.3 5.5 4.2 2.5 3.3 2.3United Kingdom 2.5 3.4 2.6 2.8 2.7 -0.1 -4.9 1.3 1.7 2.1 2.2 2.5EU 1.3 2.9 2.1 3.2 3.0 0.5 -4.2 1.8 1.8 1.9 1.7 2.0USA 3.3 3.8 2.7 2.7 1.9 0.0 -2.7 2.9 2.6 2.7 2.1 2.5Japan 1.3 0.5 1.7 2.0 2.4 -1.2 -6.3 3.9 0.5 1.6 1.3 1.7

TABLE 2 : Profiles (qoq) of quarterly GDP, volume (percentage change from previous quarter, 2010-2012)

2010/1 2010/2 2010/3 2010/4 2011/1 2011/2 2011/3 2011/4 2012/1 2012/2 2012/3 2012/4Belgium 0.1 1.1 0.4 0.5 1.0 0.3 0.5 0.5 0.5 0.6 0.6 0.7Germany 0.6 2.2 0.7 0.4 0.9 0.3 0.5 0.5 0.5 0.6 0.6 0.6Estonia 1.1 2.1 1.1 2.3 -0.1 1.3 1.3 1.2 1.0 0.8 0.6 0.6Ireland 1.7 -1.1 0.6 -1.6 : : : : : : : :Greece -0.6 -1.7 -1.3 -0.1 : : : : : : : :Spain 0.1 0.3 0.0 0.2 0.2 0.2 0.2 0.3 0.4 0.5 0.5 0.5France 0.3 0.6 0.2 0.4 0.7 0.3 0.4 0.5 0.5 0.5 0.6 0.6Italy 0.5 0.5 0.3 0.1 0.2 0.3 0.4 0.3 0.4 0.3 0.3 0.3Cyprus 0.7 0.7 0.6 0.5 0.2 0.3 0.3 0.5 0.6 0.7 0.8 0.8Luxembourg 0.3 1.4 1.1 1.7 : : : : : : : :Malta 2.5 -0.3 0.5 1.1 : : : : : : :Netherlands 0.5 1.0 0.1 0.6 0.8 0.3 0.3 0.4 0.4 0.5 0.5 0.5Austria 0.2 1.0 1.1 0.8 0.4 0.4 0.1 0.4 0.6 0.6 0.8 0.6Portu

:

gal 0.7 0.5 0.3 -0.5 -0.7 -1.4 -0.4 -0.4 -0.4 -0.4 -0.3 -Slovenia -0.1 1.1 0.3 0.6 0.4 0.4 0.4 0.5 0.6 0.7 0.7 0.7Slovakia 0.7 0.9 0.9 0.9 0.7 0.8 1.1 1.1 0.8 1.5 1.4 0.9Finland 0.2 2.7 0.4 1.7 0.6 0.6 0.6 0.6 0.7 0.6 0.6 0.5Euro area 0.4 1.0 0.4 0.3 0.5 0.3 0.4 0.4 0.5 0.5 0.5 0.5Bul

0.1

garia -0.5 0.5 0.7 2.1 0.2 0.3 0.5 0.7 0.8 1.2 1.4 1.6Czech Republic 0.7 0.7 0.9 0.3 0.2 0.5 0.6 0.6 0.7 0.8 0.9 1.0Denmark 1.2 0.4 1.7 -0.4 0.5 0.4 0.4 0.2 0.4 0.4 0.4 0.5Latvia 0.2 0.6 1.6 1.1 0.5 0.5 0.7 1.1 1.1 1.0 1.0 0.9Lithuania 1.3 1.0 0.3 1.8 3.5 0.1 -1.2 0.7 1.7 2.1 1.9 1.8Hungary 1.4 0.1 0.5 0.2 0.5 1.2 1.3 1.2 0.6 0.3 0.3 0.3Poland 0.6 1.2 1.2 0.8 0.8 0.9 1.0 1.0 0.9 0.9 0.8 0.8Romania -0.2 0.2 -0.7 0.1 0.7 0.6 0.7 0.8 0.9 1.0 1.0 1.0Sweden 1.6 2.1 2.1 1.2 0.6 0.7 0.7 0.5 0.7 0.5 0.5 0.3United Kingdom 0.2 1.1 0.7 -0.5 0.5 0.6 0.4 0.5 0.5 0.7 0.5 0.5EU 0.4 1.0 0.5 0.2 0.5 0.4 0.4 0.5 0.5 0.5 0.5 0.5USA 0.9 0.4 0.6 0.8 0.4 0.8 0.7 0.7 0.5 0.7 0.7 0.7Japan 1.5 0.5 0.8 -0.3 0.0 -1.0 0.8 1.1 0.2 0.3 0.2 0.3

204

Statistical Annex

TABLE 3 : Profiles (yoy) of quarterly GDP, volume (percentage change from corresponding quarter in previous year, 2010-2012) 2.5.2011

2010/1 2010/2 2010/3 2010/4 2011/1 2011/2 2011/3 2011/4 2012/1 2012/2 2012/3 2012/4Belgium 1.7 2.7 2.0 2.1 3.0 2.2 2.3 2.3 1.9 2.1 2.2 2.4Germany 2.1 3.9 3.9 4.0 4.2 2.3 2.1 2.1 1.8 2.1 2.3 2.5Estonia -2.7 3.1 5.5 6.8 5.5 4.8 5.0 3.9 5.0 4.5 3.7 3.0Ireland -1.2 -1.9 -0.5 -0.5 : : : : : : : :Greece -2.7 -4.0 -4.6 -3.7 : : : : : : : :Spain -1.4 0.0 0.2 0.6 0.7 0.6 0.8 0.9 1.1 1.4 1.7 1.9France 1.2 1.6 1.7 1.5 1.9 1.6 1.7 1.9 1.8 2.0 2.2 2.3Italy 0.6 1.5 1.4 1.5 1.1 0.9 0.9 1.2 1.4 1.4 1.3 1.2Cyprus -1.0 0.6 2.0 2.6 2.0 1.5 1.3 1.2 1.7 2.2 2.6 3.0Luxembourg 1.0 5.3 3.2 4.6 : : : : : : : :Malta 3.9 3.5 3.2 3.9 : : : : : : : :Netherlands 0.3 2.7 1.9 2.2 2.5 1.7 1.9 1.6 1.3 1.5 1.8 1.9Austria 0.5 2.3 2.7 3.1 3.3 2.7 1.7 1.2 1.5 1.7 2.4 2.6Portugal 1.7 1.4 1.2 1.0 -0.4 -2.3 -3.0 -3.0 -2.7 -1.6 -1.5 -1.2Slovenia -0.2 1.5 1.3 1.9 2.4 1.7 1.9 1.8 2.0 2.3 2.6 2.8Slovakia 4.5 4.2 4.0 3.4 3.4 3.4 3.5 3.7 3.8 4.4 4.8 4.6Finland 0.1 4.1 3.0 5.0 5.5 3.4 3.5 2.4 2.5 2.5 2.6 2.5Euro area 0.8 2.0 2.0 2.0 2.3 1.5 1.5 1.6 1.5 1.7 1.9 2.0Bulgaria -0.8 -0.3 0.5 2.8 3.5 3.2 3.0 1.6 2.3 3.2 4.2 5.1Czech Republic 1.1 2.3 2.7 2.6 2.2 2.0 1.7 2.0 2.5 2.7 3.0 3.3Denmark -0.8 2.6 3.7 2.9 2.2 2.2 0.9 1.5 1.4 1.4 1.4 1.7Latvia -5.3 -2.8 2.6 3.6 3.8 3.7 2.8 2.8 3.4 4.0 4.3 4.1Lithuania -1.9 1.2 1.6 4.6 6.8 5.8 4.2 3.1 1.3 3.3 6.6 7.7Hungary -0.6 0.8 2.2 2.3 1.3 2.4 3.3 4.3 4.3 3.4 2.3 1.5Poland 3.1 3.7 4.6 3.9 4.0 3.7 3.4 3.7 3.8 3.8 3.7 3.5Romania -2.1 -0.5 -2.1 -0.6 0.3 0.7 2.1 2.8 3.0 3.4 3.8 4.0Sweden 2.6 4.4 6.8 7.2 6.2 4.7 3.3 2.6 2.7 2.5 2.3 2.1United Kingdom -0.4 1.5 2.5 1.5 1.8 1.3 1.0 2.1 2.0 2.1 2.2 2.2EU 0.7 2.0 2.2 2.2 2.3 1.6 1.5 1.8 1.7 1.9 2.1 2.1USA 2.4 3.0 3.2 2.8 2.2 2.6 2.7 2.6 2.7 2.6 2.6 2.6Japan 5.4 3.3 4.7 2.5 1.0 -0.5 -0.5 0.9 1.1 2.5 1.9 1.1

TABLE 4 : Gross domestic product per capita (percentage change on preceding year, 1992-2012)5-year Spring 2011 Autumn 2010


Belgium 1.2 2.5 1.4 2.0 2.2 0.2 -3.5 1.4 1.6 1.5 1.1 1.3Germany 0.9 1.9 1.0 3.5 2.8 1.2 -4.4 3.8 2.7 2.1 2.6 2.3Estonia : 7.9 8.9 10.8 7.1 -5.0 -13.9 3.1 4.7 3.9 4.3 3.4Ireland 5.3 7.8 3.3 2.8 3.1 -5.2 -8.1 -1.7 0.3 1.7 1.0 1.8Greece 0.2 3.4 3.8 4.7 3.9 0.6 -2.4 -4.7 -3.7 0.9 -3.2 0.9Spain 1.3 3.7 1.7 2.4 1.7 -0.7 -4.4 -0.5 0.4 1.2 0.3 1.4France 0.8 2.4 1.0 1.5 1.8 -0.3 -3.2 1.0 1.2 1.5 1.2 1.3Italy 1.2 2.0 0.2 1.5 0.7 -2.1 -5.8 0.8 0.6 1.0 0.8 1.1Cyprus 3.3 3.0 1.3 2.1 3.6 2.4 -2.5 0.6 0.9 1.7 0.8 1.5Luxembourg 1.2 5.0 2.7 3.3 4.9 -0.3 -5.4 1.6 2.0 2.5 1.3 1.9Malta 4.1 2.7 1.4 1.4 3.7 4.4 -3.6 3.5 1.7 1.8 1.6 1.9Netherlands 1.9 3.1 1.2 3.2 3.7 1.5 -4.4 1.3 1.6 1.4 1.2 1.4Austria 1.3 2.4 1.6 3.1 3.3 1.7 -4.2 1.9 2.0 1.6 1.3 1.7Portugal 1.8 3.4 0.1 1.1 2.2 -0.1 -2.6 1.3 -2.2 -1.7 -1.2 0.7Slovenia 2.1 4.2 4.1 5.5 6.3 3.4 -9.0 0.9 1.7 2.2 1.7 2.4Slovakia : 2.7 5.9 8.4 10.4 5.6 -5.0 3.9 3.4 4.3 3.1 4.1Finland 0.9 4.3 2.7 4.0 4.9 0.5 -8.6 2.7 3.2 2.1 2.3 1.7Euro area 1.2 2.5 1.1 2.5 2.3 -0.1 -4.5 1.5 1.4 1.5 1.3 1.6Bulgaria -2.2 3.6 6.6 7.1 7.0 6.7 -5.0 0.7 3.3 4.2 3.1 4.3Czech Republic 2.3 1.4 4.5 6.5 5.6 1.4 -4.9 2.0 2.0 2.9 2.3 3.3Denmark 2.2 2.1 1.5 3.1 1.2 -1.7 -5.7 1.8 1.4 1.2 1.6 1.5Latvia -7.4 7.2 9.6 12.8 10.6 -3.8 -17.5 0.4 4.0 4.7 3.9 4.5Lithuania -7.8 5.5 8.6 8.5 10.4 3.5 -14.3 2.9 6.2 5.5 3.3 3.7Hungary 0.6 4.5 4.1 3.8 0.9 1.0 -6.5 1.4 2.9 2.9 2.9 3.3Poland 4.7 4.4 4.2 6.3 6.8 5.1 1.6 3.7 3.9 3.7 3.9 4.2Romania 1.6 0.3 7.0 8.1 6.5 7.5 -6.9 -1.1 1.7 3.9 1.7 4.0Sweden 0.7 3.3 2.9 3.7 2.6 -1.4 -6.1 3.8 3.9 2.2 3.3 2.3United Kingdom 2.3 3.0 2.1 2.2 2.0 -0.7 -5.5 0.5 1.0 1.4 1.5 1.8EU 1.1 2.7 1.6 2.8 2.5 0.1 -4.6 1.5 1.6 1.7 1.5 1.9USA 2.1 2.6 1.8 1.7 0.9 -0.9 -3.5 2.0 1.7 1.8 1.3 1.6Japan 1.0 0.2 1.6 2.0 2.4 -1.1 -6.2 4.0 0.6 1.7 1.4 1.8

205


TABLE 5 : Domestic demand, volume (percentage change on preceding year, 1992-2012) 2.5.20115-year Spring 2011 Autumn 2010


Belgium 1.4 2.2 1.7 2.2 3.1 2.1 -2.2 0.4 1.9 2.1 1.6 2.0Germany 1.5 1.5 0.2 2.4 1.2 1.2 -1.9 2.5 2.3 2.0 2.3 2.2Estonia : 6.4 11.0 16.5 9.6 -11.0 -23.4 1.4 4.9 4.5 4.3 3.3Ireland 4.3 8.2 6.4 6.4 5.4 -5.1 -13.9 -5.6 -3.9 -0.4 -3.5 -0.9Greece 1.2 4.3 4.0 6.4 5.7 1.3 -3.6 -6.1 -7.7 -1.5 -5.4 -0.7Spain 0.8 5.0 4.4 5.2 4.1 -0.6 -6.0 -1.1 -0.6 1.0 -0.4 1.5France 0.7 3.0 2.2 2.5 3.2 0.5 -2.4 1.2 1.9 2.4 1.7 1.8Italy 0.0 2.6 1.3 2.0 1.3 -1.4 -3.9 1.6 0.7 1.2 0.8 1.1Cyprus : 3.5 4.4 5.7 8.8 7.7 -6.9 2.2 0.8 1.6 0.9 1.6Luxembourg 1.6 5.9 2.7 1.9 5.9 3.1 -5.9 3.0 4.2 3.6 3.9 3.9Malta : 1.4 2.9 3.0 2.9 3.0 -6.1 -0.1 2.2 1.6 2.3 2.3Netherlands 2.1 3.9 1.2 4.1 3.2 2.2 -4.0 0.8 1.1 1.3 0.5 1.2Austria 2.0 1.6 1.5 2.2 2.5 1.3 -2.3 0.9 1.6 1.5 1.1 1.3Portugal 2.3 4.7 0.6 0.8 2.0 0.8 -2.9 0.7 -5.7 -4.7 -3.7 -0.7Slovenia 5.2 4.2 4.1 5.6 8.9 4.1 -9.8 0.4 1.0 2.0 1.3 2.2Slovakia : 2.5 4.8 6.6 6.3 5.8 -7.3 2.4 1.5 3.6 1.9 3.2Finland 0.2 3.7 3.0 2.4 4.7 0.6 -6.0 2.4 3.1 2.3 2.7 2.2Euro area 1.1 2.7 1.7 3.0 2.6 0.4 -3.5 1.0 0.9 1.6 1.0 1.6Bulgaria : 6.0 8.2 10.8 8.8 6.5 -12.8 -4.6 2.5 3.6 2.3 3.6Czech Republic 6.2 1.2 3.6 5.4 5.2 1.2 -3.7 1.4 0.6 2.0 1.3 2.4Denmark 2.9 2.2 2.9 5.2 2.3 -1.2 -6.5 1.7 1.7 1.6 1.9 1.8Latvia : 6.9 11.2 18.1 12.4 -10.1 -27.6 -0.9 3.5 4.7 3.4 5.2Lithuania : 5.3 9.6 9.1 14.1 3.2 -24.6 1.8 5.6 5.4 4.0 4.4Hungary 0.5 4.7 3.7 1.4 -1.3 0.8 -10.8 -1.1 1.9 1.6 2.8 3.3Poland 5.4 4.5 3.9 7.3 8.7 5.6 -1.0 4.0 4.4 3.7 4.2 4.4Romania 1.1 1.5 9.0 12.9 14.2 7.3 -12.9 -1.0 1.1 4.2 1.9 4.8Sweden 0.1 2.8 2.5 3.9 4.6 0.0 -4.9 6.1 3.8 2.3 3.3 2.1United Kingdom 2.3 4.1 2.8 2.5 3.1 -0.7 -5.5 2.4 0.4 0.7 1.6 1.6EU 1.4 3.0 2.1 3.2 3.1 0.4 -4.2 1.3 1.1 1.6 1.3 1.8USA 3.5 4.4 3.0 2.6 1.3 -1.2 -3.7 3.2 2.6 2.8 2.3 2.6Japan 1.5 0.3 1.0 1.2 1.3 -1.4 -4.6 2.2 0.7 1.5 1.4 1.4

TABLE 6 : Final demand, volume (percentage change on preceding year, 1992-2012)5-year Spring 2011 Autumn 2010


Belgium 2.5 4.0 2.7 3.5 3.7 1.9 -6.6 4.7 3.7 3.7 3.4 3.8Germany 1.7 3.2 2.3 5.8 3.4 1.7 -6.4 6.3 4.0 3.6 3.7 3.7Estonia : 8.9 10.2 12.2 6.3 -6.5 -21.4 10.3 10.1 5.5 5.3 4.7Ireland 8.3 11.8 5.5 5.7 6.7 -3.1 -9.2 2.0 1.7 2.9 0.9 2.2Greece 1.6 5.3 3.9 6.2 5.7 1.8 -6.5 -4.6 -4.7 0.1 -3.7 0.5Spain 2.3 5.8 4.3 5.5 4.7 -0.7 -7.2 1.0 1.0 2.0 0.8 2.4France 1.5 4.0 2.3 3.0 3.1 0.3 -4.5 2.9 2.9 3.3 2.5 2.7Italy 1.3 2.9 1.3 2.9 2.0 -2.0 -7.1 3.1 1.8 2.2 1.8 2.1Cyprus : 4.4 3.5 5.0 7.9 5.2 -8.2 1.7 1.7 2.4 1.7 2.3Luxembourg 3.1 8.0 5.1 7.6 7.7 5.0 -7.3 4.8 6.1 5.7 6.6 5.5Malta : 2.7 2.9 5.8 3.0 2.1 -7.2 7.8 4.2 3.9 4.3 4.3Netherlands 3.4 5.6 2.7 5.6 4.7 2.5 -5.9 5.5 3.5 3.5 3.0 3.9Austria 2.3 3.8 3.1 4.2 4.8 1.2 -7.6 4.3 3.5 3.5 3.0 3.2Portugal 3.2 4.9 1.4 3.0 3.3 0.6 -4.9 2.4 -3.1 -2.0 -1.6 1.0Slovenia 2.7 5.4 5.9 8.3 10.8 3.8 -12.9 3.2 3.2 3.9 3.1 4.2Slovakia : 5.5 7.7 12.7 9.9 4.6 -11.2 8.2 4.6 5.8 4.5 5.4Finland 2.4 5.7 3.9 5.6 5.9 2.7 -11.2 3.3 4.6 3.3 3.6 2.9Euro area 2.0 4.1 2.6 4.6 3.7 0.5 -6.5 3.9 2.7 3.0 2.5 3.0Bulgaria : 5.3 9.1 21.2 7.8 5.3 -12.3 1.7 4.4 4.9 3.4 4.5Czech Republic 7.3 4.4 6.7 9.8 9.6 3.4 -6.9 8.4 4.8 5.9 4.0 4.7Denmark 3.1 3.7 3.5 6.5 2.5 0.1 -7.7 2.3 2.7 2.6 2.9 3.1Latvia : 6.6 10.7 14.9 11.8 -7.0 -23.8 2.6 5.2 5.4 4.3 5.6Lithuania : 5.8 10.4 10.1 10.2 5.9 -20.4 7.3 7.9 6.1 4.9 5.3Hungary : 8.5 6.5 8.2 6.3 3.0 -10.2 5.7 5.6 5.4 5.7 6.5Poland 6.4 5.5 5.6 9.3 8.8 6.0 -2.6 5.8 5.3 4.9 4.9 5.4Romania 0.8 3.5 9.6 12.3 12.8 7.5 -11.3 2.2 3.0 5.0 3.0 5.1Sweden 2.4 4.4 3.8 5.7 5.0 0.6 -8.0 7.6 5.1 3.3 4.6 3.4United Kingdom 3.3 4.4 3.3 4.2 1.9 -0.3 -6.4 2.9 2.2 2.2 3.0 3.1EU 2.2 4.2 3.0 4.9 3.8 0.7 -6.6 3.9 2.9 3.1 2.8 3.2USA 3.9 4.4 3.2 3.2 2.0 -0.4 -4.3 4.1 3.2 3.6 3.0 3.1Japan 1.7 0.5 1.9 2.3 2.2 -1.0 -7.4 4.8 0.7 1.9 1.9 2.0

206

Statistical Annex

TABLE 7 : Private consumption expenditure, volume (percentage change on preceding year, 1992-2012) 2.5.20115-year Spring 2011 Autumn 2010


Belgium 1.5 2.1 1.1 1.8 1.8 1.5 -0.3 1.6 1.5 1.9 1.3 1.9Germany 1.9 1.9 0.2 1.4 -0.2 0.7 -0.2 0.4 1.2 1.5 1.4 1.6Estonia : 6.5 10.4 13.7 8.6 -5.4 -18.4 -1.9 3.2 3.5 2.5 3.1Ireland 4.2 7.8 4.7 6.5 6.3 -1.8 -7.2 -1.2 -1.9 -1.0 -1.8 -1.0Greece 1.8 3.1 4.3 5.2 2.8 3.2 -2.2 -4.5 -6.4 -2.2 -4.3 0.5Spain 1.1 4.3 3.6 3.8 3.7 -0.6 -4.2 1.2 0.8 1.1 0.9 1.6France 1.0 2.8 2.4 2.4 2.6 0.5 0.6 1.7 1.6 1.8 1.4 1.7Italy 0.5 2.5 0.9 1.3 1.1 -0.8 -1.8 1.0 0.6 1.1 0.9 1.0Cyprus : 4.4 3.7 4.7 9.4 7.1 -2.9 0.8 1.4 2.2 2.1 2.2Luxembourg 1.7 4.3 1.6 3.2 3.3 4.7 0.2 2.0 1.8 2.3 1.6 2.1Malta : 3.6 2.4 1.4 0.8 4.0 -1.4 -0.7 0.8 1.4 1.6 2.1Netherlands 2.1 3.9 0.5 -0.3 1.8 1.1 -2.5 0.4 0.8 1.1 0.7 0.9Austria 1.9 1.6 1.7 1.8 0.7 0.5 1.3 1.0 1.1 1.1 0.8 0.9Portugal 2.0 3.8 1.4 1.8 2.5 1.3 -1.1 2.2 -4.4 -3.8 -2.8 -0.7Slovenia 5.1 3.2 2.8 2.9 6.7 2.9 -0.8 0.5 0.7 1.3 0.8 1.8Slovakia : 3.8 4.9 5.9 6.8 6.2 0.3 -0.3 1.3 3.6 1.5 3.1Finland 0.6 3.2 3.6 4.3 3.5 1.7 -2.1 2.6 2.3 2.0 2.4 2.3Euro area 1.4 2.7 1.5 2.1 1.7 0.4 -1.1 0.8 0.8 1.2 0.9 1.4Bulgaria -1.4 2.8 6.7 8.6 9.0 3.4 -7.6 -1.2 2.1 3.6 2.2 3.8Czech Republic 6.2 1.5 3.7 5.1 5.0 3.6 -0.2 0.4 0.4 2.0 1.1 2.5Denmark 2.4 1.0 2.9 3.6 3.0 -0.6 -4.5 2.2 2.0 1.9 1.9 2.3Latvia : 4.7 11.4 21.2 14.8 -5.2 -24.1 -0.1 3.0 3.5 3.2 4.0Lithuania : 5.0 10.2 10.6 12.1 3.7 -17.7 -4.5 3.3 3.9 2.9 4.0Hungary : 4.5 5.5 1.9 0.2 0.4 -7.8 -2.1 2.7 1.0 2.8 3.2Poland 4.8 4.6 3.4 5.0 4.9 5.7 2.0 3.2 3.3 3.7 3.2 4.0Romania 3.1 1.6 10.6 12.7 11.9 9.0 -10.2 -1.7 0.6 3.1 1.8 3.9Sweden 0.0 3.2 2.6 2.7 3.7 0.0 -0.4 3.5 3.0 2.3 2.7 2.0United Kingdom 2.4 4.2 2.7 1.8 2.2 0.4 -3.1 0.6 0.3 0.8 1.6 1.6EU 1.7 3.0 2.0 2.3 2.1 0.7 -1.7 0.8 0.9 1.3 1.2 1.6USA 3.4 4.4 3.0 2.9 2.4 -0.3 -1.2 1.7 2.9 2.7 1.6 1.9Japan 1.9 0.6 1.2 1.5 1.6 -0.7 -1.9 1.8 -0.3 1.0 1.0 1.1

TABLE 8 : Government consumption expenditure, volume (percentage change on preceding year, 1992-2012)5-year Spring 2011 Autumn 2010


Belgium 1.2 2.0 1.6 0.6 2.1 2.3 0.6 1.1 1.2 1.6 1.2 1.4Germany 2.4 1.1 0.5 1.0 1.6 2.3 2.9 2.3 1.5 0.9 1.0 0.9Estonia : 0.1 1.8 3.9 3.9 3.8 0.0 -2.1 0.3 0.9 1.1 0.9Ireland 2.8 7.4 4.4 5.8 7.3 2.8 -4.1 -2.0 -4.4 -0.4 -5.7 -0.8Greece 1.0 4.3 3.9 8.8 8.2 1.5 10.3 -6.5 -2.6 0.1 -8.5 -6.0Spain 2.1 3.8 5.1 4.6 5.5 5.8 3.2 -0.7 -1.4 -0.3 -1.3 -0.3France 1.8 1.0 1.7 1.3 1.5 1.7 2.7 1.4 0.6 0.3 0.4 0.4Italy -1.0 1.7 1.8 0.5 0.9 0.5 1.0 -0.6 -0.4 0.1 0.0 0.1Cyprus : 5.3 3.5 7.3 0.3 6.2 5.8 0.5 3.0 1.8 1.3 2.0Luxembourg 4.1 4.8 3.6 1.6 2.8 2.7 4.6 2.9 1.0 3.5 3.2 3.5Malta : 0.0 2.4 5.7 0.5 12.1 -1.3 0.6 0.5 1.1 0.4 1.9Netherlands 1.7 2.9 3.2 9.5 3.5 2.5 3.7 1.5 -0.1 -0.1 0.1 -0.4Austria 2.6 2.0 1.4 2.7 2.1 4.0 0.4 -2.4 0.8 0.8 0.0 0.5Portugal 1.8 4.1 1.4 -0.7 0.5 0.4 3.7 1.8 -6.1 -4.6 -6.8 -1.3Slovenia 2.2 3.7 3.3 4.0 0.7 6.2 3.0 0.8 0.0 0.5 -0.3 1.0Slovakia : 1.6 3.5 9.7 0.1 6.1 5.6 0.1 -2.2 1.0 -4.5 0.5Finland -0.4 1.8 1.7 0.4 1.1 2.4 1.0 0.4 1.0 0.7 0.6 0.7Euro area 1.5 1.8 1.9 2.2 2.2 2.3 2.5 0.7 0.2 0.3 -0.1 0.2Bulgaria -15.4 7.3 3.4 3.5 0.3 -1.0 -6.5 -1.0 -0.3 -0.1 0.6 0.9Czech Republic -1.7 1.9 2.8 1.2 0.5 1.1 2.6 0.3 -2.3 0.5 -2.2 0.8Denmark 2.6 2.2 1.7 2.8 1.3 1.6 3.1 1.0 -0.2 0.4 -0.1 0.4Latvia : 2.8 2.7 4.9 3.7 1.5 -9.2 -11.0 -2.0 0.0 -2.6 -2.0Lithuania : 0.7 4.1 3.7 3.2 7.3 -1.9 -3.4 0.5 3.0 0.0 2.5Hungary -1.8 1.0 3.6 3.7 -7.3 1.0 -0.2 -1.9 -0.8 0.5 -0.1 1.2Poland 3.3 2.4 4.1 6.1 3.7 7.4 2.0 3.5 1.5 0.3 -0.2 0.3Romania 2.8 -0.2 -0.9 -4.1 -0.1 7.2 1.6 -3.6 -1.5 1.5 -1.0 1.7Sweden 0.3 0.8 0.9 1.7 0.7 1.0 1.7 2.6 1.4 0.5 0.9 0.5United Kingdom 0.6 1.9 2.6 1.4 1.3 1.6 1.0 0.8 0.8 -1.0 -0.8 -2.0EU 0.7 1.8 2.0 2.1 1.9 2.3 2.2 0.7 0.3 0.2 -0.2 0.0USA -0.1 2.4 2.2 1.2 1.4 2.9 1.9 1.0 -0.3 0.4 1.2 1.5Japan 3.1 2.8 1.7 0.4 1.5 0.5 3.0 2.3 2.1 1.2 0.8 0.9

207


TABLE 9 : Total investment, volume (percentage change on preceding year, 1992-2012) 2.5.20115-year Spring 2011 Autumn 2010


Belgium 0.8 3.6 2.4 2.7 6.2 2.6 -5.4 -1.6 3.5 3.4 2.6 2.9Germany 0.7 1.8 0.3 8.0 4.7 2.5 -10.1 6.0 6.0 4.8 6.0 5.1Estonia : 10.2 17.1 23.2 6.0 -15.0 -32.9 -9.2 14.9 10.6 12.8 6.4Ireland 7.5 9.9 5.9 4.5 2.9 -14.3 -31.1 -27.7 -13.5 2.0 -10.0 0.0Greece -0.2 8.2 4.9 10.6 5.5 -7.5 -11.2 -16.5 -16.6 -1.9 -7.5 -2.6Spain -0.3 7.6 5.7 7.2 4.5 -4.8 -16.0 -7.6 -3.4 1.8 -3.1 2.7France -0.9 5.0 2.5 4.1 6.0 0.5 -7.1 -1.4 3.4 5.0 2.4 3.5Italy -0.8 3.7 1.7 2.9 1.7 -3.8 -11.9 2.5 2.2 3.1 1.6 3.1Cyprus : 1.3 7.3 10.2 13.4 6.0 -9.1 -7.9 -3.9 -0.8 -3.8 -1.5Luxembourg 1.1 8.2 4.1 3.8 17.9 1.4 -19.2 2.6 12.0 6.0 7.6 7.3Malta : -0.1 3.8 0.4 4.8 -25.3 -18.6 10.0 11.0 3.0 8.2 3.3Netherlands 3.3 4.9 0.6 7.5 5.5 5.1 -12.7 -4.8 3.0 4.1 3.2 4.2Austria 1.8 1.6 0.7 1.8 3.9 4.1 -8.8 -1.3 3.0 2.9 2.7 2.9Portugal 1.6 7.2 -2.4 -1.3 2.6 -0.3 -11.2 -5.0 -9.9 -7.4 -3.2 -0.4Slovenia 6.9 7.8 5.6 10.1 12.8 8.5 -21.6 -6.7 0.8 3.9 2.9 4.1Slovakia : 1.4 5.6 9.3 9.1 1.0 -19.9 3.6 4.5 6.5 5.1 6.4Finland -1.9 6.8 1.9 1.9 10.7 -0.4 -14.6 0.8 6.6 4.5 4.8 3.0Euro area 0.3 4.0 2.1 5.5 4.7 -0.8 -11.4 -0.8 2.2 3.7 2.2 3.6Bulgaria : 13.1 15.4 13.1 11.8 21.9 -17.6 -16.5 4.9 5.8 3.7 5.4Czech Republic 10.9 0.3 3.4 6.0 10.8 -1.5 -7.9 -4.6 2.4 3.8 3.1 3.7Denmark 4.3 4.8 4.4 14.3 0.4 -3.3 -14.3 -4.0 3.7 3.0 2.3 2.8Latvia : 17.4 17.7 16.4 7.5 -13.6 -37.3 -19.5 9.2 12.0 9.5 15.0Lithuania : 8.0 14.1 19.4 23.0 -5.2 -40.0 0.0 16.9 13.8 13.0 8.5Hungary 2.1 7.2 4.5 -3.2 1.7 2.9 -8.0 -5.6 1.5 4.5 4.3 5.5Poland 9.9 6.6 4.0 14.9 17.6 9.6 -1.1 -2.0 9.7 7.0 8.4 9.2Romania 10.4 1.9 12.7 19.9 30.3 15.6 -25.2 -13.1 3.5 5.9 4.2 7.3Sweden -1.4 4.8 4.6 9.2 8.9 1.4 -16.3 6.3 9.8 5.1 8.1 4.7United Kingdom 2.3 5.7 3.7 6.4 7.8 -5.0 -15.4 3.0 0.1 4.0 3.5 6.5EU 2.4 4.3 2.6 6.2 5.8 -0.8 -12.0 -0.7 2.5 3.9 2.8 4.2USA 7.0 6.6 2.7 2.3 -1.4 -5.1 -15.5 3.5 4.7 5.9 4.8 6.3Japan -0.2 -1.6 -0.1 0.5 -1.2 -3.6 -11.7 0.0 0.5 3.6 2.6 3.0

TABLE 10 : Investment in construction, volume (percentage change on preceding year, 1992-2012)5-year Spring 2011 Autumn 2010


Belgium 1.8 0.4 2.8 2.8 3.9 2.3 -1.9 -2.4 3.0 2.2 0.8 1.4Germany 2.9 -1.6 -2.0 4.9 -0.5 1.2 -1.5 2.8 2.8 2.4 3.0 2.8Estonia : 6.9 17.3 16.6 4.5 -16.5 -26.2 -20.7 12.8 11.3 10.4 6.0Ireland 7.3 10.0 8.4 5.8 -0.7 -13.9 -34.9 -36.5 -24.0 -2.9 -14.8 -3.2Greece -3.1 6.6 3.3 16.4 -4.1 -18.9 -12.3 -12.5 -20.0 -5.4 -8.9 -2.5Spain -0.9 6.6 6.0 6.0 3.2 -5.9 -11.9 -11.1 -7.4 0.2 -7.0 0.7France -2.5 2.8 3.1 5.3 4.4 -1.7 -6.3 -5.9 -0.4 2.7 1.4 2.3Italy -2.0 2.2 2.4 1.0 0.3 -3.0 -8.7 -3.7 -0.7 1.6 0.1 1.5Cyprus : -0.3 8.5 8.0 14.1 3.1 -9.0 -5.5 -2.8 -1.7 -3.7 -2.6Luxembourg 4.1 6.2 4.6 1.8 12.2 2.3 -6.5 2.8 7.1 6.7 6.0 6.5Malta : : : : : : : : : : : :Netherlands 1.4 3.7 -0.6 4.2 6.1 4.3 -8.3 -11.8 0.0 2.0 2.3 2.8Austria 2.1 -0.4 0.4 0.7 1.6 1.6 -6.0 -3.4 -1.1 1.1 1.1 1.1Portugal 2.9 7.0 -1.9 -2.7 3.9 -0.4 -8.9 -5.7 -8.9 -7.3 -3.2 -1.0Slovenia 2.3 4.5 3.9 2.9 16.2 11.2 -19.2 -15.7 -3.5 1.9 1.7 3.6Slovakia : 1.7 6.8 31.0 4.9 3.8 -9.9 0.9 2.7 7.4 4.1 6.0Finland -4.3 6.7 3.0 3.0 8.8 -1.5 -14.7 2.0 6.9 4.0 5.8 2.1Euro area 0.2 2.2 1.7 4.2 2.1 -1.5 -7.0 -4.5 -1.0 1.8 0.2 2.0Bulgaria : : 18.8 28.9 -2.4 46.2 1.0 : : : : :Czech Republic 4.3 -4.9 3.9 4.2 5.8 -2.8 -0.8 -1.5 1.7 3.2 2.8 3.4Denmark 3.2 2.3 4.3 11.4 -2.4 -4.5 -16.7 -11.6 3.2 1.9 1.2 1.9Latvia : : : : : : : : : : : :Lithuania : 4.1 13.9 22.0 21.5 0.3 -37.3 -7.4 15.5 14.9 13.0 8.0Hungary : 3.7 3.7 -5.4 -5.2 2.3 -5.5 -10.0 -2.5 1.8 2.6 3.0Poland : 5.6 3.7 13.0 13.4 8.2 4.2 2.7 13.1 4.0 8.1 7.0Romania 15.2 -2.1 11.4 15.3 37.3 20.3 -18.8 -15.5 3.6 4.5 2.4 7.3Sweden -7.5 2.1 4.2 10.4 7.5 -2.6 -10.5 3.0 8.2 4.0 6.1 3.4United Kingdom 0.9 2.6 4.6 7.6 6.1 -5.7 -13.7 0.2 -4.5 2.6 2.6 5.6EU : 1.9 3.6 6.7 7.7 1.2 -9.3 -5.2 -0.1 2.3 1.2 3.3USA 3.9 3.6 1.3 -1.7 -5.8 -8.2 -17.1 -8.3 -3.7 3.2 -0.8 7.3Japan : : : : : : : : : : : :

208

Statistical Annex

TABLE 11 : Investment in equipment, volume (percentage change on preceding year, 1992-2012) 2.5.20115-year Spring 2011 Autumn 2010


Belgium -0.9 6.9 1.2 0.7 9.4 3.1 -9.8 -1.0 4.1 4.6 4.0 4.5Germany -3.1 6.3 2.8 11.6 11.1 4.0 -22.3 10.9 10.6 7.9 10.3 8.2Estonia : 13.9 16.3 31.4 7.4 -11.6 -44.0 12.9 18.5 10.0 17.0 7.0Ireland 9.2 9.0 6.2 -1.9 17.2 -17.4 -22.5 -15.0 6.0 7.0 -3.2 3.8Greece 7.4 10.9 7.5 3.0 22.3 6.6 -11.8 -23.5 -16.0 1.2 -7.3 -3.1Spain -0.1 9.1 5.0 9.9 10.4 -2.5 -24.8 1.8 3.1 4.4 3.7 6.0France 0.8 7.6 1.1 1.4 9.1 3.5 -9.6 4.1 7.0 7.0 3.1 4.5Italy 0.1 5.2 1.3 5.1 3.1 -5.0 -16.3 10.5 5.1 4.7 3.2 4.8Cyprus : 5.0 5.1 15.5 11.9 12.7 -9.3 -12.0 -5.0 1.0 -4.0 1.0Luxembourg -4.2 11.0 3.5 7.4 23.9 3.4 -37.8 4.4 26.0 4.0 10.0 8.5Malta : : : : : : : : : : : :Netherlands 4.7 6.0 1.9 12.0 8.6 4.9 -19.0 7.6 7.7 8.0 5.4 7.2Austria 0.9 2.9 0.6 1.8 6.6 7.5 -14.5 1.8 8.3 5.0 4.7 5.3Portugal 1.3 9.2 -0.1 5.2 7.9 6.9 -13.1 -4.5 -13.6 -9.3 -3.4 0.6Slovenia 9.6 11.8 8.2 20.4 8.2 4.9 -26.2 7.1 6.2 6.2 4.4 4.7Slovakia : 1.8 4.4 -6.3 4.3 1.7 -27.8 7.9 7.0 6.0 6.7 7.2Finland 1.0 6.1 -1.2 -1.1 17.9 3.9 -13.4 -5.2 7.0 6.0 2.6 5.2Euro area 0.2 6.9 2.4 6.6 9.3 1.4 -17.4 5.4 6.2 5.9 5.0 5.7Bulgaria : : 12.3 0.7 28.8 2.9 -45.1 : : : : :Czech Republic 17.0 5.6 3.2 8.4 16.9 -0.6 -19.0 -10.5 3.7 5.1 3.5 4.0Denmark 3.4 6.2 3.8 19.1 4.9 -3.5 -13.2 2.3 4.6 4.7 3.9 4.5Latvia : : : : : : : : : : : :Lithuania : 13.5 15.2 16.8 21.9 -17.1 -49.8 14.7 19.0 12.5 15.0 10.0Hungary : 10.4 5.6 1.8 8.0 2.9 -12.2 1.0 7.0 8.0 7.0 9.3Poland : 7.1 4.8 17.1 22.3 13.0 -9.1 -9.0 3.5 13.0 9.0 13.0Romania 7.3 5.9 14.9 23.5 28.3 10.9 -32.7 -2.0 8.2 7.3 6.3 7.3Sweden 5.1 6.1 5.2 9.3 12.9 5.5 -28.2 11.6 11.5 6.0 10.0 5.8United Kingdom 4.5 8.0 2.6 4.4 12.3 -5.2 -22.0 8.6 6.8 5.4 5.7 8.9EU : 7.0 4.4 9.2 12.6 2.3 -20.0 4.3 6.7 6.3 5.5 6.5USA 10.0 8.2 4.1 8.2 3.3 -3.8 -18.6 13.9 10.6 7.6 8.8 5.6Japan : : : : : : : : : : : :

TABLE 12 : Public investment (as a percentage of GDP, 1992-2012)5-year Spring 2011 Autumn 2010


Belgium 1.6 1.8 1.6 1.6 1.6 1.6 1.8 1.7 1.8 1.8 1.9 1.9Germany 2.4 1.8 1.5 1.4 1.4 1.5 1.6 1.6 1.5 1.4 1.6 1.4Estonia : 4.2 4.4 4.7 5.1 5.3 5.1 3.6 5.0 5.3 4.9 5.0Ireland 2.2 3.2 3.7 3.8 4.7 5.3 4.2 3.9 3.0 2.7 3.5 3.1Greece 2.9 3.3 3.3 3.4 3.4 3.6 3.0 2.8 2.2 2.1 2.5 2.3Spain 3.7 3.2 3.6 3.7 4.0 3.9 4.4 3.7 2.9 2.7 3.2 3.1France 3.2 3.0 3.1 3.2 3.2 3.2 3.4 3.0 3.1 3.1 3.2 3.2Italy 2.4 2.3 2.3 2.3 2.3 2.2 2.5 2.1 1.9 1.7 1.9 1.6Cyprus : 2.9 3.3 3.0 2.9 2.9 4.1 3.6 3.5 3.5 3.7 3.7Luxembourg 4.2 4.0 4.4 3.6 3.3 3.2 3.7 4.1 3.9 3.6 3.3 3.1Malta : 4.0 4.3 4.0 3.8 2.3 2.2 2.1 3.3 2.7 3.9 4.0Netherlands 2.5 3.1 3.4 3.3 3.3 3.5 3.9 3.7 3.6 3.5 3.7 3.7Austria 3.1 1.7 1.2 1.1 1.1 1.1 1.2 1.2 1.1 1.1 1.1 1.1Portugal 3.6 4.0 3.1 2.4 2.7 2.9 2.9 3.3 2.5 2.1 2.2 2.2Slovenia : 3.2 3.3 3.7 4.2 4.4 4.6 4.3 4.3 4.5 4.3 4.2Slovakia : 3.6 2.5 2.2 1.9 2.0 2.3 2.6 1.8 1.6 2.2 2.2Finland 2.9 2.7 2.6 2.3 2.4 2.5 2.8 2.7 2.6 2.5 2.7 2.6Euro area 2.8 2.5 2.5 2.5 2.6 2.6 2.8 2.4 2.3 2.2 2.4 2.2Bulgaria : 3.2 3.3 4.0 5.2 5.6 4.9 4.6 4.4 4.8 4.4 4.3Czech Republic : 3.8 4.6 5.0 4.7 4.9 5.2 4.6 4.7 4.8 5.3 5.3Denmark 1.8 1.7 1.8 1.9 1.9 1.9 2.0 2.2 2.3 2.1 2.1 1.9Latvia : 1.3 2.9 4.6 5.7 4.8 4.3 3.6 4.3 4.2 4.3 4.1Lithuania : 2.4 3.4 4.1 5.2 4.9 3.9 4.6 4.2 3.9 2.8 2.7Hungary : 3.0 4.1 4.4 3.6 2.9 3.1 3.2 3.9 3.4 3.1 3.1Poland : 3.4 3.5 3.9 4.2 4.6 5.2 5.6 6.6 5.8 6.6 6.3Romania : 2.5 3.8 5.1 5.6 5.7 5.3 5.5 5.6 5.6 4.6 4.6Sweden 2.7 3.0 3.0 3.0 3.1 3.3 3.6 3.5 3.3 3.2 3.3 3.3United Kingdom 1.8 1.3 1.5 1.8 1.9 2.3 2.7 2.5 2.2 1.9 1.9 1.7EU : 2.4 2.4 2.5 2.6 2.7 2.9 2.6 2.5 2.4 2.5 2.4USA 2.4 2.4 2.5 2.4 2.4 2.6 2.6 3.5 3.3 3.3 3.5 3.5Japan 6.1 5.5 4.0 3.3 3.1 3.0 3.4 3.3 3.3 3.4 3.2 3.2

209


TABLE 13 : Output gap relative to potential GDP (deviation of actual output from potential output as % of potential GDP, 1992-2012) ¹ 2.5.20115-year Spring 2011 Autumn 2010


Belgium -0.3 1.2 0.5 1.3 2.1 1.0 -3.1 -2.3 -1.5 -0.8 -1.7 -1.2Germany 0.7 0.7 -1.1 0.1 1.5 1.2 -4.3 -2.0 -1.1 -0.8 -1.1 -0.8Estonia : -2.2 6.6 10.7 11.8 3.2 -11.1 -7.7 -3.2 -0.3 -4.1 -0.8Ireland -0.9 2.7 1.1 2.3 4.7 0.2 -5.7 -5.2 -3.3 -0.8 -3.1 -0.5Greece -0.2 0.7 0.1 0.9 2.5 1.5 -1.2 -5.3 -7.7 -6.1 -7.7 -6.7Spain -2.3 1.0 0.8 1.1 1.4 -0.1 -4.5 -5.2 -4.7 -3.3 -3.5 -1.5France -1.3 1.2 1.9 1.9 2.0 0.3 -3.9 -3.9 -3.7 -3.2 -3.3 -2.8Italy -0.7 0.8 1.1 2.2 2.9 1.0 -4.3 -3.4 -2.8 -1.9 -1.7 -0.4Cyprus : 0.1 -0.1 -0.1 1.8 2.6 -1.1 -1.7 -1.5 -0.5 -1.8 -0.7Luxembourg -0.9 2.2 1.0 1.4 3.7 1.3 -4.9 -3.7 -2.6 -1.4 -4.2 -3.7Malta : 1.7 -1.0 -1.7 -0.7 2.2 -2.5 -0.3 -0.1 0.2 -0.2 0.5Netherlands -0.6 1.1 -1.4 0.0 2.0 1.9 -3.4 -2.8 -2.2 -1.8 -3.0 -2.5Austria -0.4 0.9 -0.6 0.8 2.5 2.6 -2.7 -2.1 -1.2 -0.8 -1.5 -0.8Portugal -0.8 2.0 -0.8 -0.9 0.7 0.0 -2.3 -0.8 -2.2 -3.2 -2.5 -1.8Slovenia : 0.4 1.2 3.1 6.0 5.9 -5.1 -5.6 -4.9 -3.7 -3.2 -1.8Slovakia : -1.5 -1.2 1.5 6.0 6.7 -2.1 -1.6 -1.2 0.2 -1.0 0.1Finland -3.8 2.5 0.9 2.6 5.1 3.3 -6.5 -5.3 -3.5 -2.7 -4.0 -3.5Euro area -0.7 1.0 0.3 1.1 2.1 1.0 -4.1 -3.2 -2.7 -2.0 -2.4 -1.6Bulgaria : -3.0 2.6 3.2 4.2 5.3 -3.5 -5.0 -4.2 -2.9 -4.2 -2.7Czech Republic : -2.6 -0.2 4.1 6.2 5.0 -2.1 -1.9 -1.8 -0.8 -1.9 -0.8Denmark -1.9 1.2 0.8 3.2 3.1 0.4 -5.6 -4.1 -3.0 -2.1 -2.1 -0.8Latvia : -1.3 2.4 9.4 14.7 7.5 -10.9 -9.5 -5.2 -0.8 -5.2 -0.9Lithuania : -5.1 3.4 6.3 9.6 8.0 -8.9 -7.5 -2.9 0.1 -3.7 -1.2Hungary : -0.7 2.0 3.4 2.4 1.8 -5.5 -4.6 -2.3 0.0 -2.2 0.0Poland : 0.5 -0.3 1.1 2.5 2.3 -0.7 -1.1 -1.2 -1.4 -1.4 -1.2Romania : -5.5 2.2 6.8 7.8 9.9 -0.8 -4.0 -4.4 -2.8 -4.6 -3.0Sweden -3.8 -0.3 1.3 3.4 3.9 0.9 -5.8 -2.5 -0.7 -0.2 -0.5 0.0United Kingdom -1.3 1.5 1.8 2.2 2.5 0.6 -5.2 -5.2 -4.8 -4.1 -4.1 -3.1EU : 0.9 0.6 1.5 2.4 1.1 -4.3 -3.6 -3.0 -2.3 -2.6 -1.8USA : : : : : : : : : : -1.7 -1.2Japan : : : : : : : : : : : :¹ When comparing output gaps between the spring and the autumn forecast it has to be taken into account that the overall revisions to the forecast

may have led to changes in the estimates for potential output.

TABLE 14 : Deflator of gross domestic product (percentage change on preceding year, 1992-2012)5-year Spring 2011 Autumn 2010


Belgium 2.2 1.4 2.2 2.3 2.3 1.9 1.1 1.8 1.9 2.1 2.0 1.9Germany 2.7 0.3 0.9 0.4 1.8 1.0 1.4 0.6 1.0 1.5 1.2 1.3Estonia : 6.4 5.0 8.3 10.5 7.2 -0.1 1.5 2.4 2.2 2.7 2.2Ireland 3.0 5.1 3.1 3.7 1.1 -1.5 -4.0 -2.6 0.6 0.9 0.4 0.8Greece 11.5 4.3 3.2 3.1 3.1 3.3 1.3 2.6 0.3 0.4 1.5 0.4Spain 4.7 3.0 4.2 4.1 3.3 2.4 0.6 1.0 1.0 1.1 1.1 1.4France 1.6 1.1 2.1 2.4 2.5 2.6 0.5 0.5 1.8 1.8 1.6 1.5Italy 4.3 2.4 2.6 1.8 2.6 2.8 2.3 0.6 1.6 1.8 1.6 1.7Cyprus 3.6 3.0 3.0 3.0 4.6 5.1 -0.3 2.0 3.1 2.1 3.2 2.5Luxembourg 3.7 1.0 4.2 6.7 3.6 4.2 -0.3 5.5 3.3 2.6 2.5 2.3Malta 3.0 2.1 2.6 3.0 3.2 2.7 2.6 3.0 2.6 2.3 2.7 2.5Netherlands 1.9 3.1 2.2 1.8 1.8 2.4 -0.2 1.6 1.9 2.1 1.5 1.6Austria 2.4 0.7 1.6 1.8 2.1 1.9 0.8 1.5 1.7 1.8 1.6 1.3Portugal 5.8 3.6 2.9 2.8 3.2 1.6 0.5 1.0 1.1 1.2 1.3 1.0Slovenia 47.9 7.2 4.0 2.0 4.2 4.0 3.2 0.7 1.0 1.8 1.3 1.5Slovakia : 6.6 4.1 2.9 1.1 2.9 -1.2 0.5 1.6 2.4 2.8 2.5Finland 1.7 2.4 0.5 0.9 3.0 1.8 1.0 2.1 2.5 2.4 2.6 2.1Euro area 3.3 1.6 2.1 1.9 2.4 2.0 1.0 0.8 1.4 1.7 1.5 1.5Bulgaria 71.8 72.4 5.1 6.9 9.2 8.4 4.3 3.0 3.1 2.5 2.6 2.5Czech Republic 13.4 5.7 1.8 1.1 3.4 1.8 2.5 -1.1 0.2 1.9 1.4 1.9Denmark 1.4 2.1 2.3 2.1 2.3 3.9 0.4 3.3 1.7 2.0 2.3 2.2Latvia 98.5 4.3 6.8 9.9 20.3 14.4 -1.5 -2.3 2.2 1.6 0.6 1.0Lithuania 160.2 2.7 3.0 6.5 8.5 9.8 -3.7 2.1 3.3 2.9 1.8 2.5Hungary 22.1 11.8 5.1 4.2 5.9 4.8 4.4 2.9 2.6 2.5 2.8 2.2Poland 30.3 8.3 2.2 1.5 4.0 3.1 3.6 1.3 3.3 3.3 2.7 2.8Romania 114.8 59.5 16.7 10.6 13.5 15.3 4.1 4.5 4.4 4.2 4.6 5.1Sweden 2.3 1.3 1.3 1.9 2.8 3.1 1.8 1.3 0.9 1.0 1.9 1.5United Kingdom 2.9 2.1 2.8 3.1 3.0 3.0 1.4 2.9 1.9 2.1 2.0 1.5EU 24.1 2.3 2.3 2.2 2.7 2.5 1.2 1.2 1.6 1.8 1.7 1.6USA 2.1 1.8 2.6 3.3 2.9 2.2 0.9 1.0 1.3 1.5 0.8 1.3Japan 0.2 -0.8 -1.3 -0.9 -0.7 -1.0 -0.4 -2.1 -2.0 0.2 0.2 -0.4

210

Statistical Annex

TABLE 15 : Price deflator of private consumption (percentage change on preceding year, 1992-2012) 2.5.20115-year Spring 2011 Autumn 2010


Belgium 1.8 1.6 2.2 3.0 2.8 3.2 -0.5 2.4 3.3 2.0 1.8 1.8Germany 2.4 1.0 1.3 1.1 1.8 1.7 0.0 2.0 2.2 1.7 1.6 1.7Estonia : 6.2 3.1 5.0 7.5 8.7 -0.9 2.1 3.5 2.5 3.3 2.4Ireland 2.6 3.8 3.1 2.4 3.3 3.0 -4.5 -3.4 1.0 0.7 0.3 0.8Greece 11.6 4.5 3.1 3.4 3.3 4.0 1.1 4.8 2.6 0.6 2.2 0.3Spain 4.9 2.8 3.3 3.6 3.3 3.5 0.1 2.8 2.7 1.5 1.5 1.5France 1.6 0.9 1.7 2.1 2.0 2.9 -0.4 1.2 2.1 1.6 1.5 1.5Italy 5.1 2.4 2.6 2.7 2.3 3.2 0.0 1.5 2.6 1.9 1.8 1.9Cyprus : 2.4 2.5 2.1 3.7 5.1 0.2 2.6 3.2 2.2 3.5 2.8Luxembourg 2.8 2.3 2.1 2.4 2.2 2.0 0.8 1.9 3.0 2.0 2.1 1.6Malta : 1.9 1.8 2.2 1.7 3.6 1.8 3.0 2.7 2.2 2.1 2.2Netherlands 2.4 2.9 2.1 2.2 1.8 1.4 -0.6 1.7 2.0 2.0 1.7 1.8Austria 2.5 1.4 1.8 2.1 2.7 2.5 -0.8 1.6 2.8 2.0 2.1 1.7Portugal 5.6 2.9 2.8 3.0 3.0 2.6 -2.5 1.6 3.4 2.0 2.2 1.2Slovenia 45.8 7.3 4.0 2.2 4.1 5.4 0.0 2.9 2.6 2.1 2.0 2.2Slovakia : 7.4 4.8 4.9 2.6 4.5 0.1 0.9 3.6 2.7 3.1 2.7Finland 1.9 2.4 0.8 1.4 2.2 3.5 0.5 1.0 3.4 2.4 2.3 2.0Euro area 3.5 1.8 2.1 2.2 2.3 2.7 -0.2 1.8 2.4 1.7 1.7 1.6Bulgaria 80.5 69.9 3.5 2.2 9.0 7.2 1.5 1.1 3.7 3.0 2.3 2.4Czech Republic 11.2 5.3 1.3 1.4 2.9 5.0 0.4 1.3 2.2 2.3 2.0 1.9Denmark 1.7 2.1 1.5 1.9 1.2 3.1 1.3 2.6 2.5 2.0 2.6 2.5Latvia : 4.1 5.4 6.0 10.1 16.8 4.2 -0.3 3.2 1.8 1.1 1.4Lithuania : 2.8 0.9 4.0 6.4 10.9 4.5 1.4 3.2 2.5 2.0 2.5Hungary : 12.0 3.9 3.6 6.3 5.4 4.1 5.0 4.0 3.5 3.9 3.1Poland 31.6 9.0 2.0 1.2 2.4 4.3 2.5 2.7 3.8 3.2 2.9 3.0Romania 118.0 55.6 12.0 4.9 4.8 10.0 3.9 4.9 6.7 4.2 5.5 4.1Sweden 3.1 1.3 1.3 1.2 1.4 3.1 1.9 1.3 1.2 1.2 1.9 1.9United Kingdom 3.4 1.8 2.0 2.7 2.9 3.1 1.3 4.3 2.8 1.6 2.6 1.4EU 24.8 2.5 2.1 2.3 2.5 3.0 0.3 2.2 2.5 1.8 1.9 1.7USA 2.3 1.8 2.3 2.7 2.7 3.3 0.2 1.7 2.2 1.5 1.2 1.4Japan 0.6 -0.3 -0.8 -0.2 -0.6 0.4 -2.1 -1.5 -0.5 0.5 -0.5 0.5

TABLE 16 : Harmonised index of consumer prices (national index if not available), (percentage change on preceding year, 1992-2012)5-year Spring 2011 Autumn 2010


Belgium 2.2 1.7 2.0 2.3 1.8 4.5 0.0 2.3 3.6 2.2 1.9 1.9Germany 3.1 1.2 1.6 1.8 2.3 2.8 0.2 1.2 2.6 2.0 1.8 2.0Estonia 120.7 6.1 3.3 4.4 6.7 10.6 0.2 2.7 4.7 2.8 3.6 2.3Ireland 2.2 3.0 3.2 2.7 2.9 3.1 -1.7 -1.6 1.0 0.7 0.4 0.6Greece 11.6 3.7 3.4 3.3 3.0 4.2 1.3 4.7 2.4 0.5 2.2 0.5Spain 4.7 2.4 3.3 3.6 2.8 4.1 -0.2 2.0 3.0 1.4 1.5 1.4France 2.0 1.2 2.1 1.9 1.6 3.2 0.1 1.7 2.2 1.7 1.6 1.6Italy 4.6 2.1 2.4 2.2 2.0 3.5 0.8 1.6 2.6 1.9 1.8 1.9Cyprus 4.3 2.7 2.6 2.2 2.2 4.4 0.2 2.6 3.4 2.3 3.3 2.5Luxembourg 1.8 1.9 2.9 3.0 2.7 4.1 0.0 2.8 3.5 2.3 2.1 1.6Malta 3.3 3.1 2.5 2.6 0.7 4.7 1.8 2.0 2.7 2.2 2.0 2.3Netherlands 2.5 2.6 2.1 1.7 1.6 2.2 1.0 0.9 2.2 2.1 1.5 1.6Austria 2.9 1.3 1.7 1.7 2.2 3.2 0.4 1.7 2.9 2.1 2.1 1.8Portugal 5.6 2.7 2.9 3.0 2.4 2.7 -0.9 1.4 3.4 2.0 2.3 1.3Slovenia : 8.0 4.3 2.5 3.8 5.5 0.9 2.1 2.6 2.1 2.0 2.2Slovakia : 8.5 5.3 4.3 1.9 3.9 0.9 0.7 3.6 2.9 3.2 2.8Finland 1.5 1.9 1.1 1.3 1.6 3.9 1.6 1.7 3.6 2.2 2.1 1.8Euro area 3.8 1.8 2.2 2.2 2.1 3.3 0.3 1.6 2.6 1.8 1.8 1.7Bulgaria 87.7 : 5.5 7.4 7.6 12.0 2.5 3.0 4.3 3.4 3.2 3.1Czech Republic : 5.6 1.5 2.1 3.0 6.3 0.6 1.2 2.3 2.5 2.1 2.2Denmark 1.9 2.1 1.8 1.9 1.7 3.6 1.1 2.2 2.5 1.8 2.1 2.0Latvia 70.3 3.9 4.9 6.6 10.1 15.3 3.3 -1.2 3.4 2.0 1.1 1.8Lithuania 179.8 3.9 1.4 3.8 5.8 11.1 4.2 1.2 3.2 2.4 2.3 2.8Hungary 23.2 12.3 4.8 4.0 7.9 6.0 4.0 4.7 4.0 3.5 3.9 3.7Poland 31.4 9.8 1.9 1.3 2.6 4.2 4.0 2.7 3.8 3.2 2.9 3.0Romania 116.9 63.2 12.9 6.6 4.9 7.9 5.6 6.1 6.7 4.0 5.5 3.2Sweden 2.4 1.5 1.5 1.5 1.7 3.3 1.9 1.9 1.7 1.6 1.4 1.9United Kingdom 2.8 1.3 1.7 2.3 2.3 3.6 2.2 3.3 4.1 2.4 2.6 1.4EU 25.9 4.3 2.3 2.3 2.4 3.7 1.0 2.1 3.0 2.0 2.1 1.8USA 2.9 2.5 2.6 3.2 2.8 3.8 -0.4 1.6 2.5 1.5 1.1 1.5Japan 0.7 0.1 -0.2 0.3 0.0 1.4 -1.4 -0.7 0.2 0.3 -0.7 0.0

211


TABLE 17 : Profiles of quarterly harmonised index of consumer prices (percentage change on corresponding quarter in previous year, 2010-2012) 2.5.2011

2010/1 2010/2 2010/3 2010/4 2011/1 2011/2 2011/3 2011/4 2012/1 2012/2 2012/3 2012/4Belgium 1.2 2.4 2.6 3.2 3.6 3.7 3.7 3.2 2.7 2.2 2.0 1.9Germany 0.8 1.0 1.2 1.6 2.2 2.8 3.0 2.5 2.2 1.8 1.9 2.0Estonia 0.0 2.9 3.1 5.0 5.2 5.2 4.8 3.6 3.6 2.7 2.4 2.6Ireland -2.4 -2.1 -1.2 -0.6 0.8 1.3 1.1 1.0 0.8 0.7 0.7 0.7Greece 3.0 5.1 5.6 5.1 4.6 2.7 1.2 1.0 0.8 0.6 0.6 -0.1Spain 1.2 1.6 1.9 2.5 3.2 3.4 2.9 2.6 1.4 1.3 1.5 1.6France 1.5 1.8 1.8 1.9 2.0 2.2 2.4 2.3 2.0 1.5 1.6 1.6Italy 1.3 1.6 1.7 2.0 2.3 2.8 2.6 2.5 2.2 1.8 1.7 1.7Cyprus 2.5 2.2 3.3 2.3 3.1 3.4 3.7 3.5 2.6 2.4 2.0 2.2Luxembourg 2.8 2.8 2.7 2.9 3.8 3.6 3.3 3.3 2.4 2.0 2.2 2.4Malta 0.9 1.5 2.6 3.2 2.8 2.5 3.1 2.3 2.2 2.3 2.3 2.1Netherlands 0.5 0.4 1.3 1.5 2.0 2.1 2.4 2.4 2.1 1.7 2.2 2.2Austria 1.3 1.8 1.7 2.0 3.0 3.0 2.9 2.6 2.3 2.0 2.0 1.9Portugal 0.3 1.0 2.0 2.3 3.6 3.7 3.3 3.2 1.9 1.8 2.0 2.2Slovenia 1.7 2.4 2.3 2.0 2.2 2.7 2.7 2.6 2.3 2.1 2.0 1.9Slovakia 0.0 0.7 1.0 1.1 3.5 3.7 3.7 3.6 2.8 2.9 3.0 2.9Finland 1.5 1.4 1.3 2.5 3.4 3.8 4.0 3.1 2.2 2.2 2.2 2.3Euro area 1.1 1.5 1.7 2.0 2.5 2.8 2.7 2.4 2.0 1.6 1.7 1.8Bulgaria 1.9 2.9 3.3 4.0 4.4 4.3 4.2 4.1 3.2 3.4 3.5 3.6Czech Republic 0.4 0.9 1.6 2.0 1.9 2.2 2.5 2.6 2.5 2.5 2.5 2.5Denmark 1.9 2.0 2.3 2.5 2.6 2.8 2.3 2.3 1.8 1.7 1.9 2.0Latvia -3.9 -2.3 -0.3 1.7 3.8 3.8 3.3 2.9 2.1 2.0 1.9 1.9Lithuania -0.4 0.6 1.8 2.9 3.2 3.4 3.2 3.0 2.6 2.4 2.4 2.4Hungary 5.8 5.2 3.6 4.3 4.3 4.1 3.9 3.8 3.8 3.6 3.4 3.3Poland 3.4 2.5 2.1 2.7 3.6 4.1 3.9 3.6 3.4 3.2 3.2 3.1Romania 4.6 4.3 7.5 7.8 7.5 8.3 5.7 5.3 4.7 3.7 3.9 3.7Sweden 2.7 1.8 1.3 1.8 1.3 1.8 2.0 1.5 1.5 1.5 1.6 1.7United Kingdom 3.2 3.4 3.0 3.3 4.1 4.5 4.1 3.8 2.4 2.4 2.4 2.4EU 1.6 1.9 2.0 2.3 2.8 3.1 3.0 2.7 2.2 1.9 1.9 1.9USA 2.4 1.8 1.2 1.2 2.2 2.8 2.6 2.3 1.4 1.3 1.6 1.8Japan -1.2 -0.9 -0.8 0.1 0.0 0.2 0.4 0.0 0.4 0.0 0.3 0.7

TABLE 18 : Price deflator of exports of goods in national currency (percentage change on preceding year, 1992-2012)5-year Spring 2011 Autumn 2010


Belgium -0.7 1.3 1.3 3.2 1.8 3.6 -6.5 5.6 3.5 2.0 1.5 2.0Germany 0.4 0.5 -0.1 1.3 0.4 0.3 -2.4 2.8 2.9 1.9 0.9 1.4Estonia : 4.5 1.6 4.8 8.1 5.3 -5.6 3.8 6.1 1.9 1.3 2.0Ireland 1.1 3.3 -2.6 0.2 -2.3 -3.4 0.3 0.2 2.0 1.3 0.7 1.7Greece 7.5 4.1 2.3 4.3 3.0 2.6 -1.1 6.7 0.5 1.2 1.1 1.2Spain 3.5 2.1 1.7 4.5 2.0 2.0 -5.0 3.3 3.5 1.5 1.7 1.8France -0.8 0.0 0.0 2.9 1.9 2.7 -4.1 1.5 3.9 2.7 1.5 1.6Italy 4.7 2.0 2.6 5.2 4.7 5.4 -1.9 5.9 5.7 2.5 2.0 2.0Cyprus : 3.7 0.6 6.8 2.7 1.6 0.3 1.6 3.3 2.5 3.3 2.7Luxembourg -0.2 0.5 2.4 4.1 2.7 6.1 -3.7 5.3 3.0 2.0 1.5 2.0Malta : 1.4 -0.1 9.5 8.2 -2.5 -7.7 1.9 2.4 1.7 1.4 2.1Netherlands -0.9 0.9 0.5 3.2 1.6 4.5 -8.3 6.8 4.2 1.7 1.4 1.7Austria 0.3 0.5 0.9 3.2 1.4 2.2 -1.9 3.3 1.8 1.7 1.4 1.6Portugal 1.2 1.8 0.9 4.8 1.3 2.2 -5.0 5.2 4.2 1.7 2.9 2.0Slovenia 39.9 5.3 2.8 2.8 2.1 0.7 -1.5 3.1 2.0 1.9 1.2 1.2Slovakia : 5.0 1.7 1.8 0.5 0.9 -5.4 3.0 3.6 1.7 1.3 1.5Finland 3.7 -1.6 -0.6 2.2 0.5 -3.0 -10.9 5.4 6.0 2.5 2.8 1.0Euro area 1.6 1.0 0.5 2.8 1.5 2.1 -4.0 3.8 3.6 2.0 1.4 1.6Bulgaria : : 4.8 17.0 5.9 8.1 -13.2 10.4 4.4 2.3 0.8 1.5Czech Republic : 2.0 -1.8 -1.5 -0.2 -5.8 -0.3 -1.1 -1.0 1.0 -1.8 1.6Denmark 0.2 1.3 1.7 4.4 2.2 7.1 -6.1 4.6 4.4 3.2 2.0 2.0Latvia : -0.2 8.8 9.7 13.4 7.7 -9.4 8.7 8.6 1.5 1.0 1.5Lithuania : 0.8 2.9 4.9 5.8 13.2 -16.7 12.8 7.7 2.9 0.3 2.0Hungary : 8.8 -0.3 6.5 -4.5 0.6 2.1 1.7 1.0 1.5 1.8 2.9Poland 21.1 6.5 3.8 2.5 2.8 -1.8 13.5 0.1 1.5 2.1 -0.2 1.2Romania 114.5 50.8 9.8 5.8 0.5 21.0 2.8 5.9 4.5 3.5 3.9 3.0Sweden 2.1 0.0 0.2 3.6 1.9 3.1 0.9 -0.8 -1.0 1.0 -1.0 1.0United Kingdom 3.1 -2.7 1.2 3.3 1.1 12.6 3.0 5.2 9.1 3.4 1.2 2.1EU : 7.1 0.7 2.9 1.4 3.0 -2.6 3.6 3.7 2.1 1.2 1.7USA -0.3 -1.3 2.3 3.3 3.4 4.9 -6.8 4.8 5.9 1.6 3.1 1.8Japan -2.6 -1.9 -0.3 3.7 2.2 -4.6 -11.5 -1.0 -2.5 -0.7 -2.5 -0.7

212

Statistical Annex

TABLE 19 : Price deflator of imports of goods in national currency (percentage change on preceding year, 1992-2012) 2.5.20115-year Spring 2011 Autumn 2010


Belgium -0.5 2.0 1.5 3.6 1.5 6.7 -9.6 7.8 4.8 2.1 1.4 2.1Germany -1.2 1.2 -0.2 3.1 -0.3 1.8 -8.0 5.9 5.2 1.8 1.0 1.7Estonia : 2.9 1.2 3.5 3.3 5.5 -3.0 5.2 6.5 2.1 1.2 2.2Ireland 3.7 1.4 -2.3 2.6 -0.3 2.7 -4.4 0.0 2.3 0.8 0.7 1.7Greece 7.2 4.3 2.4 3.9 2.2 6.0 -2.1 2.6 4.3 2.1 1.0 1.8Spain 2.9 2.1 1.1 3.9 1.9 4.3 -8.8 7.8 6.9 2.3 1.3 1.4France -1.0 0.2 0.0 3.1 0.4 4.0 -6.3 5.2 5.2 1.8 1.0 1.8Italy 5.0 2.1 3.3 8.9 3.1 8.5 -9.2 9.1 7.8 2.0 1.7 2.1Cyprus : 2.5 1.9 2.2 2.0 4.2 -2.3 2.3 3.5 2.5 2.0 2.5Luxembourg 0.4 1.9 1.5 2.1 -0.6 5.6 -2.9 6.6 4.0 2.5 2.5 2.5Malta : 2.5 1.8 10.7 7.5 3.3 -2.4 -1.1 2.8 1.3 0.1 1.4Netherlands -1.3 0.2 0.1 3.5 1.7 4.6 -7.5 7.5 4.2 1.5 1.4 1.7Austria 0.4 0.7 0.9 3.5 1.9 4.5 -3.9 4.9 3.7 2.2 1.6 1.9Portugal 0.1 1.6 0.9 4.0 1.0 5.5 -9.7 5.1 7.0 2.6 2.7 2.4Slovenia 36.0 5.5 3.1 3.3 1.6 2.5 -6.0 6.5 4.3 2.2 1.9 2.0Slovakia : 4.6 2.1 3.6 1.6 2.8 -4.8 5.4 5.5 1.9 1.0 1.5Finland 3.2 -1.0 1.9 6.5 0.5 0.4 -10.7 6.7 7.9 2.8 2.5 1.5Euro area 1.1 1.3 0.7 4.1 1.1 4.2 -7.6 6.4 5.5 1.9 1.3 1.8Bulgaria : : 4.0 11.4 7.3 10.8 -13.7 5.4 6.0 3.6 0.6 1.9Czech Republic : 1.9 -1.7 0.2 -1.4 -3.6 -3.2 1.4 0.6 1.0 -1.5 1.5Denmark -0.6 0.2 0.8 3.6 1.8 6.0 -9.5 1.8 4.5 2.9 2.1 2.2Latvia : 2.2 8.6 9.6 5.7 9.7 -6.7 7.5 8.0 1.5 0.9 1.5Lithuania : -1.5 1.6 8.8 4.9 9.3 -11.5 10.2 7.3 2.7 0.2 1.6Hungary : 9.3 0.6 8.0 -4.4 1.7 1.1 1.9 1.4 1.5 2.2 4.0Poland 19.3 7.7 3.5 2.8 0.8 0.3 8.7 1.8 3.0 1.7 0.8 1.8Romania 123.6 44.9 6.6 -1.2 -9.2 17.2 2.6 3.4 5.9 3.0 2.9 2.5Sweden 2.9 1.5 1.3 3.9 0.2 4.3 -1.1 -0.2 0.0 2.0 -1.0 2.0United Kingdom 3.4 -2.8 0.6 3.4 -0.2 13.2 2.7 5.4 8.8 1.8 2.4 1.9EU : 6.5 0.8 4.0 0.7 5.2 -5.5 5.7 5.4 1.9 1.3 1.9USA -0.2 -1.7 3.3 4.2 3.1 11.3 -12.3 7.0 9.7 1.2 4.5 1.7Japan -3.2 -0.8 4.2 12.6 6.8 7.6 -23.5 5.5 8.0 1.0 -2.0 0.0

TABLE 20 : Terms of trade of goods (percentage change on preceding year, 1992-2012)5-year Spring 2011 Autumn 2010


Belgium -0.1 -0.8 -0.2 -0.4 0.3 -2.9 3.5 -2.1 -1.2 -0.1 0.0 -0.1Germany 1.6 -0.7 0.1 -1.8 0.7 -1.5 6.1 -2.9 -2.2 0.0 -0.1 -0.3Estonia : 1.5 0.4 1.2 4.6 -0.2 -2.6 -1.3 -0.4 -0.2 0.1 -0.2Ireland -2.4 1.8 -0.3 -2.4 -2.0 -5.9 4.9 0.2 -0.3 0.5 0.0 0.0Greece 0.3 -0.1 -0.1 0.4 0.8 -3.3 1.0 4.0 -3.6 -0.9 0.1 -0.6Spain 0.6 0.0 0.5 0.6 0.1 -2.3 4.1 -4.2 -3.2 -0.8 0.4 0.4France 0.1 -0.2 0.0 -0.3 1.5 -1.2 2.3 -3.5 -1.3 0.9 0.5 -0.2Italy -0.3 -0.1 -0.7 -3.4 1.5 -2.9 8.0 -3.0 -1.9 0.5 0.3 -0.1Cyprus : 1.2 -1.3 4.5 0.6 -2.5 2.7 -0.7 -0.2 0.0 1.3 0.2Luxembourg -0.6 -1.4 0.8 2.0 3.3 0.5 -0.9 -1.3 -1.0 -0.5 -1.0 -0.5Malta : -1.1 -1.9 -1.0 0.6 -5.6 -5.4 3.0 -0.4 0.4 1.3 0.7Netherlands 0.4 0.7 0.4 -0.3 -0.1 -0.1 -0.8 -0.6 0.0 0.2 0.0 0.0Austria -0.1 -0.2 0.1 -0.3 -0.5 -2.1 2.1 -1.5 -1.8 -0.5 -0.2 -0.3Portugal 1.1 0.2 0.0 0.8 0.3 -3.1 5.1 0.2 -2.6 -0.9 0.2 -0.4Slovenia 2.9 -0.2 -0.3 -0.4 0.6 -1.8 4.7 -3.2 -2.2 -0.3 -0.7 -0.8Slovakia : 0.4 -0.3 -1.8 -1.1 -1.9 -0.7 -2.3 -1.8 -0.2 0.3 0.0Finland 0.5 -0.6 -2.5 -4.1 0.0 -3.3 -0.2 -1.3 -1.8 -0.3 0.3 -0.5Euro area 0.5 -0.3 -0.2 -1.3 0.4 -2.0 3.9 -2.5 -1.8 0.1 0.1 -0.2Bulgaria : : 0.8 5.1 -1.3 -2.5 0.6 4.7 -1.5 -1.3 0.2 -0.4Czech Republic : 0.1 -0.1 -1.7 1.2 -2.3 3.0 -2.5 -1.6 0.0 -0.3 0.1Denmark 0.8 1.0 0.9 0.7 0.5 1.0 3.8 2.7 -0.1 0.3 -0.1 -0.2Latvia : -2.3 0.2 0.0 7.2 -1.8 -2.9 1.1 0.6 0.0 0.1 0.0Lithuania : 2.3 1.2 -3.5 0.9 3.6 -5.9 2.4 0.4 0.2 0.1 0.4Hungary : -0.4 -0.9 -1.4 -0.1 -1.1 1.0 -0.2 -0.4 0.0 -0.4 -1.1Poland 1.5 -1.1 0.3 -0.3 2.0 -2.1 4.4 -1.7 -1.5 0.4 -1.0 -0.6Romania -4.1 4.0 3.0 7.2 10.6 3.2 0.1 2.4 -1.3 0.5 1.0 0.5Sweden -0.7 -1.5 -1.1 -0.3 1.7 -1.2 1.9 -0.6 -1.0 -1.0 0.0 -1.0United Kingdom -0.3 0.1 0.6 -0.1 1.3 -0.5 0.3 -0.1 0.3 1.6 -1.2 0.2EU : 0.6 -0.1 -1.0 0.8 -2.1 3.1 -2.0 -1.6 0.2 -0.1 -0.2USA -0.1 0.4 -1.0 -0.8 0.2 -5.8 6.3 -2.0 -3.5 0.4 -1.4 0.1Japan 0.6 -1.1 -4.3 -8.0 -4.3 -11.3 15.8 -6.2 -9.7 -1.7 -0.5 -0.7

213


TABLE 21 : Total population (percentage change on preceding year, 1992-2012) 2.5.20115-year Spring 2011 Autumn 2010


Belgium 0.3 0.2 0.5 0.7 0.7 0.8 0.8 0.8 0.7 0.7 0.7 0.7Germany 0.5 0.1 0.0 -0.1 -0.1 -0.2 -0.3 -0.2 -0.1 -0.1 -0.3 -0.3Estonia -2.0 -0.8 -0.3 -0.2 -0.2 -0.1 0.0 0.0 0.1 0.1 0.1 0.1Ireland 0.6 1.3 2.0 2.4 2.4 1.8 0.6 0.7 0.3 0.2 0.0 0.1Greece 0.9 0.4 0.4 0.4 0.4 0.4 0.4 0.2 0.2 0.2 0.2 0.2Spain 0.2 0.6 1.6 1.5 1.8 1.6 0.7 0.3 0.3 0.3 0.3 0.3France 0.4 0.5 0.7 0.7 0.6 0.6 0.6 0.6 0.5 0.5 0.5 0.5Italy 0.0 0.0 0.7 0.6 0.7 0.8 0.6 0.5 0.4 0.3 0.4 0.3Cyprus 2.1 1.2 1.9 2.0 1.5 1.2 0.9 0.5 0.7 0.7 0.7 0.7Luxembourg 1.3 1.3 1.4 1.6 1.6 1.7 1.9 1.9 1.4 1.3 1.4 1.3Malta 0.9 0.7 0.7 0.7 0.7 0.8 0.2 0.1 0.4 0.4 0.4 0.4Netherlands 0.6 0.7 0.4 0.1 0.2 0.4 0.5 0.5 0.3 0.3 0.3 0.3Austria 0.5 0.2 0.6 0.5 0.4 0.4 0.3 0.1 0.3 0.4 0.4 0.4Portugal 0.2 0.5 0.6 0.3 0.2 0.1 0.1 0.0 0.0 0.0 0.2 0.2Slovenia -0.1 0.0 0.2 0.4 0.5 0.3 1.0 0.3 0.2 0.2 0.2 0.2Slovakia 0.3 0.0 0.0 0.1 0.1 0.2 0.2 0.1 0.1 0.1 -0.2 -0.2Finland 0.4 0.2 0.3 0.4 0.4 0.5 0.5 0.5 0.5 0.5 0.5 0.5Euro area 0.3 0.3 0.6 0.5 0.6 0.5 0.4 0.3 0.3 0.2 0.2 0.2Bulgaria -0.6 -1.1 -0.6 -0.5 -0.5 -0.4 -0.5 -0.5 -0.5 -0.5 -0.5 -0.5Czech Republic 0.0 -0.2 0.1 0.3 0.5 1.0 0.7 0.3 0.0 -0.1 0.1 -0.2Denmark 0.4 0.4 0.3 0.3 0.4 0.6 0.5 0.3 0.3 0.3 0.3 0.3Latvia -1.5 -0.8 -0.6 -0.5 -0.5 -0.4 -0.5 -0.7 -0.7 -0.7 -0.5 -0.5Lithuania -0.6 -0.7 -0.5 -0.6 -0.5 -0.5 -0.6 -1.6 -1.2 -0.8 -0.5 -0.5Hungary -0.1 -0.2 -0.2 -0.2 -0.2 -0.2 -0.2 -0.2 -0.2 -0.3 -0.1 -0.1Poland 0.2 0.0 -0.1 -0.1 0.0 0.0 0.1 0.1 0.1 0.0 0.0 0.0Romania -0.3 -0.2 -0.7 -0.2 -0.2 -0.2 -0.2 -0.2 -0.2 -0.2 -0.2 -0.2Sweden 0.5 0.1 0.4 0.6 0.7 0.8 0.9 1.7 0.3 0.3 0.0 0.0United Kingdom 0.3 0.3 0.5 0.6 0.7 0.7 0.6 0.7 0.7 0.7 0.7 0.7EU 0.2 0.2 0.4 0.4 0.5 0.5 0.3 0.3 0.2 0.2 0.2 0.2USA 1.2 1.1 0.9 1.0 1.0 0.9 0.9 0.9 0.8 0.8 0.8 0.8Japan 0.3 0.2 0.1 0.0 0.0 -0.1 -0.1 -0.1 -0.1 -0.1 -0.1 -0.1

TABLE 22 : Total employment (percentage change on preceding year, 1992-2012)5-year Spring 2011 Autumn 2010


Belgium 0.1 1.4 0.7 1.2 1.6 1.7 -0.4 0.7 0.8 0.7 0.3 0.6Germany -0.6 1.0 -0.1 0.6 1.7 1.4 0.0 0.5 0.9 0.5 0.7 0.4Estonia -5.2 -1.4 2.0 5.4 0.8 0.2 -9.9 -4.8 4.2 1.3 2.9 1.9Ireland 2.5 5.6 3.2 4.3 3.7 -1.1 -8.2 -4.1 -1.5 0.4 -0.8 0.6Greece 0.9 0.7 2.0 3.3 1.7 0.2 -0.7 -2.1 -2.6 0.1 -2.6 0.1Spain -0.3 4.1 2.8 3.3 2.8 -0.5 -6.6 -2.4 -0.6 0.9 -0.3 1.1France -0.5 1.7 0.5 1.0 1.6 0.7 -1.2 0.1 0.8 0.9 0.5 0.7Italy -0.9 1.1 0.8 1.5 1.0 -0.4 -2.6 -0.7 0.4 0.9 0.4 0.9Cyprus : 1.6 3.0 1.8 3.2 2.8 -0.7 -0.3 0.2 0.8 0.2 0.8Luxembourg 2.5 4.7 2.7 3.6 4.5 4.7 0.9 1.6 2.1 2.3 2.0 2.1Malta 1.5 0.8 0.7 1.3 3.2 2.6 -0.3 2.2 1.3 1.4 1.2 1.4Netherlands 1.0 2.4 -0.2 1.6 2.2 1.2 -1.2 -0.6 0.5 0.7 0.2 0.3Austria 0.0 0.8 0.6 1.0 1.5 1.6 -1.6 1.0 0.8 0.7 0.7 0.8Portugal -0.8 2.1 0.0 0.5 0.0 0.5 -2.5 -1.5 -1.5 -0.9 -0.7 -0.3Slovenia : 0.2 0.5 1.5 3.0 2.8 -1.9 -2.2 -1.3 0.3 -0.2 0.6Slovakia : -1.1 0.9 2.1 2.1 2.9 -2.5 -1.4 0.6 0.9 0.3 0.8Finland -2.3 2.2 0.9 1.8 2.2 1.6 -2.7 -0.4 0.9 0.7 0.9 0.9Euro area -0.4 1.6 0.7 1.5 1.7 0.6 -2.0 -0.5 0.4 0.7 0.3 0.6Bulgaria : -2.3 2.4 3.3 3.2 2.6 -2.6 -5.9 0.5 1.0 0.7 1.1Czech Republic : -0.9 0.5 1.9 2.7 1.2 -1.2 -0.8 0.0 0.0 0.2 0.3Denmark 0.1 1.0 0.3 2.1 2.8 1.9 -3.1 -2.1 0.2 0.4 0.3 0.3Latvia -7.4 0.0 2.5 4.9 3.6 0.9 -13.2 -4.8 1.5 1.7 0.5 0.6Lithuania -2.7 -2.1 2.0 1.8 2.8 -0.7 -6.8 -5.1 2.1 2.8 1.1 2.1Hungary : 1.0 -0.2 0.6 -0.3 -1.3 -2.8 0.2 0.4 3.0 0.1 0.8Poland : -1.1 0.5 3.2 4.4 3.8 0.3 0.4 1.1 1.0 1.3 1.4Romania -2.8 -2.5 -2.6 0.7 0.4 0.0 -1.8 -1.8 0.1 0.6 0.1 0.6Sweden -1.9 1.4 0.1 1.7 2.3 0.9 -2.0 1.1 1.9 1.1 0.9 0.8United Kingdom 0.0 1.2 0.9 0.9 0.7 0.7 -1.6 0.2 0.4 0.5 0.4 0.5EU : 1.0 0.6 1.5 1.7 0.9 -1.9 -0.5 0.4 0.7 0.4 0.7USA 1.8 1.7 0.7 1.8 0.9 -0.7 -5.0 -0.6 0.8 1.3 0.8 1.1Japan 0.4 -0.6 -0.2 0.4 0.4 -0.3 -1.6 -0.6 -0.2 0.1 -0.2 0.1

Note : See note 6 on concepts and sources where countries using full time equivalents are listed.

214

Statistical Annex

TABLE 23 : Unemployment rate (number of unemployed as a percentage of total labour force, 1992-2012) ¹ 2.5.20115-year Spring 2011 Autumn 2010


Belgium 8.9 8.1 8.2 8.3 7.5 7.0 7.9 8.3 7.9 7.8 8.8 8.7Germany 7.8 8.4 9.8 10.3 8.7 7.5 7.8 7.1 6.4 6.0 6.7 6.3Estonia : 11.3 8.8 5.9 4.7 5.5 13.8 16.9 13.0 11.5 15.1 13.6Ireland 13.9 6.2 4.5 4.5 4.6 6.3 11.9 13.7 14.6 14.0 13.5 12.7Greece 8.8 10.9 9.9 8.9 8.3 7.7 9.5 12.6 15.2 15.3 15.0 15.2Spain 17.8 13.1 10.1 8.5 8.3 11.3 18.0 20.1 20.6 20.2 20.2 19.2France 11.0 10.0 9.1 9.2 8.4 7.8 9.5 9.7 9.5 9.2 9.5 9.2Italy 10.3 10.5 7.9 6.8 6.1 6.7 7.8 8.4 8.4 8.2 8.3 8.2Cyprus : 3.8 4.5 4.6 4.0 3.6 5.3 6.5 6.3 5.6 6.6 5.9Luxembourg 2.7 2.4 4.1 4.6 4.2 4.9 5.1 4.5 4.4 4.2 5.6 5.6Malta 5.2 6.8 7.4 7.1 6.4 5.9 7.0 6.8 6.8 6.7 6.6 6.5Netherlands 6.0 3.8 4.4 4.4 3.6 3.1 3.7 4.5 4.2 4.0 4.4 4.3Austria 3.9 4.0 4.7 4.8 4.4 3.8 4.8 4.4 4.3 4.2 4.2 4.0Portugal 6.2 4.9 6.7 7.8 8.1 7.7 9.6 11.0 12.3 13.0 11.1 11.2Slovenia : 6.9 6.4 6.0 4.9 4.4 5.9 7.3 8.2 8.0 7.2 6.6Slovakia : 15.8 16.8 13.4 11.1 9.5 12.0 14.4 14.0 13.3 14.2 13.4Finland 14.9 10.6 8.6 7.7 6.9 6.4 8.2 8.4 7.9 7.4 7.8 7.2Euro area 10.1 9.3 8.8 8.5 7.6 7.6 9.6 10.1 10.0 9.7 10.0 9.6Bulgaria : 15.7 12.6 9.0 6.9 5.6 6.8 10.2 9.4 8.5 9.1 8.0Czech Republic : 7.3 7.7 7.2 5.3 4.4 6.7 7.3 6.8 6.4 7.0 6.7Denmark 7.8 4.8 4.8 3.9 3.8 3.3 6.0 7.4 7.1 6.7 6.3 5.8Latvia 13.8 14.0 9.8 6.8 6.0 7.5 17.1 18.7 17.2 15.8 17.7 16.2Lithuania 5.0 13.3 10.3 5.6 4.3 5.8 13.7 17.8 15.5 12.7 16.9 15.1Hungary : 7.3 6.5 7.5 7.4 7.8 10.0 11.2 11.0 9.3 11.0 10.3Poland 13.4 13.8 18.1 13.9 9.6 7.1 8.2 9.6 9.3 8.8 9.2 8.5Romania 5.8 6.4 7.6 7.3 6.4 5.8 6.9 7.3 7.2 6.8 7.4 7.0Sweden 8.5 7.2 7.0 7.1 6.1 6.2 8.3 8.4 7.6 7.2 8.0 7.5United Kingdom 9.1 5.8 5.0 5.4 5.3 5.6 7.6 7.8 8.0 7.8 7.9 7.8EU : 8.8 8.8 8.2 7.2 7.1 9.0 9.6 9.5 9.1 9.5 9.1USA 6.3 4.5 5.4 4.6 4.6 5.8 9.3 9.6 8.7 8.1 9.4 9.0Japan 2.8 4.4 4.8 4.1 3.9 4.0 5.1 5.1 4.9 4.8 4.9 4.8¹ Series following Eurostat definition, based on the labour force survey.

TABLE 24 : Compensation of employees per head (percentage change on preceding year, 1992-2012)5-year Spring 2011 Autumn 2010


Belgium 3.4 2.8 2.5 3.3 3.4 3.6 1.8 1.1 3.1 3.6 2.3 2.3Germany 4.4 1.2 0.9 1.1 0.9 2.0 0.2 2.2 2.7 2.9 2.6 2.8Estonia : 13.2 11.6 14.1 24.6 10.1 -3.3 -0.2 4.4 4.0 2.2 3.5Ireland 4.5 5.9 5.4 4.7 5.4 3.4 0.0 -1.9 -0.3 0.7 0.5 0.1Greece 10.8 7.0 6.1 3.6 6.1 7.0 3.6 -3.5 -1.0 0.1 -0.2 0.1Spain 6.0 2.5 3.5 4.0 4.8 6.4 4.1 0.7 0.9 1.2 0.7 1.3France 2.8 2.1 3.1 3.2 2.3 2.4 1.6 2.3 2.0 2.3 1.7 1.8Italy 4.8 2.1 3.1 2.7 2.4 3.8 1.5 2.0 1.5 1.8 1.5 1.8Cyprus : 4.6 3.8 3.0 3.0 2.3 3.2 2.8 3.8 3.2 3.1 3.2Luxembourg 3.9 3.2 2.9 2.6 3.7 2.1 1.8 1.6 2.0 4.6 2.0 2.5Malta 7.8 4.5 3.4 3.6 1.5 4.9 2.9 -1.7 2.0 3.0 2.0 3.0Netherlands 2.9 4.1 3.4 2.4 3.4 3.6 2.2 1.1 2.9 2.5 2.3 2.1Austria 3.9 1.9 2.3 3.4 3.0 3.2 2.3 1.6 2.5 2.7 2.2 2.1Portugal 9.4 5.4 3.2 1.8 3.6 3.0 3.3 1.5 -0.3 0.1 -1.3 0.7Slovenia : 10.4 7.1 5.3 6.4 7.0 1.6 4.1 2.4 3.6 2.8 3.3Slovakia : 10.3 8.5 7.9 8.4 6.9 5.0 2.7 3.9 5.1 3.7 4.5Finland 2.5 3.3 2.9 2.9 3.7 5.1 1.7 2.0 2.8 3.4 2.7 2.8Euro area 4.4 2.2 2.5 2.5 2.6 3.3 1.7 1.7 2.1 2.3 1.8 2.1Bulgaria : 83.1 6.4 6.3 12.7 16.3 9.4 7.2 7.1 6.8 5.7 5.5Czech Republic : 7.9 6.5 5.9 6.3 6.3 0.4 2.9 2.5 4.1 2.9 4.7Denmark 3.2 3.8 3.6 3.5 3.6 3.6 2.4 2.7 1.7 2.4 3.1 3.1Latvia : 7.7 15.0 23.2 35.1 15.7 -12.2 -6.5 1.5 1.5 0.7 1.8Lithuania : 9.1 10.5 16.7 13.9 14.3 -11.1 -1.3 3.4 5.8 1.2 4.4Hungary : 14.7 9.4 5.3 6.7 7.0 -2.2 -0.2 2.6 2.0 3.1 4.8Poland 37.8 13.8 1.9 1.8 4.9 8.9 2.9 4.7 5.9 6.3 4.0 5.9Romania 118.0 71.2 19.7 12.4 22.0 31.9 -6.6 1.3 2.2 6.0 3.3 4.2Sweden 4.8 4.0 3.0 2.1 5.2 1.5 1.3 2.7 2.8 3.3 2.6 3.0United Kingdom 3.6 5.1 4.0 4.9 5.0 1.5 2.5 3.2 2.8 4.0 2.8 4.0EU : 4.0 2.8 2.8 3.2 3.2 1.6 2.1 2.3 2.7 2.1 2.5USA 3.0 4.4 3.9 3.9 3.9 3.1 2.2 2.9 2.4 1.4 1.0 0.5Japan 1.2 0.0 -0.8 0.4 -1.3 0.0 -3.1 0.8 1.1 1.2 1.1 1.2


215


TABLE 25 : Real compensation of employees per head ¹ (percentage change on preceding year, 1992-2012) 2.5.20115-year Spring 2011 Autumn 2010


Belgium 1.6 1.1 0.3 0.3 0.6 0.4 2.3 -1.3 -0.2 1.5 0.4 0.5Germany 1.9 0.3 -0.4 0.0 -0.9 0.2 0.2 0.2 0.5 1.2 0.9 1.1Estonia : 6.6 8.2 8.7 15.9 1.4 -2.4 -2.3 0.8 1.5 -1.1 1.1Ireland 1.9 2.0 2.3 2.2 2.0 0.3 4.7 1.6 -1.3 0.0 0.1 -0.7Greece -0.7 2.4 2.8 0.2 2.7 3.0 2.5 -7.9 -3.5 -0.5 -2.3 -0.2Spain 1.0 -0.3 0.2 0.4 1.5 2.7 4.0 -2.0 -1.7 -0.3 -0.8 -0.2France 1.1 1.2 1.4 1.1 0.2 -0.5 2.0 1.1 -0.1 0.6 0.2 0.3Italy -0.3 -0.2 0.5 0.0 0.1 0.6 1.5 0.5 -1.0 -0.1 -0.3 -0.1Cyprus : 2.1 1.3 0.8 -0.7 -2.6 3.1 0.3 0.5 1.0 -0.4 0.4Luxembourg 1.0 0.9 0.8 0.2 1.5 0.1 1.1 -0.3 -1.0 2.5 -0.1 0.8Malta : 2.5 1.5 1.4 -0.2 1.3 1.1 -4.5 -0.6 0.8 -0.1 0.7Netherlands 0.5 1.2 1.3 0.3 1.6 2.2 2.8 -0.5 0.9 0.5 0.6 0.3Austria 1.4 0.6 0.5 1.3 0.3 0.7 3.1 -0.1 -0.3 0.7 0.1 0.4Portugal 3.6 2.4 0.4 -1.2 0.6 0.5 5.9 -0.1 -3.6 -1.9 -3.5 -0.5Slovenia : 2.8 2.9 3.0 2.2 1.5 1.6 1.2 -0.2 1.5 0.8 1.1Slovakia : 2.7 3.5 2.9 5.7 2.3 4.9 1.8 0.3 2.4 0.5 1.8Finland 0.6 0.9 2.1 1.4 1.4 1.6 1.2 0.9 -0.5 0.9 0.3 0.8Euro area 1.1 0.5 0.4 0.3 0.3 0.6 1.9 0.0 -0.3 0.6 0.2 0.4Bulgaria : 7.7 2.8 4.0 3.4 8.6 7.8 6.1 3.2 3.7 3.3 3.0Czech Republic : 2.4 5.2 4.4 3.3 1.3 0.0 1.6 0.3 1.8 0.9 2.7Denmark 1.5 1.7 2.0 1.5 2.3 0.6 1.0 0.1 -0.8 0.4 0.4 0.5Latvia : 3.4 9.2 16.3 22.7 -0.9 -15.7 -6.2 -1.7 -0.3 -0.4 0.4Lithuania : 6.2 9.6 12.1 7.0 3.1 -14.9 -2.7 0.2 3.3 -0.8 1.9Hungary : 2.4 5.3 1.7 0.4 1.5 -6.0 -4.9 -1.3 -1.4 -0.7 1.6Poland 4.7 4.4 -0.1 0.6 2.4 4.4 0.4 2.0 2.0 3.0 1.1 2.8Romania 0.0 10.0 6.9 7.2 16.5 19.9 -10.1 -3.4 -4.2 1.7 -2.1 0.1Sweden 1.7 2.7 1.8 0.8 3.8 -1.5 -0.6 1.3 1.6 2.0 0.7 1.1United Kingdom 0.2 3.2 1.9 2.1 2.1 -1.6 1.2 -1.1 -0.1 2.4 0.2 2.6EU : 1.4 0.7 0.5 0.7 0.2 1.3 -0.1 -0.3 0.9 0.1 0.8USA 0.7 2.6 1.5 1.2 1.1 -0.2 2.1 1.2 0.2 -0.1 -0.2 -0.8Japan 0.6 0.3 0.0 0.6 -0.7 -0.4 -1.0 2.3 1.6 0.7 1.6 0.7¹ Deflated by the price deflator of private consumption.


TABLE 26 : Labour productivity (real GDP per occupied person) (percentage change on preceding year, 1992-2012)5-year Spring 2011 Autumn 2010


Belgium 1.4 1.3 1.3 1.5 1.3 -0.7 -2.4 1.5 1.6 1.5 1.5 1.3Germany 2.0 1.1 1.1 2.7 1.0 -0.4 -4.7 3.1 1.6 1.4 1.5 1.6Estonia : 8.6 6.4 4.9 6.1 -5.2 -4.4 8.3 0.6 2.7 1.5 1.6Ireland 3.3 3.4 2.1 0.9 1.9 -2.4 0.6 3.2 2.2 1.5 1.7 1.3Greece 0.2 3.1 2.2 1.8 2.5 0.8 -1.3 -2.4 -0.9 1.0 -0.3 1.0Spain 1.8 0.2 0.5 0.7 0.7 1.4 3.1 2.3 1.4 0.6 1.0 0.6France 1.6 1.2 1.2 1.2 0.8 -0.5 -1.4 1.5 0.9 1.2 1.2 1.1Italy 2.2 0.9 0.1 0.5 0.5 -0.9 -2.6 2.0 0.6 0.5 0.8 0.6Cyprus : 2.6 0.2 2.3 1.8 0.8 -1.0 1.3 1.3 1.5 1.2 1.3Luxembourg 0.1 1.5 1.3 1.4 2.1 -3.2 -4.5 1.9 1.3 1.5 0.8 1.1Malta 3.5 2.6 1.3 0.8 1.2 2.6 -3.1 1.4 0.7 0.7 0.8 0.8Netherlands 1.4 1.4 1.8 1.7 1.7 0.6 -2.8 2.4 1.4 1.0 1.3 1.4Austria 1.8 1.8 1.6 2.6 2.2 0.5 -2.3 1.0 1.6 1.3 1.0 1.3Portugal 2.8 1.7 0.7 0.9 2.4 -0.5 0.0 2.9 -0.8 -0.8 -0.3 1.1Slovenia : 4.0 3.7 4.3 3.8 0.9 -6.4 3.4 3.3 2.1 2.1 2.0Slovakia : 3.9 4.9 6.3 8.3 2.8 -2.3 5.5 2.9 3.5 2.6 3.1Finland 3.7 2.3 2.1 2.5 3.1 -0.6 -5.6 3.5 2.7 1.9 1.9 1.3Euro area 1.9 1.3 1.1 1.6 1.2 -0.1 -2.1 2.2 1.2 1.0 1.1 1.2Bulgaria : 4.9 3.5 3.1 3.2 3.5 -2.9 6.4 2.3 2.7 1.9 2.6Czech Republic : 2.1 4.1 4.8 3.4 1.2 -3.0 3.1 2.0 2.9 2.2 2.8Denmark 2.5 1.4 1.5 1.3 -1.1 -2.9 -2.2 4.2 1.6 1.0 1.6 1.5Latvia -1.5 6.2 6.3 7.0 6.2 -5.1 -5.5 4.6 1.8 2.3 2.9 3.4Lithuania -5.8 6.9 5.9 5.9 6.9 3.6 -8.5 6.8 2.8 1.9 1.7 1.1Hungary : 3.3 4.1 3.0 1.1 2.1 -4.0 1.0 2.3 -0.3 2.7 2.3Poland : 5.5 3.6 2.9 2.3 1.3 1.3 3.4 2.9 2.7 2.6 2.8Romania 4.1 2.6 9.0 7.1 5.9 7.3 -5.4 0.5 1.3 3.0 1.4 3.2Sweden 3.2 2.0 3.2 2.6 1.0 -1.5 -3.4 4.4 2.2 1.4 2.4 1.4United Kingdom 2.5 2.1 1.6 1.9 2.0 -0.8 -3.4 1.0 1.3 1.6 1.8 2.0EU : 2.0 2.0 2.2 1.7 0.3 -2.3 2.3 1.4 1.4 1.4 1.6USA 1.5 2.1 2.1 0.9 1.0 0.7 2.5 3.5 1.7 1.3 1.4 1.3Japan 0.9 1.1 1.9 1.6 2.0 -0.8 -4.7 4.6 0.7 1.5 1.5 1.6


216

Statistical Annex

TABLE 27 : Unit labour costs, whole economy ¹ (percentage change on preceding year, 1992-2012) 2.5.20115-year Spring 2011 Autumn 2010


Belgium 2.0 1.5 1.2 1.8 2.1 4.4 4.3 -0.4 1.5 2.0 0.7 1.0Germany 2.4 0.2 -0.3 -1.6 -0.1 2.4 5.2 -0.9 1.0 1.4 1.0 1.2Estonia : 4.3 4.8 8.7 17.4 16.2 1.2 -7.9 3.8 1.3 0.7 1.9Ireland 1.2 2.4 3.3 3.7 3.4 5.9 -0.6 -4.9 -2.5 -0.9 -1.3 -1.2Greece 10.6 3.7 3.8 1.8 3.6 6.2 5.0 -1.1 -0.1 -0.9 0.1 -0.9Spain 4.1 2.3 3.0 3.3 4.0 4.9 1.0 -1.5 -0.4 0.6 -0.3 0.6France 1.1 0.8 1.9 2.0 1.5 2.9 3.0 0.8 1.1 1.1 0.5 0.7Italy 2.6 1.2 3.0 2.2 1.9 4.8 4.3 0.0 0.9 1.3 0.7 1.2Cyprus : 1.9 3.5 0.6 1.1 1.5 4.3 1.5 2.5 1.7 1.8 1.8Luxembourg 3.8 1.7 1.6 1.2 1.6 5.4 6.7 -0.3 0.7 3.0 1.2 1.4Malta 4.2 1.9 2.1 2.8 0.3 2.3 6.1 -3.1 1.3 2.3 1.2 2.1Netherlands 1.5 2.7 1.6 0.7 1.7 3.0 5.1 -1.2 1.4 1.6 1.0 0.7Austria 2.0 0.1 0.6 0.8 0.8 2.7 4.8 0.6 1.0 1.4 1.2 0.8Portugal 6.5 3.6 2.5 0.9 1.2 3.5 3.3 -1.4 0.5 0.9 -1.1 -0.4Slovenia : 6.2 3.2 1.0 2.6 5.9 8.5 0.6 -0.8 1.4 0.7 1.3Slovakia : 6.2 3.4 1.5 0.2 4.0 7.5 -2.7 0.9 1.6 1.0 1.4Finland -1.2 1.0 0.8 0.3 0.5 5.8 7.8 -1.5 0.1 1.5 0.7 1.5Euro area 2.4 1.1 1.6 1.0 1.5 3.6 4.0 -0.5 0.8 1.2 0.6 0.9Bulgaria : 74.5 2.8 3.1 9.3 12.5 12.7 0.8 4.6 4.0 3.7 2.8Czech Republic : 5.7 2.4 1.1 2.9 5.1 3.5 -0.2 0.5 1.2 0.7 1.8Denmark 0.6 2.3 2.1 2.2 4.8 6.8 4.7 -1.5 0.1 1.3 1.4 1.5Latvia : 1.3 8.2 15.2 27.2 22.0 -7.0 -10.6 -0.3 -0.8 -2.1 -1.5Lithuania : 2.1 4.4 10.1 6.5 10.4 -2.8 -7.6 0.5 3.9 -0.4 3.3Hungary : 11.0 5.0 2.3 5.6 4.8 1.9 -1.1 0.3 2.3 0.4 2.4Poland : 7.9 -1.7 -1.1 2.6 7.5 1.6 1.3 2.9 3.6 1.3 3.0Romania 109.4 66.8 9.8 4.9 15.2 22.9 -1.3 0.8 0.8 2.9 1.9 1.0Sweden 1.6 2.0 -0.1 -0.5 4.2 3.1 4.8 -1.6 0.6 1.8 0.2 1.6United Kingdom 1.1 2.9 2.4 2.9 3.0 2.3 6.1 2.1 1.5 2.4 1.0 2.0EU : 2.1 1.7 1.4 2.1 3.8 4.1 -0.2 0.9 1.5 0.7 1.2USA 1.5 2.3 1.8 3.0 2.9 2.4 -0.2 -0.5 0.6 0.1 -0.3 -0.8Japan 0.3 -1.1 -2.6 -1.2 -3.2 0.9 1.7 -3.6 0.3 -0.4 -0.4 -0.4¹ Compensation of employees per head divided by labour productivity per head, defined as GDP in volume divided by total employment.


TABLE 28 : Real unit labour costs ¹ (percentage change on preceding year, 1992-2012)5-year Spring 2011 Autumn 2010


Belgium -0.2 0.1 -0.9 -0.5 -0.2 2.4 3.2 -2.2 -0.4 0.0 -1.2 -0.9Germany -0.3 -0.2 -1.2 -2.0 -1.9 1.3 3.7 -1.5 0.0 -0.1 -0.2 -0.1Estonia : -2.0 -0.1 0.4 6.2 8.4 1.2 -9.2 1.4 -0.9 -1.9 -0.3Ireland -1.7 -2.6 0.1 0.0 2.3 7.5 3.6 -2.4 -3.1 -1.8 -1.6 -1.9Greece -0.8 -0.5 0.6 -1.3 0.5 2.8 3.7 -3.5 -0.4 -1.3 -1.4 -1.3Spain -0.6 -0.7 -1.2 -0.8 0.7 2.4 0.4 -2.5 -1.5 -0.5 -1.3 -0.8France -0.4 -0.2 -0.1 -0.3 -1.0 0.3 2.5 0.3 -0.7 -0.8 -1.1 -0.8Italy -1.6 -1.2 0.4 0.3 -0.7 2.0 2.0 -0.6 -0.7 -0.5 -0.9 -0.6Cyprus : -1.1 0.6 -2.3 -3.4 -3.4 4.6 -0.5 -0.6 -0.4 -1.3 -0.7Luxembourg 0.1 0.7 -2.5 -5.1 -2.0 1.1 7.0 -5.5 -2.5 0.3 -1.3 -0.9Malta 1.2 -0.2 -0.5 -0.2 -2.8 -0.4 3.5 -5.9 -1.3 0.0 -1.4 -0.4Netherlands -0.4 -0.4 -0.6 -1.1 -0.1 0.6 5.3 -2.8 -0.4 -0.6 -0.5 -0.9Austria -0.3 -0.6 -1.0 -1.0 -1.2 0.8 3.9 -0.9 -0.8 -0.3 -0.4 -0.5Portugal 0.6 0.0 -0.4 -1.8 -2.0 1.9 2.7 -2.3 -0.6 -0.3 -2.3 -1.4Slovenia : -1.0 -0.8 -1.0 -1.5 1.8 5.1 -0.1 -1.8 -0.4 -0.6 -0.2Slovakia : -0.3 -0.6 -1.4 -0.9 1.1 8.8 -3.1 -0.6 -0.8 -1.7 -1.1Finland -2.8 -1.3 0.3 -0.5 -2.4 3.9 6.8 -3.5 -2.4 -1.0 -1.8 -0.6Euro area -0.7 -0.6 -0.6 -0.9 -0.9 1.5 2.9 -1.3 -0.6 -0.4 -0.8 -0.6Bulgaria : 1.2 -2.2 -3.5 0.1 3.7 8.1 -2.1 1.5 1.5 1.1 0.3Czech Republic : 0.0 0.5 0.0 -0.5 3.2 1.0 0.9 0.3 -0.7 -0.6 -0.1Denmark -0.8 0.3 -0.2 0.1 2.4 2.8 4.3 -4.6 -1.6 -0.7 -0.9 -0.7Latvia : -2.8 1.3 4.9 5.8 6.6 -5.6 -8.5 -2.4 -2.3 -2.7 -2.5Lithuania : -0.7 1.4 3.4 -1.8 0.5 0.9 -9.4 -2.7 1.0 -2.2 0.8Hungary : -0.7 -0.1 -1.9 -0.3 0.0 -2.4 -3.9 -2.2 -0.2 -2.3 0.2Poland : -0.4 -3.8 -2.5 -1.3 4.3 -2.0 0.0 -0.3 0.3 -1.4 0.2Romania -2.5 4.6 -6.0 -5.1 1.5 6.6 -5.2 -3.5 -3.5 -1.2 -2.6 -4.0Sweden -0.6 0.6 -1.4 -2.4 1.4 -0.1 2.9 -2.8 -0.3 0.8 -1.7 0.0United Kingdom -1.7 0.8 -0.4 -0.1 0.0 -0.7 4.6 -0.8 -0.5 0.3 -1.1 0.5EU : -0.3 -0.9 -1.1 -0.7 1.1 2.8 -1.4 -0.6 -0.3 -0.9 -0.4USA -0.6 0.5 -0.8 -0.2 -0.1 0.2 -1.1 -1.5 -0.7 -1.3 -1.1 -2.0Japan 0.1 -0.3 -1.4 -0.3 -2.5 1.9 2.1 -1.5 2.3 -0.6 -0.6 0.1¹ Nominal unit labour costs divided by GDP price deflator.


217


TABLE 29 : Nominal bilateral exchange rates against Ecu/euro (1992-2012) 2.5.20115-year Spring 2011 Autumn 2010


Belgium 39.91 40.43 : : : : : : : : : :Germany 1.93 1.96 : : : : : : : : : :Estonia 15.36 15.68 15.65 15.65 15.65 15.65 15.65 15.65 : : : :Ireland 0.79 0.78 : : : : : : : : : :Greece 282.43 328.65 : : : : : : : : : :Spain 152.86 166.45 : : : : : : : : : :France 6.62 6.58 : : : : : : : : : :Italy 1888.18 1936.35 : : : : : : : : : :Cyprus 0.59 0.58 0.58 0.58 0.58 : : : : : : :Luxembourg 39.91 40.43 : : : : : : : : : :Malta 0.45 0.42 0.42 0.43 0.43 : : : : : : :Netherlands 2.17 2.21 : : : : : : : : : :Austria 13.60 13.79 : : : : : : : : : :Portugal 190.37 200.35 : : : : : : : : : :Slovenia 143.42 197.20 235.62 239.60 : : : : : : : :Slovakia : 41.54 40.01 37.23 33.77 31.24 : : : : : :Finland 6.05 5.94 : : : : : : : : : :Euro area : : : : : : : : : : : :Bulgaria 0.09 1.95 1.95 1.96 1.96 1.96 1.96 1.96 1.96 1.96 1.96 1.96Czech Republic 34.86 35.71 30.53 28.34 27.77 24.95 26.43 25.28 24.24 24.19 24.56 24.56Denmark 7.53 7.46 7.44 7.46 7.45 7.46 7.45 7.45 7.46 7.46 7.45 7.45Latvia 0.75 0.61 0.66 0.70 0.70 0.70 0.71 0.71 0.71 0.71 0.71 0.71Lithuania 4.45 4.11 3.45 3.45 3.45 3.45 3.45 3.45 3.45 3.45 3.45 3.45Hungary 152.74 244.33 252.11 264.26 251.35 251.51 280.33 275.48 267.32 265.67 273.43 273.43Poland 2.88 3.91 4.14 3.90 3.78 3.51 4.33 3.99 3.95 3.95 3.93 3.93Romania 0.20 1.61 3.62 3.53 3.34 3.68 4.24 4.21 4.12 4.09 4.29 4.29Sweden 8.73 8.81 9.19 9.25 9.25 9.62 10.62 9.54 8.93 8.95 9.30 9.30United Kingdom 0.79 0.65 0.67 0.68 0.68 0.80 0.89 0.86 0.88 0.88 0.86 0.86EU : : : : : : : : : : : :USA 1.25 1.03 1.16 1.26 1.37 1.47 1.39 1.33 1.43 1.45 1.39 1.39Japan 135.36 122.59 133.27 146.02 161.25 152.45 130.34 116.24 118.08 119.93 113.25 113.25

TABLE 30 : Nominal effective exchange rates to rest of a group ¹ of industrialised countries (percentage change on preceding year, 1997-2012)5-year Spring 2011 Autumn 2010

averages forecast forecast1997-01 2002-06 2006 2007 2008 2009 2010 2011 2012 2011 2012

Belgium -1.1 1.4 0.4 1.2 1.8 1.0 -2.5 0.7 0.3 0.2 0.0Germany -1.0 1.8 0.5 1.8 1.8 1.3 -3.5 0.8 0.4 0.1 0.0Estonia -0.4 1.0 0.2 1.1 1.4 2.2 -3.1 -0.1 0.2 -0.1 0.0Ireland -1.8 2.4 0.6 2.6 4.0 0.8 -3.5 1.6 0.6 0.7 0.0Greece 0.3 1.7 0.6 0.9 2.0 1.9 -2.3 0.8 0.2 0.1 0.0Spain -1.1 1.4 0.4 1.3 2.0 1.2 -2.5 0.8 0.3 0.2 0.0France -1.0 1.7 0.6 1.6 2.1 0.8 -3.0 0.9 0.4 0.2 0.0Italy 0.1 1.9 0.6 1.6 1.9 0.9 -3.1 0.9 0.3 0.2 0.0Cyprus 5.0 1.6 0.6 -0.3 2.2 1.8 -2.4 0.6 0.3 0.0 0.0Luxembourg -1.1 1.4 0.4 1.2 1.8 1.0 -2.5 0.7 0.3 0.2 0.0Malta 0.4 1.3 1.0 3.1 2.2 -1.2 -4.0 1.6 0.6 0.3 0.0Netherlands -1.0 1.2 0.3 1.1 2.0 1.4 -2.5 0.6 0.3 0.1 0.0Austria -0.1 1.1 0.3 1.0 0.9 1.2 -2.5 0.3 0.2 0.0 0.0Portugal -1.1 1.1 0.3 1.1 1.6 0.6 -2.0 0.7 0.3 0.2 0.0Slovenia -3.9 -1.1 0.2 0.3 0.5 2.0 -1.9 0.2 0.1 -0.1 0.0Slovakia -1.3 3.6 3.7 10.4 8.7 6.5 -2.1 0.1 0.1 -0.1 0.0Finland -1.0 1.7 0.5 1.6 1.9 1.5 -3.9 0.4 0.4 0.0 0.0Euro area -1.7 3.6 1.2 3.5 4.2 2.8 -6.7 1.6 0.7 0.2 0.0Bulgaria -32.2 1.7 0.8 0.6 1.8 2.6 -2.5 1.2 0.2 0.0 0.0Czech Republic 0.8 4.5 5.2 2.3 12.2 -3.7 2.5 4.3 0.3 2.7 0.0Denmark -1.0 1.4 0.3 1.4 2.2 2.2 -3.9 -0.1 0.3 -0.1 0.0Latvia 4.3 -3.4 0.0 0.0 0.9 2.3 -3.1 0.0 0.0 -0.3 0.0Lithuania 8.3 2.1 0.1 0.8 1.0 2.7 -2.6 0.2 0.2 -0.1 0.0Hungary -4.7 0.3 -6.1 5.4 0.9 -8.4 -0.3 3.2 0.8 0.5 0.0Poland -1.1 -0.5 3.5 3.4 9.2 -17.7 6.2 1.0 0.1 1.5 0.0Romania -30.1 -4.7 3.6 6.2 -8.3 -11.4 -1.5 2.9 1.0 -1.9 0.0Sweden -2.5 1.8 0.8 1.7 -1.8 -8.5 7.6 7.6 0.0 3.2 0.0United Kingdom 4.8 0.2 1.0 1.9 -12.9 -11.5 0.4 -0.9 -0.5 0.1 0.0EU -0.8 5.2 2.8 6.6 1.5 -5.4 -7.4 3.6 0.9 0.9 0.0USA 5.0 -3.9 -0.8 -5.0 -4.3 6.3 -3.2 -6.7 -0.8 -4.4 0.0Japan 1.5 -2.4 -5.8 -5.9 11.3 15.9 6.5 0.7 -1.0 4.4 0.0¹ 35 countries : EU (excl. LU), TR, CH, NO, US, CA, JP, AU, MX and NZ.

218

Statistical Annex

TABLE 31 : Relative unit labour costs, to rest of a group ¹ of industrialised countries (nat. curr.) (percentage change on preceding year, 1997-2012) 2.5.20115-year Spring 2011 Autumn 2010


Belgium -0.7 -0.3 0.5 0.2 0.9 0.5 -0.1 0.5 0.7 0.0 :Germany -3.0 -2.1 -3.6 -2.5 -1.6 1.7 -0.6 -0.1 0.1 0.3 :Estonia 1.3 3.2 6.6 13.3 10.0 -2.2 -6.4 3.0 -0.1 0.1 :Ireland 0.2 1.7 1.9 1.3 2.7 -3.9 -4.8 -3.5 -2.1 -1.9 :Greece -1.9 1.5 0.0 0.7 1.4 0.8 -1.0 -1.3 -2.4 -0.8 :Spain -0.2 1.2 1.7 2.0 1.2 -2.8 -1.4 -1.5 -0.7 -1.0 :France -1.7 0.3 0.5 -0.6 -0.8 -0.6 1.4 0.1 -0.2 -0.2 :Italy -2.0 1.3 0.6 -0.4 0.9 0.7 0.4 -0.2 0.0 0.0 :Cyprus -6.4 1.5 -1.2 -1.3 -2.8 0.1 1.8 1.6 0.6 1.1 :Luxembourg : : : : : : : : : : :Malta -0.1 0.7 1.3 -1.2 -0.7 2.9 -2.6 0.3 1.2 0.7 :Netherlands 0.7 0.2 -0.5 -0.2 -0.6 1.2 -0.9 0.4 0.2 0.3 :Austria -2.5 -0.8 -0.1 -1.1 -1.2 0.8 1.1 -0.1 0.0 0.3 :Portugal 1.6 0.7 -1.0 -1.2 -0.2 0.1 -0.9 -0.2 -0.2 -1.6 :Slovenia 3.3 1.7 -0.1 0.5 1.6 4.3 1.0 -1.9 -0.1 -0.2 :Slovakia 2.9 2.1 0.8 -1.8 -0.1 3.4 -2.4 -0.1 0.1 0.1 :Finland -1.6 -0.6 -1.2 -2.0 1.7 4.1 -0.8 -1.0 0.1 0.0 :Euro area -3.8 -0.6 -1.6 -1.8 -0.7 1.2 -0.5 -0.5 -0.2 -0.1 :Bulgaria 62.8 -0.1 1.2 6.0 6.9 7.9 1.2 3.6 2.7 2.8 :Czech Republic 2.9 1.2 0.4 1.0 1.1 -0.6 0.2 -0.6 -0.3 -0.1 :Denmark 0.2 0.8 0.9 2.4 2.9 0.8 -1.0 -0.9 0.0 0.7 :Latvia -1.8 6.5 13.1 23.4 15.9 -10.2 -9.3 -1.4 -2.5 -2.8 :Lithuania -1.8 2.4 7.7 2.3 4.2 -5.8 -6.2 -0.5 2.5 -1.1 :Hungary 7.8 3.6 1.3 3.4 0.3 -2.1 -0.7 -0.8 0.8 -0.5 :Poland 5.3 -3.1 -2.3 0.4 3.3 -2.5 1.9 2.0 2.1 0.5 :Romania 59.6 7.4 3.2 12.5 17.9 -5.6 1.1 -0.3 1.5 1.0 :Sweden -0.7 -1.7 -2.4 1.6 -1.1 1.0 -1.3 -0.4 0.5 -0.7 :United Kingdom 0.5 0.8 1.3 0.9 -1.3 3.1 3.0 0.6 1.3 0.4 :EU -3.3 -0.4 -1.6 -0.6 0.1 1.8 0.3 -0.5 0.7 -0.1 :USA -0.7 0.3 1.2 1.1 -1.0 -4.1 -0.1 -0.7 -1.6 -1.5 :Japan -3.4 -4.4 -3.5 -5.6 -2.3 -0.7 -3.5 -0.9 -1.5 -1.1 :¹ 35 countries : EU (excl. LU), TR, CH, NO, US, CA, JP, AU, MX and NZ.


TABLE 32 : Real effective exchange rate : ulc relative to rest of a group ¹ of industrialised countries (USD) (% change on preceding year, 1997-2012)5-year Spring 2011 Autumn 2010


Belgium -1.8 1.0 0.9 1.5 2.8 1.5 -2.6 1.2 1.0 0.2 :Germany -4.0 -0.3 -3.0 -0.8 0.2 3.0 -4.0 0.7 0.5 0.5 :Estonia 0.9 4.2 6.8 14.5 11.6 0.0 -9.2 2.9 0.2 0.0 :Ireland -1.6 4.1 2.5 3.9 6.8 -3.1 -8.1 -2.0 -1.6 -1.2 :Greece -1.6 3.3 0.6 1.5 3.4 2.6 -3.2 -0.5 -2.2 -0.7 :Spain -1.3 2.6 2.2 3.3 3.2 -1.6 -3.8 -0.8 -0.4 -0.8 :France -2.7 2.0 1.1 1.0 1.3 0.1 -1.7 0.9 0.1 0.0 :Italy -1.8 3.2 1.2 1.2 2.8 1.7 -2.8 0.7 0.4 0.2 :Cyprus -1.7 3.1 -0.6 -1.6 -0.7 1.9 -0.6 2.2 0.9 1.2 :Luxembourg : : : : :: : : : : : :Malta 0.3 2.0 2.3 1.9 1.5 1.6 -6.5 1.9 1.8 1.0 :Netherlands -0.3 1.4 -0.2 0.9 1.3 2.6 -3.4 1.1 0.5 0.4 :Austria -2.6 0.2 0.2 -0.1 -0.3 2.0 -1.5 0.2 0.2 0.3 :Portugal 0.5 1.8 -0.7 -0.1 1.3 0.7 -2.8 0.4 0.0 -1.4 :Slovenia -0.8 0.6 0.1 0.8 2.2 6.4 -0.9 -1.7 0.1 -0.3 :Slovakia 1.5 5.8 4.5 8.4 8.6 10.1 -4.4 -0.1 0.2 0.0 :Finland -2.7 1.1 -0.7 -0.4 3.7 5.7 -4.7 -0.5 0.5 0.0 :Euro area -5.4 3.0 -0.4 1.7 3.4 4.0 -7.2 1.1 0.6 0.1 :Bulgaria 10.4 1.6 2.0 6.6 8.8 10.7 -1.4 4.9 3.0 2.8 :Czech Republic 3.8 5.8 5.6 3.4 13.5 -4.3 2.7 3.7 0.0 2.6 :Denmark -0.8 2.2 1.2 3.8 5.1 3.0 -4.9 -1.0 0.3 0.6 :Latvia 2.5 2.8 13.1 23.4 16.9 -8.1 -12.1 -1.4 -2.5 -3.1 :Lithuania 6.3 4.6 7.8 3.0 5.2 -3.2 -8.6 -0.3 2.7 -1.1 :Hungary 2.7 3.9 -4.8 9.0 1.2 -10.3 -1.0 2.4 1.6 0.0 :Poland 4.1 -3.6 1.2 3.8 12.8 -19.7 8.2 3.0 2.2 2.0 :Romania 11.5 2.4 6.9 19.4 8.0 -16.4 -0.5 2.5 2.5 -0.9 :Sweden -3.2 0.1 -1.6 3.2 -2.9 -7.6 6.2 7.1 0.6 2.4 :United Kingdom 5.3 1.0 2.3 2.8 -14.0 -8.7 3.3 -0.3 0.9 0.5 :EU -4.0 4.7 1.1 6.0 1.6 -3.7 -7.2 3.1 1.7 0.8 :USA 4.3 -3.6 0.4 -4.0 -5.3 2.0 -3.4 -7.4 -2.4 -5.8 :Japan -2.0 -6.7 -9.1 -11.2 8.7 15.1 2.7 -0.2 -2.5 3.3 :¹ 35 countries : EU (excl. LU), TR, CH, NO, US, CA, JP, AU, MX and NZ.


219


TABLE 33 : Total expenditure, general government (as a percentage of GDP, 1992-2012) ¹ 2.5.20115-year Spring 2011 Autumn 2010


Belgium 52.8 50.0 50.2 48.6 48.4 50.1 54.0 53.0 53.1 53.6 52.9 53.0Germany 47.8 47.4 47.2 45.3 43.5 43.8 47.5 46.6 45.3 44.3 45.6 44.5Estonia : 37.5 34.4 33.6 34.4 39.9 45.1 40.0 39.8 40.4 42.0 41.4Ireland 39.3 34.0 33.8 34.5 36.7 42.8 48.2 67.0 45.5 43.9 45.2 43.8Greece 43.4 45.1 44.8 44.9 46.3 49.6 52.7 49.6 49.7 49.5 49.3 49.2Spain 44.6 40.0 38.6 38.4 39.2 41.3 45.8 45.0 42.9 42.0 43.4 42.9France 53.3 52.5 53.0 52.7 52.4 52.8 56.2 56.2 55.8 55.4 56.1 55.8Italy 53.2 48.3 48.0 48.7 47.9 48.9 51.9 50.6 49.9 49.2 50.0 49.4Cyprus : 36.6 42.2 42.6 41.2 41.7 45.8 46.6 46.1 45.9 46.1 46.2Luxembourg : 39.3 41.2 38.6 36.2 36.9 42.2 41.2 40.3 40.1 42.7 42.7Malta : 42.6 45.1 44.3 42.6 43.5 43.2 42.3 42.7 42.4 44.1 44.3Netherlands 52.0 45.9 45.9 45.5 45.2 46.0 51.4 51.3 50.2 49.4 50.7 49.5Austria 53.8 53.0 51.2 49.4 48.8 49.2 52.9 53.0 52.4 52.0 52.3 52.1Portugal 39.9 41.3 44.2 44.5 44.3 44.6 49.8 50.7 47.7 46.9 46.8 46.9Slovenia : 46.3 45.7 44.6 42.5 44.1 49.0 49.0 49.1 48.1 49.0 48.3Slovakia : 47.9 39.5 36.6 34.3 35.0 41.5 41.0 38.8 37.4 38.0 37.4Finland 59.8 51.4 49.5 48.9 47.2 49.3 56.0 54.8 53.7 53.5 54.9 55.0Euro area 50.1 47.7 47.4 46.6 46.0 46.9 50.8 50.4 49.1 48.5 49.4 48.7Bulgaria : 38.8 38.3 34.4 39.7 37.6 40.7 37.7 37.4 36.6 37.1 36.0Czech Republic : 43.0 45.5 43.8 42.5 42.9 46.0 45.2 45.6 45.2 44.9 44.1Denmark 59.0 55.2 53.5 51.5 50.8 51.9 58.3 58.0 57.5 56.8 56.9 56.1Latvia : 38.1 36.0 38.1 35.8 38.8 44.2 42.9 41.4 40.4 41.7 39.7Lithuania : 41.1 33.6 33.6 34.8 37.4 44.0 41.2 39.0 38.3 41.5 41.8Hungary : 48.6 50.3 52.0 50.0 48.9 50.6 48.8 50.4 45.3 47.4 46.9Poland : 43.7 43.8 43.9 42.2 43.2 44.5 45.7 45.8 43.7 45.5 44.6Romania : 36.9 34.2 35.5 36.3 38.3 40.6 40.8 38.8 38.1 37.2 36.4Sweden 64.4 57.4 54.2 52.6 50.9 51.7 54.9 52.7 51.5 50.6 51.6 50.5United Kingdom 42.2 39.2 42.9 44.2 43.9 47.5 51.6 51.0 49.8 48.6 49.5 47.9EU : 46.7 46.7 46.3 45.6 46.9 50.8 50.3 49.1 48.3 49.2 48.4USA 36.5 34.6 36.1 36.0 36.8 38.9 42.2 43.3 41.7 40.8 41.2 40.3Japan 34.4 38.9 37.8 36.2 35.9 37.2 41.8 42.3 44.1 44.8 40.7 41.4¹ ESA 79 up to 1994, ESA 95 from 1995 onwards.

TABLE 34 : Total revenue, general government (as a percentage of GDP, 1992-2012) ¹5-year Spring 2011 Autumn 2010


Belgium 47.5 49.3 49.6 48.8 48.1 48.8 48.1 48.9 49.3 49.4 48.3 48.3Germany 44.8 45.9 43.9 43.7 43.8 43.9 44.5 43.3 43.3 43.2 42.9 42.7Estonia : 37.1 35.9 36.0 36.9 37.0 43.4 40.1 39.2 38.0 40.1 38.7Ireland 37.7 36.3 34.9 37.4 36.8 35.5 33.9 34.6 35.0 35.1 34.9 34.7Greece 33.8 40.9 39.0 39.2 40.0 39.9 37.3 39.1 40.2 40.2 41.9 41.5Spain 39.1 38.1 39.0 40.4 41.1 37.1 34.7 35.7 36.5 36.7 37.0 37.4France 48.4 50.4 49.8 50.4 49.6 49.5 48.7 49.2 50.1 50.1 49.8 50.0Italy 44.9 46.1 44.5 45.4 46.4 46.1 46.5 46.0 45.9 46.1 45.7 45.8Cyprus : 33.0 38.5 41.4 44.6 42.6 39.8 41.3 41.0 41.0 40.4 40.5Luxembourg : 43.8 41.8 39.9 39.8 39.8 41.3 39.5 39.3 39.0 41.4 41.5Malta : 35.0 39.9 41.5 40.3 39.0 39.5 38.7 39.7 39.4 41.1 41.0Netherlands 48.7 46.0 44.6 46.1 45.4 46.6 45.9 45.9 46.5 47.1 46.8 46.7Austria 49.7 51.3 49.2 47.8 48.0 48.3 48.8 48.3 48.7 48.7 48.7 48.8Portugal 35.3 37.9 40.3 40.5 41.1 41.1 39.7 41.5 41.8 42.4 41.9 41.7Slovenia : 43.2 43.6 43.2 42.4 42.3 43.1 43.4 43.3 43.1 43.7 43.7Slovakia : 40.3 35.6 33.4 32.5 32.9 33.6 33.1 33.6 32.9 32.6 32.4Finland 54.0 54.1 52.6 52.9 52.4 53.5 53.4 52.3 52.8 52.9 53.3 53.9Euro area 45.1 46.0 44.9 45.3 45.3 44.9 44.5 44.5 44.9 44.9 44.8 44.8Bulgaria : 39.4 38.9 36.2 40.8 39.3 36.0 34.5 34.7 35.0 34.1 34.2Czech Republic : 38.6 41.0 41.1 41.8 40.2 40.1 40.5 41.2 41.2 40.3 39.9Denmark 56.5 56.1 56.1 56.6 55.6 55.2 55.6 55.3 53.4 53.6 52.6 52.6Latvia : 36.6 34.8 37.7 35.4 34.6 34.6 35.2 36.9 36.5 33.8 32.5Lithuania : 36.2 32.5 33.1 33.8 34.1 34.5 34.2 33.5 33.5 34.4 35.0Hungary : 43.3 42.3 42.6 45.0 45.2 46.1 44.6 52.0 42.0 42.6 40.8Poland : 39.8 38.9 40.2 40.3 39.5 37.2 37.8 40.0 40.1 38.9 38.6Romania : 32.8 32.6 33.3 33.7 32.6 32.1 34.3 34.1 34.5 32.3 32.9Sweden 56.7 58.5 54.8 54.9 54.5 53.9 54.2 52.7 52.4 52.7 51.5 51.5United Kingdom 36.2 39.7 39.9 41.5 41.2 42.5 40.2 40.6 41.2 41.6 40.9 41.5EU : 45.3 44.2 44.8 44.7 44.6 44.0 44.0 44.5 44.5 44.1 44.2USA 32.3 34.9 32.4 33.9 34.0 32.7 31.0 32.1 31.7 32.3 32.3 32.5Japan 32.0 31.6 31.7 34.5 33.5 35.0 33.1 33.0 34.5 35.0 34.3 35.1¹ ESA 79 up to 1994, ESA 95 from 1995 onwards.

220

Statistical Annex

TABLE 35 : Net lending (+) or net borrowing (-), general government (as a percentage of GDP, 1992-2012) ¹ 2.5.20115-year Spring 2011 Autumn 2010


Belgium -5.4 -0.7 -0.6 0.1 -0.3 -1.3 -5.9 -4.1 -3.7 -4.2 -4.6 -4.7Germany -3.0 -1.6 -3.3 -1.6 0.3 0.1 -3.0 -3.3 -2.0 -1.2 -2.7 -1.8Estonia : -0.5 1.5 2.4 2.5 -2.8 -1.7 0.1 -0.6 -2.4 -1.9 -2.7Ireland -1.7 2.4 1.2 2.9 0.1 -7.3 -14.3 -32.4 -10.5 -8.8 -10.3 -9.1Greece -9.6 -4.2 -5.8 -5.7 -6.4 -9.8 -15.4 -10.5 -9.5 -9.3 -7.4 -7.6Spain -5.6 -1.9 0.4 2.0 1.9 -4.2 -11.1 -9.2 -6.3 -5.3 -6.4 -5.5France -4.9 -2.1 -3.2 -2.3 -2.7 -3.3 -7.5 -7.0 -5.8 -5.3 -6.3 -5.8Italy -8.3 -2.2 -3.5 -3.4 -1.5 -2.7 -5.4 -4.6 -4.0 -3.2 -4.3 -3.5Cyprus : -3.6 -3.7 -1.2 3.4 0.9 -6.0 -5.3 -5.1 -4.9 -5.7 -5.7Luxembourg 1.6 4.5 0.6 1.4 3.7 3.0 -0.9 -1.7 -1.0 -1.1 -1.3 -1.2Malta : -7.6 -5.2 -2.8 -2.4 -4.5 -3.7 -3.6 -3.0 -3.0 -3.0 -3.3Netherlands -3.3 0.0 -1.3 0.5 0.2 0.6 -5.5 -5.4 -3.7 -2.3 -3.9 -2.8Austria -4.1 -1.6 -2.0 -1.6 -0.9 -0.9 -4.1 -4.6 -3.7 -3.3 -3.6 -3.3Portugal -4.6 -3.3 -3.9 -4.1 -3.1 -3.5 -10.1 -9.1 -5.9 -4.5 -4.9 -5.1Slovenia : -3.1 -2.0 -1.4 -0.1 -1.8 -6.0 -5.6 -5.8 -5.0 -5.3 -4.7Slovakia : -7.6 -3.9 -3.2 -1.8 -2.1 -8.0 -7.9 -5.1 -4.6 -5.3 -5.0Finland -5.8 2.7 3.1 4.0 5.2 4.2 -2.6 -2.5 -1.0 -0.7 -1.6 -1.2Euro area -5.0 -1.6 -2.5 -1.4 -0.7 -2.0 -6.3 -6.0 -4.3 -3.5 -4.6 -3.9Bulgaria : 0.5 0.6 1.9 1.1 1.7 -4.7 -3.2 -2.7 -1.6 -2.9 -1.8Czech Republic : -4.4 -4.5 -2.6 -0.7 -2.7 -5.9 -4.7 -4.4 -4.1 -4.6 -4.2Denmark -2.5 0.9 2.6 5.2 4.8 3.2 -2.7 -2.7 -4.1 -3.2 -4.3 -3.5Latvia : -1.4 -1.2 -0.5 -0.3 -4.2 -9.7 -7.7 -4.5 -3.8 -7.9 -7.3Lithuania : -4.9 -1.1 -0.4 -1.0 -3.3 -9.5 -7.1 -5.5 -4.8 -7.0 -6.9Hungary : -5.2 -8.0 -9.3 -5.0 -3.7 -4.5 -4.2 1.6 -3.3 -4.7 -6.2Poland : -3.9 -4.9 -3.6 -1.9 -3.7 -7.3 -7.9 -5.8 -3.6 -6.6 -6.0Romania : -4.0 -1.6 -2.2 -2.6 -5.7 -8.5 -6.4 -4.7 -3.6 -4.9 -3.5Sweden -7.7 1.0 0.6 2.3 3.6 2.2 -0.7 0.0 0.9 2.0 -0.1 1.0United Kingdom -6.1 0.5 -3.0 -2.7 -2.7 -5.0 -11.4 -10.4 -8.6 -7.0 -8.6 -6.4EU : -1.4 -2.5 -1.5 -0.9 -2.4 -6.8 -6.4 -4.7 -3.8 -5.1 -4.2USA -4.2 0.3 -3.7 -2.0 -2.8 -6.2 -11.2 -11.2 -10.0 -8.6 -8.9 -7.9Japan -2.5 -7.3 -6.1 -1.6 -2.4 -2.2 -8.7 -9.3 -9.7 -9.8 -6.4 -6.3¹ ESA 79 up to 1994, ESA 95 from 1995 onwards.

TABLE 36 : Interest expenditure, general government (as a percentage of GDP, 1992-2012) ¹5-year Spring 2011 Autumn 2010


Belgium 9.5 7.0 4.8 3.9 3.8 3.8 3.6 3.4 3.4 3.5 3.5 3.6Germany 3.3 3.2 2.9 2.8 2.8 2.7 2.6 2.4 2.4 2.4 2.4 2.4Estonia : 0.3 0.2 0.2 0.2 0.2 0.3 0.2 0.2 0.3 0.4 0.4Ireland 5.6 2.7 1.2 1.0 1.0 1.4 2.1 3.3 3.8 4.6 3.5 4.4Greece 11.1 7.7 4.8 4.3 4.4 4.9 5.1 5.6 6.7 7.4 6.2 7.4Spain 4.8 3.7 2.1 1.6 1.6 1.6 1.8 1.9 2.2 2.5 2.4 2.8France 3.4 3.1 2.7 2.5 2.7 2.9 2.4 2.5 2.6 2.9 2.7 2.8Italy 11.3 7.3 5.0 4.7 5.0 5.2 4.6 4.5 4.8 5.1 4.8 4.9Cyprus : 3.1 3.4 3.3 3.0 2.8 2.5 2.2 2.4 2.4 2.4 2.4Luxembourg 0.3 0.4 0.2 0.2 0.2 0.3 0.4 0.4 0.5 0.5 0.4 0.5Malta : 3.3 3.6 3.5 3.3 3.2 3.1 3.0 3.1 3.0 3.1 3.1Netherlands 5.7 4.1 2.5 2.2 2.2 2.2 2.2 2.0 2.1 2.2 2.3 2.4Austria 4.0 3.5 2.9 2.8 2.8 2.6 2.8 2.7 2.8 3.0 2.8 2.9Portugal 5.6 3.1 2.6 2.6 2.9 3.0 2.9 3.0 4.2 4.8 3.7 4.0Slovenia : 2.3 1.8 1.4 1.3 1.1 1.3 1.6 1.8 2.0 1.7 1.8Slovakia : 3.3 2.3 1.5 1.4 1.2 1.4 1.3 1.6 1.7 1.8 2.1Finland 4.0 3.2 1.7 1.4 1.5 1.4 1.2 1.1 1.2 1.4 1.3 1.6Euro area 5.5 4.2 3.1 2.9 3.0 3.0 2.8 2.8 3.0 3.2 3.0 3.2Bulgaria : 4.7 1.9 1.3 1.2 0.9 0.8 0.6 0.8 0.9 0.8 0.9Czech Republic : 1.0 1.2 1.1 1.1 1.1 1.3 1.4 1.8 1.8 1.8 1.9Denmark 6.4 4.1 2.3 1.6 1.6 1.4 1.8 1.8 1.9 2.0 1.9 1.9Latvia : 0.8 0.6 0.4 0.3 0.6 1.5 1.5 1.9 2.1 2.1 2.3Lithuania : 1.3 1.0 0.7 0.7 0.7 1.3 1.8 2.0 2.0 2.2 2.6Hungary : 6.6 4.1 3.9 4.1 4.1 4.6 4.0 3.8 3.8 3.8 3.7Poland : 3.5 2.8 2.7 2.3 2.2 2.6 2.7 2.8 2.7 2.9 3.0Romania : 4.2 1.5 0.8 0.7 0.7 1.5 1.6 1.8 1.8 1.9 1.8Sweden 5.5 4.0 1.9 1.6 1.7 1.7 0.9 0.7 0.7 0.8 0.9 1.0United Kingdom 3.1 3.0 2.0 2.0 2.2 2.3 2.0 3.0 3.1 3.4 3.0 3.2EU : 4.0 2.9 2.6 2.7 2.8 2.6 2.7 2.9 3.0 2.9 3.0USA 4.7 3.8 2.7 2.7 2.9 2.7 2.5 2.8 2.9 2.9 2.8 2.8Japan 3.6 3.4 2.6 2.4 2.5 2.5 2.6 2.6 2.7 2.7 2.8 2.8¹ ESA 79 up to 1994, ESA 95 from 1995 onwards.

221


TABLE 37 : Primary balance, general government (as a percentage of GDP, 1992-2012) ¹ ² 2.5.20115-year Spring 2011 Autumn 2010


Belgium 4.1 6.3 4.1 4.1 3.5 2.5 -2.3 -0.7 -0.4 -0.7 -1.1 -1.1Germany 0.3 1.7 -0.4 1.2 3.0 2.8 -0.4 -0.9 0.4 1.2 -0.3 0.6Estonia : -0.2 1.7 2.6 2.7 -2.6 -1.4 0.3 -0.4 -2.1 -1.6 -2.3Ireland 4.0 5.0 2.4 3.9 1.1 -6.0 -12.2 -29.2 -6.8 -4.2 -6.9 -4.8Greece 1.6 3.5 -0.9 -1.4 -2.0 -4.8 -10.3 -4.9 -2.8 -1.8 -1.2 -0.3Spain -0.8 1.8 2.5 3.7 3.5 -2.6 -9.4 -7.3 -4.1 -2.9 -4.1 -2.7France -1.5 1.0 -0.5 0.3 0.0 -0.4 -5.1 -4.5 -3.1 -2.4 -3.6 -2.9Italy 3.0 5.1 1.4 1.3 3.5 2.5 -0.7 -0.1 0.8 1.9 0.5 1.4Cyprus : -0.5 -0.4 2.1 6.4 3.7 -3.4 -3.1 -2.7 -2.5 -3.3 -3.3Luxembourg 1.9 4.9 0.8 1.5 3.9 3.3 -0.5 -1.3 -0.5 -0.6 -0.8 -0.8Malta : -4.3 -1.6 0.8 1.0 -1.4 -0.6 -0.6 0.0 0.1 0.2 -0.2Netherlands 2.4 4.1 1.1 2.7 2.4 2.8 -3.3 -3.4 -1.6 -0.1 -1.7 -0.4Austria -0.1 1.9 0.9 1.2 1.9 1.7 -1.3 -2.0 -0.9 -0.3 -0.8 -0.4Portugal 1.0 -0.3 -1.3 -1.4 -0.2 -0.5 -7.2 -6.1 -1.7 0.3 -1.2 -1.1Slovenia : -0.8 -0.3 0.0 1.2 -0.7 -4.6 -4.0 -4.1 -3.1 -3.6 -2.9Slovakia : -4.3 -1.6 -1.7 -0.4 -0.8 -6.5 -6.6 -3.6 -2.9 -3.5 -3.0Finland -1.8 5.9 4.8 5.5 6.7 5.6 -1.5 -1.4 0.2 0.7 -0.3 0.4Euro area 0.6 2.6 0.6 1.5 2.3 1.0 -3.5 -3.2 -1.3 -0.4 -1.6 -0.8Bulgaria : 5.2 2.5 3.2 2.3 2.5 -3.9 -2.6 -1.9 -0.7 -2.1 -1.0Czech Republic : -3.3 -3.3 -1.5 0.5 -1.6 -4.5 -3.3 -2.7 -2.3 -2.8 -2.4Denmark 3.9 5.0 4.9 6.8 6.4 4.7 -0.9 -1.0 -2.2 -1.2 -2.4 -1.5Latvia : -0.6 -0.5 0.0 0.0 -3.6 -8.2 -6.2 -2.7 -1.8 -5.8 -4.9Lithuania : -3.6 -0.1 0.3 -0.3 -2.6 -8.3 -5.3 -3.5 -2.8 -4.8 -4.2Hungary : 1.4 -3.9 -5.4 -0.9 0.5 0.1 -0.1 5.5 0.5 -1.0 -2.5Poland : -0.4 -2.0 -1.0 0.4 -1.5 -4.7 -5.2 -3.0 -0.9 -3.7 -3.0Romania : 0.1 -0.1 -1.4 -1.9 -5.0 -7.0 -4.9 -2.9 -1.8 -2.9 -1.6Sweden -2.2 5.0 2.5 3.9 5.3 3.9 0.2 0.7 1.6 2.8 0.9 2.0United Kingdom -2.9 3.5 -1.0 -0.7 -0.5 -2.7 -9.4 -7.4 -5.5 -3.6 -5.6 -3.3EU : 2.6 0.4 1.2 1.8 0.4 -4.2 -3.7 -1.8 -0.8 -2.2 -1.2USA 0.5 4.1 -1.0 0.7 0.1 -3.5 -8.7 -8.4 -7.1 -5.7 -6.1 -5.1Japan 1.1 -3.9 -3.5 0.8 0.1 0.4 -6.1 -6.6 -7.0 -7.1 -3.6 -3.6¹ ESA 79 up to 1994, ESA 95 from 1995 onwards.

² Net lending/borrowing excluding interest expenditure.

TABLE 38 : Cyclically-adjusted net lending (+) or net borrowing (-), general government (as a percentage of GDP, 1992-2012)5-year Spring 2011 Autumn 2010


Belgium -5.2 -1.3 -0.9 -0.6 -1.4 -1.8 -4.2 -2.8 -2.9 -3.7 -3.7 -4.1Germany -3.4 -1.9 -2.7 -1.6 -0.5 -0.5 -0.8 -2.2 -1.4 -0.8 -2.2 -1.4Estonia : 0.2 -0.5 -0.8 -1.0 -3.8 1.7 2.5 0.3 -2.3 -0.7 -2.5Ireland -1.3 1.2 0.8 2.0 -1.8 -7.4 -12.0 -30.3 -9.2 -8.5 -9.1 -8.9Greece -9.5 -4.5 -5.8 -6.1 -7.5 -10.4 -14.9 -8.2 -6.1 -6.6 -4.1 -4.7Spain -4.6 -2.4 0.1 1.5 1.3 -4.1 -9.2 -7.0 -4.3 -3.9 -4.9 -4.8France -4.2 -2.7 -4.1 -3.2 -3.7 -3.4 -5.6 -5.1 -3.9 -3.7 -4.6 -4.4Italy -8.0 -2.6 -4.1 -4.5 -3.0 -3.2 -3.2 -2.9 -2.6 -2.2 -3.5 -3.3Cyprus : -3.7 -3.7 -1.2 2.7 -0.1 -5.5 -4.6 -4.5 -4.7 -5.0 -5.4Luxembourg : 3.5 0.1 0.6 1.9 2.3 1.5 0.1 0.3 -0.4 0.8 0.6Malta : -8.1 -4.8 -2.2 -2.1 -5.3 -2.8 -3.5 -3.0 -3.1 -2.9 -3.5Netherlands -2.9 -0.6 -0.6 0.6 -0.9 -0.5 -3.6 -3.8 -2.5 -1.3 -2.3 -1.5Austria -3.9 -2.1 -1.7 -1.9 -2.0 -2.2 -2.9 -3.7 -3.2 -2.9 -2.9 -2.9Portugal -4.3 -4.1 -3.5 -3.6 -3.4 -3.5 -9.1 -8.8 -4.9 -3.1 -3.8 -4.3Slovenia : -3.3 -2.6 -2.8 -2.9 -4.6 -3.6 -3.0 -3.5 -3.3 -3.8 -3.8Slovakia : -7.1 -3.5 -3.6 -3.6 -4.0 -7.4 -7.4 -4.8 -4.6 -5.0 -5.1Finland -3.8 1.4 2.6 2.7 2.6 2.5 0.7 0.2 0.8 0.7 0.4 0.6Euro area -4.7 -2.1 -2.6 -1.9 -1.7 -2.5 -4.3 -4.4 -3.0 -2.5 -3.5 -3.2Bulgaria : : -0.3 0.7 -0.4 -0.2 -3.4 -1.4 -1.2 -0.6 -1.4 -0.9Czech Republic : -3.5 -4.4 -4.1 -2.9 -4.5 -5.1 -4.0 -3.8 -3.8 -3.9 -3.9Denmark -1.3 0.1 2.1 3.1 2.8 3.0 0.9 0.0 -2.2 -1.8 -2.9 -3.0Latvia : -1.0 -1.8 -3.1 -4.4 -6.3 -6.6 -5.1 -3.1 -3.6 -6.5 -7.0Lithuania : -3.4 -2.0 -2.1 -3.6 -5.4 -7.1 -5.1 -4.7 -4.8 -6.0 -6.5Hungary : -5.0 -8.9 -10.9 -6.1 -4.5 -2.0 -2.1 2.7 -3.3 -3.7 -6.2Poland : -4.1 -4.7 -4.1 -2.9 -4.6 -7.1 -7.4 -5.3 -3.1 -6.1 -5.5Romania : -2.3 -2.3 -4.3 -4.9 -8.7 -8.3 -5.2 -3.3 -2.8 -3.5 -2.6Sweden -5.5 1.2 -0.2 0.4 1.4 1.7 2.6 1.4 1.3 2.1 0.2 1.0United Kingdom -5.6 -0.1 -3.8 -3.6 -3.8 -5.3 -9.1 -8.2 -6.5 -5.3 -6.9 -5.1EU : -1.8 -2.8 -2.2 -2.0 -2.9 -4.8 -4.7 -3.3 -2.8 -3.9 -3.4

222

Statistical Annex

TABLE 39 : Cyclically-adjusted primary balance, general government (as a percentage of GDP, 1992-2012) 2.5.20115-year Spring 2011 Autumn 2010


Belgium 4.3 5.7 3.9 3.4 2.4 2.0 -0.6 0.6 0.5 -0.3 -0.2 -0.5Germany -0.1 1.3 0.2 1.2 2.3 2.2 1.8 0.1 0.9 1.6 0.2 1.1Estonia : 0.5 -0.3 -0.6 -0.9 -3.6 2.0 2.6 0.5 -2.0 -0.3 -2.0Ireland 4.4 3.9 1.9 3.0 -0.8 -6.0 -9.9 -27.0 -5.4 -3.9 -5.6 -4.6Greece 1.6 3.2 -1.0 -1.8 -3.1 -5.5 -9.8 -2.7 0.6 0.8 2.1 2.6Spain 0.2 1.4 2.2 3.2 2.9 -2.5 -7.4 -5.1 -2.1 -1.4 -2.5 -2.0France -0.8 0.4 -1.4 -0.7 -1.1 -0.6 -3.2 -2.6 -1.3 -0.8 -2.0 -1.5Italy 3.3 4.7 0.9 0.2 2.0 2.0 1.4 1.6 2.2 2.9 1.3 1.6Cyprus : -0.6 -0.3 2.1 5.7 2.7 -3.0 -2.4 -2.1 -2.3 -2.6 -3.0Luxembourg : 3.8 0.3 0.8 2.1 2.6 1.9 0.5 0.8 0.1 1.2 1.1Malta : -4.8 -1.2 1.4 1.2 -2.1 0.3 -0.5 0.1 0.0 0.2 -0.4Netherlands 2.8 3.5 1.9 2.7 1.3 1.7 -1.4 -1.9 -0.4 0.9 0.0 0.9Austria 0.1 1.4 1.2 0.8 0.7 0.4 -0.1 -1.0 -0.4 0.0 -0.1 -0.1Portugal 1.3 -1.1 -0.9 -1.0 -0.5 -0.5 -6.2 -5.8 -0.7 1.7 -0.1 -0.3Slovenia : -0.9 -0.9 -1.4 -1.6 -3.5 -2.2 -1.4 -1.7 -1.3 -2.1 -2.0Slovakia : -3.8 -1.2 -2.1 -2.2 -2.8 -5.9 -6.1 -3.2 -3.0 -3.2 -3.0Finland 0.2 4.6 4.3 4.1 4.1 3.9 1.8 1.3 2.0 2.1 1.7 2.2Euro area 0.9 2.1 0.5 1.0 1.2 0.5 -1.5 -1.6 0.0 0.6 -0.5 0.0Bulgaria : : 1.6 2.0 0.8 0.6 -2.6 -0.8 -0.4 0.3 -0.6 0.0Czech Republic : -2.4 -3.3 -3.0 -1.8 -3.4 -3.8 -2.6 -2.0 -2.0 -2.1 -2.1Denmark 5.1 4.2 4.4 4.7 4.4 4.4 2.7 1.7 -0.3 0.2 -1.1 -1.0Latvia : -0.2 -1.2 -2.6 -4.1 -5.7 -5.1 -3.6 -1.2 -1.5 -4.4 -4.7Lithuania : -2.1 -1.0 -1.4 -2.9 -4.8 -5.9 -3.3 -2.7 -2.8 -3.8 -3.9Hungary : 1.6 -4.8 -7.0 -2.0 -0.4 2.6 2.0 6.5 0.4 0.0 -2.5Poland : -0.5 -1.9 -1.4 -0.6 -2.4 -4.4 -4.7 -2.6 -0.3 -3.2 -2.5Romania : 1.9 -0.8 -3.4 -4.2 -8.0 -6.7 -3.7 -1.5 -1.0 -1.5 -0.7Sweden 0.0 5.2 1.7 2.0 3.1 3.3 3.6 2.1 2.0 2.9 1.1 2.0United Kingdom -2.5 2.9 -1.8 -1.6 -1.6 -3.0 -7.1 -5.2 -3.5 -1.9 -3.8 -2.0EU : 2.2 0.1 0.4 0.7 -0.1 -2.2 -2.0 -0.5 0.3 -1.0 -0.4

TABLE 40 : Gross debt, general government (as a percentage of GDP, 2003-2012)Spring 2011 Autumn 2010

forecast forecast2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2011 2012

Belgium 98.5 94.2 92.1 88.1 84.2 89.6 96.2 96.8 97.0 97.5 100.5 102.1Germany 63.9 65.8 68.0 67.6 64.9 66.3 73.5 83.2 82.4 81.1 75.9 75.2Estonia 5.6 5.0 4.6 4.4 3.7 4.6 7.2 6.6 6.1 6.9 9.5 11.7Ireland 30.9 29.6 27.4 24.8 25.0 44.4 65.6 96.2 112.0 117.9 107.0 114.3Greece 97.4 98.9 100.3 106.1 105.4 110.7 127.1 142.8 157.7 166.1 150.2 156.0Spain 48.7 46.2 43.0 39.6 36.1 39.8 53.3 60.1 68.1 71.0 69.7 73.0France 62.9 64.9 66.4 63.7 63.9 67.7 78.3 81.7 84.7 86.8 86.8 89.8Italy 104.4 103.9 105.9 106.6 103.6 106.3 116.1 119.0 120.3 119.8 120.2 119.9Cyprus 68.9 70.2 69.1 64.6 58.3 48.3 58.0 60.8 62.3 64.3 65.2 68.4Luxembourg 6.1 6.3 6.1 6.7 6.7 13.6 14.6 18.4 17.2 19.0 19.6 20.9Malta 69.3 72.4 69.6 64.2 62.0 61.5 67.6 68.0 68.0 67.9 70.8 70.9Netherlands 52.0 52.4 51.8 47.4 45.3 58.2 60.8 62.7 63.9 64.0 66.6 67.3Austria 65.5 64.8 63.9 62.1 60.7 63.8 69.6 72.3 73.8 75.4 72.0 73.3Portugal 55.9 57.6 62.8 63.9 68.3 71.6 83.0 93.0 101.7 107.4 88.8 92.4Slovenia 27.3 27.4 26.7 26.4 23.1 21.9 35.2 38.0 42.8 46.0 44.8 47.6Slovakia 42.4 41.5 34.2 30.5 29.6 27.8 35.4 41.0 44.8 46.8 45.1 47.4Finland 44.5 44.4 41.7 39.7 35.2 34.1 43.8 48.4 50.6 52.2 51.1 53.0Euro area (a) 69.0 69.4 70.0 68.4 66.2 69.9 79.3 85.4 87.7 88.5 86.5 87.8Bulgaria 44.4 37.0 27.5 21.6 17.2 13.7 14.6 16.2 18.0 18.6 20.2 20.8Czech Republic 29.8 30.1 29.7 29.4 29.0 30.0 35.3 38.5 41.3 42.9 43.1 45.2Denmark 47.2 45.1 37.8 32.1 27.5 34.5 41.8 43.6 45.3 47.1 47.5 49.2Latvia 14.6 14.9 12.4 10.7 9.0 19.7 36.7 44.7 48.2 49.4 51.9 56.6Lithuania 21.1 19.4 18.4 18.0 16.9 15.6 29.5 38.2 40.7 43.6 42.8 48.3Hungary 58.3 59.1 61.8 65.7 66.1 72.3 78.4 80.2 75.2 72.7 80.1 81.6Poland 47.1 45.7 47.1 47.7 45.0 47.1 50.9 55.0 55.4 55.1 57.2 59.6Romania 21.5 18.7 15.8 12.4 12.6 13.4 23.6 30.8 33.7 34.8 33.4 34.1Sweden 51.7 50.3 50.4 45.0 40.2 38.8 42.8 39.8 36.5 33.4 38.9 37.5United Kingdom 39.0 40.9 42.5 43.4 44.5 54.4 69.6 80.0 84.2 87.9 83.5 86.6EU (a) 61.8 62.2 62.8 61.5 59.0 62.3 74.4 80.2 82.3 83.3 81.8 83.3

(a) Unconsolidated general government debt. For 2010, this implies a debt ratio, which is 0.3 pp. higher for the euro area (0.2 pp. higher for the EU) than

the consolidated general government debt ratio (i.e corrected for the intergovernmental loans) published by Eurostat on April 26, 2011.

223


TABLE 41 : Gross national saving (as a percentage of GDP, 1992-2012) 2.5.20115-year Spring 2011 Autumn 2010


Belgium 24.8 25.9 25.2 25.8 26.7 25.1 22.2 22.5 22.3 22.5 23.1 23.4Germany 21.2 20.3 21.4 24.2 26.0 25.2 21.5 22.6 22.9 23.2 23.0 23.3Estonia : 21.8 22.4 23.0 22.0 20.6 24.5 25.9 26.4 25.9 24.9 24.9Ireland 18.6 23.5 23.0 24.8 21.7 16.4 11.5 10.1 11.5 12.1 11.8 12.7Greece 18.5 14.0 10.1 7.7 6.3 4.2 2.1 2.8 3.4 5.8 5.1 6.7Spain 20.6 22.3 22.5 22.0 21.0 19.4 18.9 18.5 18.2 18.6 18.4 18.8France 18.9 21.1 19.1 19.3 20.0 19.3 16.1 15.3 15.5 16.2 16.3 16.5Italy 20.6 21.3 20.0 19.6 20.1 18.0 15.9 16.0 17.0 17.6 17.0 17.7Cyprus : 16.7 14.4 13.5 10.8 7.2 9.4 9.6 9.2 9.3 9.1 8.5Luxembourg 35.0 33.4 32.3 30.7 31.0 25.5 23.2 24.1 25.2 25.3 24.5 25.0Malta : 14.2 12.1 11.1 16.5 14.8 9.2 12.3 13.4 14.1 13.4 14.3Netherlands 25.9 27.1 26.9 29.0 28.8 25.7 21.8 24.9 26.1 26.9 25.1 26.6Austria 22.1 23.1 24.9 25.6 27.2 26.9 23.8 24.4 24.8 25.4 24.4 25.1Portugal 19.4 19.1 15.1 12.4 12.7 10.6 9.2 9.2 10.3 11.5 10.9 12.0Slovenia 23.5 24.3 25.2 26.5 27.2 25.2 21.7 22.1 22.0 22.0 23.0 23.2Slovakia : 23.7 19.9 19.7 22.1 20.7 16.4 20.2 20.8 21.4 21.6 22.2Finland 17.8 26.5 26.0 25.9 27.1 25.2 20.6 21.7 22.1 22.7 20.1 20.3Euro area 20.9 21.6 21.1 21.9 22.5 21.1 18.2 18.7 19.1 19.7 19.3 19.8Bulgaria : : 16.0 14.5 8.8 14.4 20.4 23.4 23.8 24.0 20.6 20.9Czech Republic 28.1 24.9 22.7 24.7 24.4 24.5 20.5 20.0 20.5 21.2 21.6 22.1Denmark 19.9 22.0 24.0 25.7 24.7 24.5 20.7 21.4 21.5 21.5 21.9 21.8Latvia 31.2 16.6 20.0 17.2 18.1 18.1 28.9 24.3 21.3 21.4 21.0 20.7Lithuania : 13.1 15.7 16.0 15.8 13.7 13.3 17.7 18.5 19.4 15.9 16.3Hungary : 21.9 16.9 16.3 16.4 16.8 18.8 20.1 20.1 20.8 20.8 20.6Poland 17.2 19.9 17.1 18.0 19.4 19.1 18.2 17.3 17.7 18.1 19.1 19.8Romania 22.0 13.7 17.2 15.9 17.4 19.8 21.1 22.3 22.2 22.8 20.3 21.4Sweden 17.6 22.3 24.3 26.6 28.9 29.1 23.0 24.6 25.6 25.9 25.8 25.9United Kingdom 15.2 16.2 14.8 14.1 15.6 15.0 11.7 12.1 13.0 14.2 13.4 15.3EU : 21.0 20.1 20.6 21.4 20.4 17.6 18.0 18.5 19.1 18.7 19.4USA 15.0 17.7 14.5 15.8 13.9 11.9 10.3 12.7 12.1 12.6 12.9 13.3Japan 31.6 28.5 26.7 27.7 28.5 26.8 23.0 23.7 22.2 22.3 24.3 23.9

TABLE 42 : Gross saving, private sector (as a percentage of GDP, 1992-2012) ¹5-year Spring 2011 Autumn 2010


Belgium 28.0 24.1 23.7 23.8 24.9 24.3 25.3 24.5 23.9 24.4 25.4 25.7Germany 20.8 19.6 22.2 23.6 23.5 22.8 22.0 23.3 22.7 22.4 23.4 23.0Estonia : 17.7 16.6 16.2 14.4 17.4 22.3 24.0 23.7 23.3 22.9 23.2Ireland 18.6 18.1 18.5 18.7 17.5 17.7 19.1 18.5 18.8 18.0 18.9 19.1Greece 24.6 14.5 12.4 11.2 10.5 10.6 14.1 11.2 10.8 13.9 11.1 13.5Spain 21.8 20.1 17.8 15.6 14.1 18.4 24.1 22.8 20.6 20.2 20.7 20.5France 20.0 19.7 18.9 18.0 18.9 18.7 19.5 18.7 18.3 18.7 18.7 18.6Italy 25.6 20.5 20.1 18.3 17.8 17.2 18.0 17.6 18.3 18.2 18.6 18.5Cyprus : 16.9 14.7 11.0 3.6 2.6 10.1 9.9 9.9 9.9 10.3 9.7Luxembourg : 24.4 26.1 24.2 23.0 18.5 19.2 20.6 21.2 21.7 21.2 21.9Malta : 17.9 13.9 12.4 16.1 16.8 11.0 14.2 14.9 15.4 14.5 15.4Netherlands 26.4 24.1 24.8 25.5 25.4 21.5 22.4 25.8 25.4 25.1 24.7 25.3Austria 21.6 21.2 23.2 24.1 24.6 24.5 24.3 25.0 24.8 25.1 25.2 25.6Portugal 20.7 18.5 16.8 14.1 13.3 11.8 16.1 15.7 14.7 14.8 14.4 15.7Slovenia : 22.9 23.0 23.7 22.5 21.5 22.2 22.8 22.4 22.7 23.3 23.2Slovakia : 23.6 20.0 19.9 21.5 19.8 20.1 24.4 22.7 23.2 23.8 24.2Finland 19.8 21.0 20.4 19.8 19.6 18.6 20.2 21.4 20.4 20.7 18.9 18.8Euro area 22.2 20.2 20.4 20.0 19.9 19.7 20.8 21.0 20.5 20.5 20.8 20.8Bulgaria : : 11.8 9.2 0.5 7.8 20.3 22.6 22.7 21.6 19.4 19.0Czech Republic : 21.5 19.8 21.0 19.7 21.5 21.5 20.5 20.5 20.5 21.2 21.4Denmark 20.4 19.3 19.9 18.9 18.2 19.1 21.3 21.8 23.2 22.5 24.2 23.5Latvia : 15.5 17.2 11.7 12.4 17.6 33.9 26.5 21.9 21.0 25.1 24.3Lithuania : 11.7 13.5 12.9 12.2 12.6 20.0 22.3 21.9 22.4 21.1 21.4Hungary : 21.5 19.3 20.3 16.9 17.0 20.5 22.4 23.0 21.9 22.8 24.1Poland : 19.7 17.9 17.4 16.9 17.8 20.0 20.1 18.6 17.3 20.7 20.7Romania : 14.2 13.9 11.6 13.3 18.8 23.9 22.9 20.3 19.9 19.9 19.6Sweden 21.4 18.4 20.7 21.2 22.2 23.7 20.2 21.2 21.3 20.6 22.4 21.5United Kingdom 18.6 14.5 15.6 14.3 15.9 16.7 18.3 18.8 18.5 18.4 18.8 18.8EU : 19.4 19.5 18.9 19.0 19.2 20.5 20.7 20.2 20.1 20.6 20.6USA 17.1 15.3 15.7 15.6 14.1 15.1 17.8 19.3 18.9 17.6 18.6 17.5Japan 26.6 27.7 28.4 27.6 28.2 27.2 29.2 30.7 29.8 30.0 29.1 28.8¹ ESA 79 up to 1994, ESA 95 from 1995 onwards.

224

Statistical Annex

TABLE 43 : Savings rate of households (1992-2012) ¹ 2.5.20115-year Spring 2011 Autumn 2010


Belgium 20.1 17.3 16.1 15.9 16.4 17.0 18.3 17.1 16.5 16.5 16.6 16.8Germany 17.0 15.5 16.1 16.4 16.8 17.6 17.2 17.3 17.1 16.9 17.2 17.0Estonia : 4.1 -3.3 -6.3 -1.7 3.4 13.3 7.4 7.7 5.4 7.1 6.7Ireland : : 8.9 8.6 6.4 9.3 16.4 18.0 18.1 16.1 15.8 15.1Greece : 9.1 -0.3 -1.8 4.4 -0.3 4.2 -0.2 3.2 5.0 1.3 1.0Spain : 11.9 11.4 11.1 10.7 13.4 18.0 13.1 11.0 11.0 14.6 13.7France 15.0 15.3 15.5 14.8 15.2 15.1 16.0 15.9 15.3 15.7 15.7 15.7Italy 23.3 16.6 16.0 15.2 14.8 15.2 14.9 13.4 13.2 13.1 14.3 14.0Cyprus : 10.3 10.5 10.5 7.9 6.5 9.1 : : : : :Luxembourg : : : : : : : : : : : :Malta : : : : : : : : : : : :Netherlands 18.9 15.1 12.9 12.2 13.0 12.0 13.4 12.2 12.4 12.8 14.7 14.7Austria : 13.5 14.1 15.1 16.2 16.5 16.0 15.0 14.9 15.0 15.7 15.9Portugal : 10.6 9.8 8.0 7.0 7.1 10.9 9.8 10.5 11.5 9.9 10.2Slovenia : 13.9 16.1 17.6 15.7 15.5 15.9 15.3 14.5 14.6 15.5 15.3Slovakia : 11.4 6.7 5.8 7.5 6.6 8.1 9.5 8.6 8.2 7.2 6.8Finland 11.6 8.6 8.3 6.8 7.2 7.9 11.5 11.6 9.3 8.7 10.0 9.4Euro area : : 14.3 13.9 14.2 14.7 15.8 14.7 14.3 14.3 15.1 14.9Bulgaria : : -21.3 -29.2 -27.4 : : : : : : :Czech Republic : 8.9 7.8 9.4 10.7 10.1 8.9 9.1 8.8 8.3 8.3 8.0Denmark 7.3 5.6 7.0 5.4 4.2 5.0 7.7 5.1 8.0 7.1 10.4 9.7Latvia 5.4 1.2 1.2 -3.6 -5.0 5.0 9.4 : : : : :Lithuania : 5.1 2.2 1.1 -5.2 -2.2 7.8 : : : : :Hungary : 15.9 11.2 12.4 10.3 8.4 10.9 : : : : :Poland : 13.5 9.9 9.8 8.5 3.7 9.9 10.7 8.2 7.5 7.9 7.5Romania : 0.6 -8.7 -14.0 -11.5 -1.1 : : : : : :Sweden 10.7 6.9 9.5 9.4 11.6 13.9 15.5 13.5 13.8 13.8 12.4 11.2United Kingdom 10.3 6.6 4.2 3.4 2.6 2.0 6.0 5.4 6.1 7.1 3.7 4.0EU : : 11.7 11.1 10.9 11.1 13.4 13.0 12.8 12.9 13.1 12.9USA 9.9 7.8 7.2 7.0 6.8 8.7 10.5 8.5 7.8 7.4 7.8 7.2Japan 19.5 15.7 10.9 10.3 9.2 8.9 11.3 11.9 13.6 13.7 9.0 8.9¹ ESA 79 up to 1994, ESA 95 from 1995 onwards.

TABLE 44 : Gross saving, general government (as a percentage of GDP, 1992-2012) ¹5-year Spring 2011 Autumn 2010


Belgium -3.3 1.8 1.5 2.0 1.8 0.8 -3.1 -2.0 -1.5 -1.9 -2.3 -2.4Germany 0.4 0.7 -0.7 0.7 2.4 2.5 -0.5 -0.8 0.2 0.8 -0.4 0.3Estonia : 4.0 5.8 6.8 7.6 3.2 2.3 2.0 2.6 2.5 2.0 1.7Ireland 0.0 5.4 4.5 6.1 4.2 -1.4 -7.7 -8.5 -7.3 -5.9 -7.1 -6.4Greece -6.1 -0.5 -2.3 -3.5 -4.1 -6.5 -11.9 -8.4 -7.4 -8.1 -6.0 -6.8Spain -1.1 2.1 4.7 6.4 6.9 1.0 -5.2 -4.3 -2.3 -1.5 -2.4 -1.7France -1.1 1.5 0.2 1.3 1.1 0.6 -3.4 -3.4 -2.8 -2.5 -2.4 -2.1Italy -5.0 0.8 -0.1 1.4 2.2 0.8 -2.1 -1.6 -1.3 -0.6 -1.5 -0.8Cyprus : -0.2 -0.3 2.5 7.2 4.7 -0.7 -0.3 -0.6 -0.6 -1.2 -1.2Luxembourg : 9.0 6.2 6.5 8.0 7.0 4.0 3.5 4.0 3.6 3.3 3.2Malta : -3.7 -1.8 -1.3 0.4 -2.0 -1.7 -2.0 -1.5 -1.4 -1.1 -1.1Netherlands -0.4 3.0 2.0 3.5 3.4 4.2 -0.6 -0.9 0.7 1.8 0.4 1.3Austria 0.6 1.9 1.7 1.5 2.6 2.4 -0.5 -0.7 0.0 0.3 -0.8 -0.5Portugal -1.2 0.6 -1.7 -1.7 -0.6 -1.3 -7.0 -6.5 -4.3 -3.3 -3.6 -3.6Slovenia : 1.4 2.1 2.8 4.7 3.7 -0.5 -0.7 -0.5 -0.7 -0.3 0.0Slovakia : 0.2 -0.1 -0.2 0.7 1.0 -3.7 -4.2 -1.9 -1.8 -2.2 -1.9Finland -2.0 5.5 5.6 6.2 7.6 6.6 0.3 0.3 1.7 2.0 1.1 1.5Euro area -1.4 1.4 0.7 1.9 2.6 1.4 -2.6 -2.3 -1.4 -0.8 -1.5 -1.0Bulgaria : 4.1 4.2 5.3 8.4 6.6 0.1 0.9 1.1 2.3 1.1 1.9Czech Republic : 3.3 2.9 3.7 4.7 3.0 -1.0 -0.4 0.0 0.6 0.3 0.8Denmark -0.6 2.7 4.1 6.8 6.5 5.5 -0.6 -0.4 -1.6 -0.9 -2.3 -1.8Latvia : 1.0 2.8 5.5 5.7 0.5 -5.0 -2.2 -0.6 0.4 -4.1 -3.6Lithuania : 1.4 2.2 3.0 3.6 1.1 -6.7 -4.7 -3.4 -3.0 -5.2 -5.1Hungary : 0.4 -2.4 -4.0 -0.4 -0.2 -1.7 -2.3 -2.9 -1.1 -2.0 -3.5Poland : 0.2 -0.8 0.7 2.5 1.3 -1.8 -2.8 -0.9 0.7 -1.7 -0.9Romania : -0.5 3.4 4.3 4.1 1.1 -2.8 -0.6 1.9 3.0 0.4 1.8Sweden -3.8 3.9 3.6 5.5 6.7 5.4 2.9 3.5 4.3 5.2 3.3 4.4United Kingdom -3.4 1.7 -0.8 -0.2 -0.3 -1.6 -6.6 -6.6 -5.4 -4.3 -5.4 -3.5EU : 1.5 0.6 1.8 2.4 1.2 -2.9 -2.7 -1.7 -1.0 -1.4 -0.6USA -2.0 2.4 -1.3 0.2 -0.2 -3.2 -7.5 -6.6 -6.8 -5.1 -5.7 -4.2Japan 5.0 0.8 -1.7 0.1 0.3 -0.4 -6.2 -7.0 -7.5 -7.7 -4.8 -4.9¹ ESA 79 up to 1994, ESA 95 from 1995 onwards.

225


TABLE 45 : Exports of goods and services, volume (percentage change on preceding year, 1992-2012) 2.5.20115-year Spring 2011 Autumn 2010


Belgium 4.0 6.3 3.9 5.1 4.4 1.7 -11.6 10.5 5.9 5.5 5.7 6.0Germany 2.8 9.1 7.5 13.1 7.6 2.5 -14.3 14.1 7.6 6.5 6.6 6.7Estonia : 13.0 9.0 6.7 1.5 0.4 -18.7 21.7 16.0 6.4 6.6 6.3Ireland 14.2 16.9 4.6 4.8 8.2 -0.8 -4.1 9.4 6.0 5.2 4.5 4.5Greece 4.2 11.2 3.6 5.3 5.8 4.0 -20.1 3.8 10.7 6.9 5.1 6.0Spain 10.3 8.9 3.8 6.7 6.7 -1.1 -11.6 10.3 7.0 5.8 5.5 5.6France 5.2 8.1 2.4 4.8 2.5 -0.5 -12.4 10.5 6.7 6.6 5.9 6.2Italy 7.7 4.3 1.4 6.2 4.6 -4.3 -18.4 9.1 6.0 5.7 5.6 5.7Cyprus : 6.1 1.6 3.5 6.1 -0.3 -11.3 0.6 4.1 4.3 3.5 3.8Luxembourg 4.4 10.7 7.4 13.0 9.1 6.6 -8.2 6.3 6.8 6.5 7.6 6.1Malta : 4.8 2.8 9.3 3.1 1.0 -8.4 17.2 6.1 6.1 6.3 6.2Netherlands 5.8 8.3 4.7 7.3 6.4 2.8 -7.9 10.9 6.4 6.0 6.0 6.9Austria 3.2 9.1 6.1 7.7 8.6 1.0 -16.1 10.8 7.0 6.8 6.3 6.5Portugal 7.5 5.9 4.4 11.6 7.6 -0.1 -11.6 8.8 6.2 5.9 5.6 6.4Slovenia -2.1 7.9 9.0 12.5 13.7 3.3 -17.7 7.8 6.7 6.9 5.9 7.2Slovakia : 10.8 11.7 21.0 14.3 3.1 -15.9 16.4 8.5 8.2 7.9 8.0Finland 10.8 10.5 5.6 12.2 8.2 6.3 -20.1 5.1 8.5 5.5 6.1 4.8Euro area 5.8 8.2 4.8 8.6 6.3 0.9 -13.1 11.2 6.9 6.2 6.1 6.3Bulgaria : 3.2 11.0 50.7 6.1 3.0 -11.2 16.2 7.7 7.1 5.6 6.2Czech Republic 9.7 10.3 11.3 15.8 15.0 6.0 -10.8 18.0 9.8 10.3 7.3 7.6Denmark 3.4 7.2 4.5 9.0 2.8 2.8 -9.7 3.6 4.7 4.3 5.0 5.6Latvia : 5.8 9.2 6.5 10.0 2.0 -14.1 10.3 8.6 6.6 6.0 6.4Lithuania : 6.7 11.9 12.0 3.0 11.6 -12.7 17.4 11.2 7.1 6.3 6.6Hungary 11.5 15.2 10.9 18.6 16.2 5.7 -9.6 14.1 9.6 9.2 9.0 10.0Poland 12.2 9.7 11.0 14.6 9.1 7.1 -6.8 10.2 7.7 7.6 6.9 7.7Romania 11.2 11.1 11.6 10.4 7.8 8.3 -5.3 13.1 8.4 7.3 6.0 6.1Sweden 7.8 8.3 6.3 9.0 5.7 1.7 -13.4 10.7 7.6 5.1 6.9 5.9United Kingdom 7.2 5.4 5.3 11.1 -2.6 1.0 -10.1 5.3 8.9 7.5 8.3 8.9EU 7.0 7.9 5.3 9.4 5.5 1.5 -12.4 10.6 7.3 6.5 6.4 6.6USA 7.4 4.1 4.9 9.0 9.3 6.0 -9.5 11.9 7.8 9.3 8.4 7.4Japan 3.7 2.9 9.4 9.7 8.4 1.6 -23.9 24.2 1.0 3.8 4.8 5.1

TABLE 46 : Imports of goods and services, volume (percentage change on preceding year, 1992-2012)5-year Spring 2011 Autumn 2010


Belgium 4.0 5.8 3.7 4.6 4.7 3.0 -11.1 8.4 5.4 5.5 5.5 6.1Germany 3.2 7.5 5.9 11.9 5.0 3.3 -9.4 12.6 7.5 7.2 7.2 7.6Estonia : 12.4 12.2 13.3 7.8 -7.0 -32.6 21.0 16.9 7.1 6.6 6.2Ireland 12.0 16.8 4.8 6.4 7.8 -2.9 -9.7 6.6 3.2 4.0 0.9 2.5Greece 3.8 10.8 3.0 9.7 9.9 4.0 -18.6 -4.8 -8.4 -3.1 -6.4 -1.5Spain 6.4 11.4 7.5 10.2 8.0 -5.3 -17.8 5.4 1.7 3.8 1.4 4.5France 3.2 8.6 4.3 5.6 5.6 0.6 -10.7 8.2 6.8 7.5 5.7 5.7Italy 2.1 7.0 2.7 5.9 3.8 -4.4 -13.7 10.5 4.6 5.1 4.3 4.6Cyprus : 4.7 4.0 6.7 13.3 8.1 -19.3 3.1 2.2 2.5 2.1 2.4Luxembourg 3.6 11.1 7.2 12.8 9.3 8.5 -10.2 6.7 8.0 7.0 8.8 6.7Malta : 2.4 3.7 9.7 1.6 -1.1 -11.1 12.6 6.4 5.6 6.5 6.3Netherlands 5.5 8.9 4.4 8.8 5.6 3.4 -8.5 10.5 5.8 6.1 5.2 6.9Austria 3.3 6.7 5.1 5.4 7.0 -0.9 -14.4 9.2 5.9 6.3 5.6 5.5Portugal 7.0 8.0 3.2 7.2 5.5 2.3 -10.6 5.2 -5.3 -2.8 -3.2 1.5Slovenia 3.1 7.7 8.7 12.2 16.7 3.8 -19.7 6.6 5.2 6.1 5.0 6.5Slovakia : 9.6 10.0 17.8 9.2 3.1 -18.6 14.9 5.9 7.3 6.6 7.2Finland 6.0 8.4 6.6 7.9 7.0 6.5 -17.6 2.6 7.2 5.1 5.8 4.8Euro area 3.9 8.3 4.9 8.5 5.8 0.8 -11.9 9.3 5.4 5.9 5.1 5.9Bulgaria : 11.5 14.1 47.7 9.6 4.2 -21.0 4.5 7.0 6.8 4.9 5.8Czech Republic 20.1 9.8 9.9 14.3 14.3 4.7 -10.6 18.0 8.4 9.7 6.3 7.0Denmark 4.3 7.2 7.5 13.4 4.3 2.7 -12.5 2.9 5.0 4.9 5.3 5.9Latvia : 7.3 13.6 19.4 14.7 -11.2 -33.5 8.6 8.6 7.7 6.0 8.5Lithuania : 7.5 14.6 13.7 10.7 10.3 -28.4 17.9 12.0 8.0 8.1 8.4Hungary 11.9 16.0 10.4 14.8 13.3 5.8 -14.6 12.0 9.3 8.6 9.5 10.6Poland 15.3 9.7 9.9 17.3 13.7 8.0 -12.4 10.7 8.5 7.5 7.5 8.2Romania 8.1 13.1 17.8 22.6 27.3 7.9 -20.9 11.6 6.6 8.1 6.4 8.3Sweden 4.5 7.6 5.0 9.0 9.0 3.5 -13.7 12.7 7.3 5.0 7.7 6.1United Kingdom 6.2 8.1 6.0 9.1 -0.8 -1.2 -11.9 8.5 4.0 2.5 5.7 5.2EU 5.4 8.4 5.6 9.4 5.7 1.1 -12.3 9.5 5.6 5.7 5.4 6.1USA 8.8 9.2 6.2 6.1 2.7 -2.6 -13.8 12.7 6.7 9.3 8.0 6.9Japan 6.5 1.3 4.6 4.2 1.6 0.4 -15.3 9.3 4.5 3.7 5.4 4.3

226

Statistical Annex

TABLE 47 : Merchandise trade balance (fob-fob, as a percentage of GDP, 1992-2012) 2.5.20115-year Spring 2011 Autumn 2010


Belgium 3.1 3.0 3.4 2.0 1.6 -1.6 0.1 1.0 0.7 0.5 -0.2 -0.3Germany 2.2 3.6 6.7 7.0 8.2 7.3 5.6 6.1 5.8 5.7 6.0 5.8Estonia : -16.6 -15.7 -17.3 -17.2 -12.2 -3.9 -2.6 -2.6 -3.0 -4.1 -4.1Ireland 16.5 23.9 20.6 13.2 10.5 13.2 20.3 24.2 27.1 28.6 25.1 26.7Greece -12.0 -15.4 -18.1 -17.9 -19.5 -20.4 -16.3 -14.2 -13.0 -12.3 -11.1 -10.3Spain -3.3 -4.6 -6.5 -8.4 -8.6 -7.8 -4.2 -4.4 -4.2 -4.0 -3.5 -3.2France 0.6 1.0 -0.5 -1.5 -2.1 -2.8 -2.2 -2.6 -3.1 -3.3 -3.0 -3.0Italy 2.7 2.1 0.4 -0.7 0.2 -0.1 0.1 -1.3 -1.5 -1.3 -0.3 0.0Cyprus : -24.6 -25.8 -27.2 -29.7 -31.9 -25.0 -26.7 -27.0 -27.2 -24.3 -24.4Luxembourg -10.2 -12.7 -10.5 -9.6 -8.8 -10.4 -7.7 -8.1 -9.2 -9.4 -12.8 -14.3Malta -22.4 -17.6 -14.8 -19.1 -18.0 -21.1 -16.6 -14.9 -16.0 -15.8 -14.9 -15.2Netherlands 5.0 5.3 7.2 7.7 7.6 7.3 6.7 7.4 8.3 8.7 7.7 8.1Austria -4.2 -2.2 -0.1 0.2 0.4 -0.2 -0.8 -0.8 -1.1 -1.2 -0.3 0.1Portugal -9.8 -10.8 -10.1 -10.9 -10.9 -12.9 -10.1 -10.0 -8.0 -5.9 -8.5 -7.6Slovenia -1.1 -4.4 -2.9 -3.8 -4.9 -7.2 -2.1 -2.8 -3.4 -3.3 -2.0 -1.9Slovakia : -8.6 -5.2 -5.4 -1.8 -1.6 1.5 0.0 0.6 1.2 2.9 3.5Finland 7.3 9.8 6.6 5.2 5.1 3.7 2.0 1.9 1.6 1.7 2.3 2.2Euro area 1.1 1.5 1.5 0.6 0.8 0.2 0.6 0.7 0.6 0.7 1.0 1.1Euro area, adjusted ¹ : : : : : -0.2 0.4 0.4 0.4 0.5 : :Bulgaria -2.6 -5.3 -16.8 -21.1 -23.6 -24.3 -12.0 -6.7 -7.5 -8.2 -6.5 -6.5Czech Republic -5.2 -5.3 -0.4 2.0 3.4 2.7 4.5 3.7 3.8 4.4 5.6 6.4Denmark 4.1 3.7 3.4 1.1 0.1 0.2 2.6 2.9 3.1 3.1 1.9 1.5Latvia -7.0 -14.8 -19.7 -25.6 -23.9 -17.7 -7.1 -6.4 -6.8 -7.5 -7.8 -8.9Lithuania : -11.3 -10.8 -13.9 -15.0 -13.0 -3.1 -4.3 -5.0 -5.5 -2.2 -3.2Hungary -5.7 -4.5 -3.3 -2.8 -0.2 -0.6 3.5 4.7 5.0 5.9 4.4 3.5Poland -0.1 -6.4 -2.3 -2.0 -4.0 -4.9 -1.0 -1.4 -2.2 -2.0 -2.0 -2.5Romania -6.3 -5.6 -8.8 -12.0 -14.3 -13.6 -5.8 -4.8 -4.9 -5.1 -4.4 -5.0Sweden 5.0 7.1 6.4 5.7 4.6 3.6 3.2 2.4 2.5 2.3 3.3 3.0United Kingdom -1.8 -2.9 -5.0 -5.7 -6.4 -6.4 -5.9 -6.7 -6.1 -4.7 -6.3 -5.8EU -0.4 0.7 0.3 -0.6 -0.7 -1.1 -0.2 -0.3 -0.3 0.0 0.0 0.1EU, adjusted ¹ -1.4 -1.2 -1.7 -0.7 -0.8 -0.7 -0.5 -0.5 -0.4USA -2.1 -3.6 -5.7 -6.5 -6.0 -6.0 -3.7 -4.6 -5.3 -5.6 -5.3 -5.5Japan 2.7 2.5 2.3 1.9 2.4 0.8 0.9 1.8 0.2 -0.1 1.4 1.4¹ See note 7 on concepts and sources.

TABLE 48 : Current-account balance (as a percentage of GDP, 1992-2012)5-year Spring 2011 Autumn 2010


Belgium 4.3 4.5 4.5 3.4 3.9 1.1 2.0 2.4 2.0 2.0 2.0 2.0Germany -1.1 -0.8 4.2 6.6 7.6 6.7 5.0 5.1 4.7 4.6 4.6 4.3Estonia : -7.4 -11.8 -15.7 -17.2 -8.8 4.5 2.8 1.8 0.1 1.4 0.9Ireland 2.6 0.5 -1.3 -3.7 -5.5 -5.6 -3.1 -0.7 1.2 1.8 1.5 2.7Greece -0.5 -6.7 -11.8 -12.7 -15.6 -16.3 -14.0 -11.8 -8.3 -6.1 -8.0 -6.5Spain -1.4 -2.4 -6.0 -9.0 -10.0 -9.6 -5.5 -4.5 -4.1 -4.1 -3.8 -3.6France 0.5 1.9 -0.6 -1.8 -2.2 -2.7 -2.9 -3.5 -3.9 -4.2 -3.4 -3.5Italy ¹ 1.0 1.2 -1.0 -2.0 -1.8 -3.2 -3.0 -4.2 -3.5 -3.3 -2.7 -2.4Cyprus : -1.3 -5.0 -7.2 -11.6 -17.0 -7.9 -8.9 -8.1 -7.2 -5.7 -5.4Luxembourg 12.8 10.0 10.5 10.4 10.1 5.3 6.9 7.8 7.8 7.6 9.4 9.9Malta : -6.4 -4.9 -9.3 -5.6 -5.6 -6.9 -4.1 -4.7 -4.5 -2.9 -2.2Netherlands 4.6 4.8 7.5 9.0 8.4 4.8 3.4 6.7 7.7 8.3 6.8 7.9Austria -2.5 -1.4 2.4 3.3 4.0 3.7 2.6 2.6 2.6 2.8 3.5 4.1Portugal -5.5 -8.8 -8.9 -10.8 -10.2 -12.6 -10.7 -9.8 -7.5 -5.2 -8.0 -6.7Slovenia 2.5 -1.8 -1.4 -2.4 -4.5 -6.8 -1.3 -1.1 -1.4 -1.9 -0.6 -0.8Slovakia : -6.5 -7.5 -8.3 -5.6 -6.9 -3.2 -2.9 -2.8 -2.6 -1.9 -1.7Finland 0.1 6.4 5.6 4.6 4.2 2.9 2.2 3.0 2.5 2.5 1.6 1.4Euro area 0.2 0.4 0.5 0.3 0.2 -0.8 -0.6 -0.4 -0.2 -0.1 0.0 0.1Euro area, adjusted ¹ : : : : : -1.5 -0.3 -0.1 0.1 0.2 : :Bulgaria -4.3 -2.3 -8.7 -17.6 -25.2 -23.2 -9.0 -1.5 -2.0 -2.6 -2.5 -2.3Czech Republic -2.1 -4.1 -4.4 -2.1 -2.6 -0.8 -1.2 -2.3 -2.5 -1.9 -1.5 -1.1Denmark 1.8 1.2 3.3 3.0 1.4 2.7 3.6 5.3 5.2 5.1 4.2 4.0Latvia 6.0 -7.3 -12.5 -22.5 -22.3 -13.1 8.6 3.6 -0.3 -1.6 -0.5 -2.9Lithuania : -8.5 -7.4 -10.4 -15.1 -13.1 2.6 1.8 0.2 -0.6 1.3 1.0Hungary : -6.2 -8.1 -7.7 -7.0 -6.9 -0.4 1.7 1.6 1.9 0.4 -0.4Poland 0.6 -4.0 -2.4 -3.0 -5.1 -4.8 -2.2 -3.1 -4.1 -4.1 -3.3 -3.7Romania : -5.4 -6.3 -10.6 -13.6 -11.4 -4.2 -4.2 -4.4 -4.8 -5.6 -6.2Sweden 1.2 4.7 6.7 7.9 8.6 8.9 6.8 6.2 6.2 5.9 6.5 6.1United Kingdom -1.4 -1.5 -2.3 -3.4 -2.6 -1.6 -1.7 -2.5 -1.2 -0.1 -1.5 -0.2EU -0.2 0.0 0.0 -0.4 -0.5 -1.0 -0.6 -0.5 -0.2 0.0 -0.1 0.1EU, adjusted ¹ -1.2 -1.0 -2.0 -0.9 -0.9 -0.6 -0.3 -0.5 -0.3USA -1.3 -3.0 -5.2 -6.0 -5.1 -4.7 -2.7 -3.3 -4.0 -4.0 -4.0 -4.2Japan 2.4 2.5 3.5 3.9 4.8 3.2 2.8 3.6 1.4 1.1 3.7 3.7¹ See note 7 on concepts and sources.

227


TABLE 49 : Net lending (+) or net borrowing (-) of the nation (as a percentage of GDP, 1992-2012) 2.5.20115-year Spring 2011 Autumn 2010


Belgium 4.1 4.5 4.5 3.4 3.6 0.6 1.6 2.1 1.8 1.8 1.7 1.8Germany -1.1 -0.7 4.2 6.6 7.7 6.7 5.0 5.1 4.7 4.6 4.6 4.3Estonia : -7.0 -10.9 -13.6 -16.2 -7.7 7.8 6.6 5.4 2.4 5.4 4.6Ireland 3.4 1.4 -1.9 -3.1 -5.6 -5.9 -3.4 -1.6 0.9 1.4 1.4 2.6Greece : -5.0 -10.3 -10.4 -13.3 -14.9 -12.9 -10.1 -6.4 -4.0 -6.7 -5.1Spain -0.7 -1.4 -5.1 -8.4 -9.6 -9.2 -5.1 -3.9 -3.6 -3.5 -3.3 -3.1France 0.5 2.0 -0.7 -1.8 -2.1 -2.7 -2.8 -3.2 -2.9 -2.9 -3.1 -3.0Italy ¹ 1.1 1.4 -0.9 -1.9 -1.7 -3.2 -2.9 -4.2 -3.5 -3.2 -2.5 -2.2Cyprus : -1.3 -4.6 -7.1 -11.6 -16.9 -7.6 -8.7 -7.9 -7.1 -5.4 -5.1Luxembourg : : 10.3 9.5 9.7 4.7 6.2 7.8 7.8 7.6 9.4 9.9Malta : -6.0 -3.3 -6.3 -4.6 -5.1 -5.7 -2.8 -3.3 -3.0 -0.9 -0.2Netherlands 4.2 4.6 7.2 8.7 8.2 4.4 3.1 6.0 7.1 7.7 6.5 7.7Austria -2.6 -1.5 2.3 3.0 4.1 3.7 2.7 1.5 1.7 2.1 3.5 4.1Portugal -2.9 -6.7 -7.2 -9.5 -8.9 -11.4 -9.7 -8.5 -6.0 -3.7 -6.7 -5.3Slovenia 2.4 -1.7 -1.8 -2.8 -4.7 -6.7 -1.4 -1.1 -2.0 -1.3 -0.2 -0.2Slovakia : -6.7 -7.9 -7.8 -5.2 -6.0 -2.4 -0.6 -0.7 -0.2 -0.1 0.1Finland 0.1 6.5 5.7 4.7 4.3 3.0 2.3 3.1 2.6 2.6 1.7 1.5Euro area 0.3 0.6 0.6 0.5 0.5 -0.6 -0.5 -0.3 0.1 0.3 0.2 0.4Euro area, adjusted ¹ : : : : : : : : : : : :Bulgaria -4.6 -2.1 -8.2 -16.9 -27.2 -22.4 -7.6 -0.8 -1.3 -1.8 -0.8 -0.6Czech Republic -3.0 -4.0 -4.1 -1.7 -2.0 0.3 0.6 -0.2 -0.4 -0.2 0.0 0.0Denmark 1.8 1.4 3.3 3.0 1.4 2.7 3.5 5.0 4.9 4.8 4.2 3.9Latvia 11.9 -7.0 -11.6 -21.3 -20.4 -11.6 11.1 5.6 3.1 1.5 1.9 -0.6Lithuania : -8.5 -6.6 -8.9 -12.9 -11.2 7.0 5.8 3.9 2.9 5.4 4.9Hungary : -6.0 -7.8 -7.1 -6.2 -6.0 1.3 3.7 3.2 3.9 2.1 1.3Poland 2.4 -4.0 -2.2 -2.1 -4.1 -4.1 -1.0 -1.1 -1.0 -1.3 -0.5 -1.2Romania -3.8 -5.2 -5.7 -10.4 -13.0 -11.0 -3.6 -4.0 -4.2 -4.6 -5.1 -5.7Sweden 0.8 4.3 6.6 7.3 8.5 8.7 6.6 6.1 6.1 5.8 6.4 6.0United Kingdom -1.3 -1.4 -2.2 -3.3 -2.4 -1.4 -1.5 -2.3 -1.0 0.1 -1.3 0.0EU -0.6 -0.6 -1.0 -2.2 -3.1 -3.1 -1.2 -0.3 0.2 0.4 0.2 0.5EU, adjusted ¹ -3.0 -3.6 -4.0 -1.5 -0.6 -0.2 0.1 -0.2 0.1USA -2.6 -2.1 -4.7 -4.3 -5.3 -5.6 -4.0 -3.3 -4.0 -4.0 -4.0 -4.2Japan 2.4 2.3 3.4 3.8 4.7 3.1 2.7 3.5 1.3 1.0 3.7 3.7¹ See note 7 on concepts and sources.

TABLE 50 : Current-account balance (in billions of euro, 2003-2012)Spring 2011 Autumn 2010


Belgium 15.4 13.0 9.8 10.9 13.2 3.8 6.8 8.4 7.4 7.8 7.3 7.7Germany 44.5 106.5 117.3 153.6 185.9 167.0 120.0 126.6 122.9 123.7 119.7 115.4Estonia -1.0 -1.1 -1.1 -2.1 -2.7 -1.4 0.6 0.4 0.3 0.0 0.2 0.1Ireland 1.2 -0.2 -4.9 -6.6 -10.4 -10.2 -4.7 -1.1 1.8 2.9 2.3 4.4Greece -21.2 -19.4 -20.9 -26.9 -35.3 -38.7 -32.8 -27.1 -18.6 -13.8 -18.1 -14.9Spain -31.6 -49.5 -67.8 -88.9 -105.3 -104.9 -58.0 -48.0 -44.5 -45.2 -40.7 -40.1France 3.9 -9.7 -30.8 -33.0 -42.0 -52.9 -54.4 -67.3 -78.7 -87.5 -67.4 -73.7Italy -12.0 -7.6 -17.1 -29.5 -28.1 -50.3 -45.3 -65.0 -56.4 -54.5 -42.3 -39.1Cyprus -0.3 -0.7 -0.8 -1.1 -1.9 -2.9 -1.3 -1.5 -1.5 -1.4 -1.0 -1.0Luxembourg 2.1 3.3 3.5 3.5 3.8 2.1 2.6 3.3 3.4 3.6 4.0 4.4Malta -0.1 -0.3 -0.4 -0.5 -0.3 -0.3 -0.4 -0.3 -0.3 -0.3 -0.2 -0.2Netherlands 29.2 42.2 38.4 48.7 48.1 28.6 19.4 39.9 47.6 53.1 41.0 49.0Austria 3.9 5.2 5.3 8.5 10.9 10.4 7.1 7.4 7.7 8.7 10.1 12.2Portugal -9.6 -12.3 -15.9 -17.2 -17.2 -21.7 -18.1 -16.9 -12.7 -8.8 -13.8 -11.8Slovenia -0.2 -0.7 -0.5 -0.7 -1.6 -2.5 -0.5 -0.4 -0.5 -0.7 -0.2 -0.3Slovakia -1.9 -2.3 -3.3 -3.7 -3.1 -4.4 -2.0 -1.9 -1.9 -1.9 -1.4 -1.3Finland 7.4 9.6 5.5 7.7 7.6 5.3 5.1 5.4 4.8 5.0 2.9 2.7Euro area 29.7 76.0 16.1 22.8 21.5 -73.2 -56.0 -39.5 -19.1 -9.2 2.4 13.7Euro area, adjusted ¹ : : : : : -142.4 -25.7 -9.2 11.1 21.0 : :Bulgaria -1.0 -1.3 -2.7 -4.7 -7.8 -8.2 -3.3 -0.5 -0.8 -1.1 -0.9 -0.9Czech Republic -5.3 -4.8 -1.7 -2.4 -3.3 -1.2 -1.7 -3.4 -3.8 -3.1 -2.4 -1.7Denmark 6.5 5.9 9.0 6.5 3.1 6.2 7.9 12.3 12.7 12.8 10.3 10.0Latvia -0.8 -1.4 -1.6 -3.6 -4.7 -3.0 1.6 0.6 -0.1 -0.3 -0.1 -0.6Lithuania -1.1 -1.4 -1.5 -2.5 -4.3 -4.2 0.7 0.5 0.1 -0.2 0.4 0.3Hungary -6.2 -7.8 -7.3 -6.9 -7.1 -7.4 -0.4 1.6 1.8 2.2 0.4 -0.5Poland -3.3 -8.4 -2.9 -8.3 -15.8 -17.3 -6.8 -10.8 -15.7 -16.9 -12.7 -15.1Romania -2.6 -3.5 -7.1 -10.4 -17.0 -16.0 -4.9 -5.1 -5.8 -6.8 -7.1 -8.5Sweden 19.2 19.7 21.1 25.2 29.0 29.6 19.7 21.5 24.0 23.7 24.5 23.9United Kingdom -26.5 -36.7 -48.0 -65.9 -53.3 -29.9 -26.8 -42.1 -21.2 -2.0 -27.1 -3.4EU 8.8 36.1 -26.7 -50.1 -59.8 -124.7 -69.9 -64.8 -27.9 -1.1 -12.3 17.1EU, adjusted ¹ : -35.7 -83.5 -139.6 -125.9 -254.9 -113.2 -108.1 -71.2 -44.4 -64.5 -35.0USA -456.3 -502.7 -595.4 -636.1 -523.4 -457.1 -273.0 -361.0 -426.5 -436.4 -435.3 -475.8Japan 120.4 138.6 133.4 136.0 153.8 108.2 102.0 150.2 55.1 43.5 158.4 162.5¹ See note 7 on concepts and sources.

228

Statistical Annex

TABLE 51 : Export markets (a) (percentage change on preceding year, 2003-2012) 2.5.2011Spring 2011 Autumn 2010


Belgium : : 6.1 8.8 5.3 2.1 -10.6 10.3 6.4 6.6 6.2 6.4Germany : : 6.2 8.7 6.8 2.2 -11.7 10.5 6.5 6.7 6.3 6.4Estonia : : 9.7 10.0 9.3 1.8 -17.7 9.6 7.3 6.3 6.4 6.2Ireland : : 5.7 8.3 4.1 1.2 -11.5 10.7 6.2 6.4 6.5 6.4Greece : : 6.5 8.7 5.7 1.7 -12.4 10.4 6.2 6.5 6.3 6.3Spain : : 5.6 8.3 5.0 1.9 -10.6 9.8 5.3 5.7 5.5 5.9France : : 6.0 8.6 5.9 1.8 -11.1 10.3 6.0 6.3 6.1 6.4Italy : : 6.7 9.2 6.6 2.7 -11.0 9.9 6.2 6.6 6.2 6.4Cyprus : : 8.3 10.8 6.7 2.2 -13.6 8.1 4.6 5.0 5.0 5.6Luxembourg : : 5.3 7.9 4.9 1.6 -11.2 10.1 6.0 6.1 5.8 6.1Malta : : 6.4 8.6 5.2 1.8 -11.7 10.3 6.3 6.4 6.4 6.4Netherlands : : 5.8 8.8 5.5 2.3 -11.2 10.4 6.3 6.4 6.2 6.4Austria : : 6.0 10.0 6.8 2.8 -11.5 11.3 6.9 6.9 6.6 6.9Portugal : : 6.2 8.7 5.5 0.9 -12.6 9.7 5.4 6.0 5.2 5.7Slovenia : : 5.5 9.3 7.3 2.7 -13.1 9.8 6.3 6.5 6.0 6.4Slovakia : : 5.9 10.8 8.3 3.2 -12.3 11.7 7.0 7.1 6.5 6.9Finland : : 8.4 10.6 8.7 3.6 -12.2 11.9 7.3 6.9 7.0 6.8Euro area (b) : : 6.1 8.8 6.1 2.2 -11.3 10.4 6.3 6.5 6.2 6.4Bulgaria : : 6.6 9.4 8.5 2.4 -12.8 9.4 5.3 5.9 5.1 5.9Czech Republic : : 6.5 10.8 7.0 3.2 -12.3 11.2 6.7 6.7 6.5 6.9Denmark : : 7.0 8.8 6.4 2.4 -11.4 11.4 6.7 6.3 6.6 6.4Latvia : : 9.1 11.8 8.9 3.8 -17.0 12.5 8.7 6.7 6.6 6.5Lithuania : : 10.2 12.0 11.1 2.5 -16.6 11.2 8.1 6.8 6.2 6.4Hungary : : 6.2 10.2 7.8 3.5 -12.5 11.0 6.5 6.7 6.2 6.6Poland : : 7.3 10.5 8.0 3.5 -12.4 11.4 6.8 6.7 6.2 6.5Romania : : 5.6 8.4 7.0 1.7 -12.4 10.2 6.2 6.3 5.8 6.2Sweden : : 7.5 9.0 5.9 2.3 -11.9 9.7 6.2 6.1 6.1 6.1United Kingdom : : 6.5 7.8 6.2 1.6 -11.1 10.5 6.3 6.9 6.1 6.2EU (b) : : 6.3 8.8 6.2 2.2 -11.5 10.5 6.3 6.5 6.2 6.4USA : : 6.7 8.2 7.2 3.5 -11.2 13.1 7.6 7.5 7.1 6.9Japan : : 7.2 8.8 7.7 3.7 -9.0 14.8 9.1 9.1 8.6 8.1

(a) Imports of goods and services to the various markets (incl. EU-markets) weighted according to their share in country's exports of goods and services.

(b) Intra- and extra-EU trade.

TABLE 52 : Export performance (a) (percentage change on preceding year, 2003-2012)Spring 2011 Autumn 2010


Belgium : : -1.4 -3.4 -0.9 -0.4 -1.1 0.2 -0.5 -1.0 -0.5 -0.4Germany : : 1.4 4.0 0.8 0.3 -2.9 3.2 1.0 -0.2 0.3 0.2Estonia : : 8.1 -3.0 -7.2 -1.4 -1.2 11.2 8.3 0.1 0.2 0.2Ireland : : -0.5 -3.2 3.9 -2.0 8.3 -1.3 -0.2 -1.1 -1.9 -1.8Greece : : -3.8 -3.1 0.1 2.3 -8.8 -6.0 4.2 0.4 -1.1 -0.3Spain : : -2.9 -1.5 1.6 -2.9 -1.1 0.5 1.6 0.1 0.1 -0.3France : : -2.7 -3.5 -3.2 -2.2 -1.4 0.2 0.7 0.3 -0.2 -0.2Italy : : -5.3 -2.7 -1.9 -6.8 -8.3 -0.7 -0.2 -0.8 -0.6 -0.7Cyprus : : -3.2 -6.6 -0.6 -2.5 2.6 -6.9 -0.5 -0.7 -1.4 -1.7Luxembourg : : -0.8 4.7 4.0 4.9 3.4 -3.5 0.8 0.3 1.7 0.0Malta : : -5.5 0.7 -2.0 -0.8 3.8 6.3 -0.2 -0.3 -0.1 -0.2Netherlands : : 0.2 -1.4 0.8 0.5 3.7 0.5 0.1 -0.4 -0.1 0.6Austria : : 1.3 -2.1 1.7 -1.8 -5.2 -0.4 0.0 -0.1 -0.3 -0.4Portugal : : -4.0 2.7 2.0 -1.0 1.2 -0.9 0.8 -0.1 0.4 0.7Slovenia : : 4.8 3.0 6.0 0.6 -5.3 -1.8 0.4 0.4 -0.1 0.8Slovakia : : 3.8 9.2 5.5 -0.1 -4.2 4.3 1.4 1.0 1.3 1.0Finland : : -1.3 1.4 -0.5 2.6 -9.0 -5.7 1.1 -1.4 -0.8 -1.9Euro area (b) : : -1.0 -0.2 0.2 -1.2 -2.1 0.7 0.6 -0.3 -0.1 -0.1Bulgaria : : 1.8 37.7 -2.2 0.6 1.8 6.7 2.3 1.1 0.5 0.3Czech Republic : : 4.8 4.5 7.5 2.7 1.8 6.1 2.8 3.3 0.8 0.7Denmark : : 1.0 0.2 -3.4 0.4 1.9 -7.0 -1.9 -1.9 -1.5 -0.8Latvia : : 10.2 -4.7 1.0 -1.7 3.5 -2.0 -0.1 -0.1 -0.6 -0.1Lithuania : : 6.8 0.0 -7.3 8.8 4.6 5.7 2.9 0.3 0.1 0.2Hungary : : 4.8 7.7 7.8 2.2 3.4 2.8 2.9 2.3 2.6 3.2Poland : : 0.6 3.7 1.0 3.4 6.4 -1.1 0.8 0.8 0.7 1.2Romania : : 1.9 1.9 0.8 6.5 8.1 2.8 2.2 0.9 0.2 -0.1Sweden : : -0.8 0.0 -0.2 -0.5 -1.7 0.9 1.3 -0.9 0.8 -0.2United Kingdom : : 1.3 3.0 -8.3 -0.6 1.1 -4.7 2.4 0.6 2.1 2.5EU (b) : : -0.4 0.6 -0.7 -0.7 -1.0 0.2 0.9 0.0 0.2 0.3USA : : 0.0 0.7 2.0 2.4 1.9 -1.1 0.2 1.7 1.2 0.5Japan : : -0.2 0.8 0.7 -2.0 -16.4 8.2 -7.4 -4.9 -3.5 -2.8

(a) Index for exports of goods and services divided by an index for growth of markets.


229


TABLE 53 : World GDP, volume (percentage change on preceding year, 2005-2012) 2.5.2011Spring 2011 Autumn 2010

forecast forecast( a ) 2005 2006 2007 2008 2009 2010 2011 2012 2011 2012

EU 21.3 2.0 3.2 3.0 0.5 -4.2 1.8 1.8 1.9 1.7 2.0Euro area 15.2 1.7 3.1 2.9 0.4 -4.1 1.8 1.6 1.8 1.5 1.8Belgium 0.6 1.7 2.7 2.9 1.0 -2.8 2.2 2.4 2.2 1.8 2.0Bulgaria 0.1 6.4 6.5 6.4 6.2 -5.5 0.2 2.8 3.7 2.6 3.8Czech Republic 0.2 6.3 6.8 6.1 2.5 -4.1 2.3 2.0 2.9 2.3 3.1Denmark 0.4 2.4 3.4 1.6 -1.1 -5.2 2.1 1.7 1.5 1.9 1.8Germany 4.3 0.8 3.4 2.7 1.0 -4.7 3.6 2.6 1.9 2.2 2.0Estonia 0.0 9.4 10.6 6.9 -5.1 -13.9 3.1 4.9 4.0 4.4 3.5Ireland 0.3 6.0 5.3 5.6 -3.5 -7.6 -1.0 0.6 1.9 0.9 1.9Greece 0.4 2.3 5.2 4.3 1.0 -2.0 -4.5 -3.5 1.1 -3.0 1.1Spain 1.9 3.6 4.0 3.6 0.9 -3.7 -0.1 0.8 1.5 0.7 1.7France 3.4 1.9 2.2 2.4 0.2 -2.6 1.6 1.8 2.0 1.6 1.8Italy 2.7 0.7 2.0 1.5 -1.3 -5.2 1.3 1.0 1.3 1.1 1.4Cyprus 0.0 3.9 4.1 5.1 3.6 -1.7 1.0 1.5 2.4 1.5 2.2Latvia 0.0 10.6 12.2 10.0 -4.2 -18.0 -0.3 3.3 4.0 3.3 4.0Lithuania 0.0 7.8 7.8 9.8 2.9 -14.7 1.3 5.0 4.7 2.8 3.2Luxembourg 0.1 5.4 5.0 6.6 1.4 -3.6 3.5 3.4 3.8 2.8 3.2Hungary 0.2 3.2 3.6 0.8 0.8 -6.7 1.2 2.7 2.6 2.8 3.2Malta 0.0 4.7 2.1 4.4 5.3 -3.4 3.7 2.0 2.2 2.0 2.2Netherlands 1.0 2.0 3.4 3.9 1.9 -3.9 1.8 1.9 1.7 1.5 1.7Austria 0.5 2.5 3.6 3.7 2.2 -3.9 2.0 2.4 2.0 1.7 2.1Poland 0.6 3.6 6.2 6.8 5.1 1.7 3.8 4.0 3.7 3.9 4.2Portugal 0.3 0.8 1.4 2.4 0.0 -2.5 1.3 -2.2 -1.8 -1.0 0.8Romania 0.2 4.2 7.9 6.3 7.3 -7.1 -1.3 1.5 3.7 1.5 3.8Slovenia 0.1 4.5 5.9 6.9 3.7 -8.1 1.2 1.9 2.5 1.9 2.6Slovakia 0.1 6.7 8.5 10.5 5.8 -4.8 4.0 3.5 4.4 3.0 3.9Finland 0.3 2.9 4.4 5.3 0.9 -8.2 3.1 3.7 2.6 2.9 2.3Sweden 0.5 3.2 4.3 3.3 -0.6 -5.3 5.5 4.2 2.5 3.3 2.3United Kingdom 2.8 2.2 2.8 2.7 -0.1 -4.9 1.3 1.7 2.1 2.2 2.5Candidate countries 1.4 7.9 6.7 4.8 0.9 -4.9 7.6 5.6 5.1 5.1 4.3- Croatia 0.1 4.3 4.9 5.1 2.2 -6.0 -1.2 1.1 2.0 1.5 2.1- Turkey 1.2 8.4 6.9 4.7 0.7 -4.8 8.9 6.1 5.5 5.5 4.5- The former Yugoslav

Republic of Macedonia 0.0 4.4 5.0 6.1 5.0 -0.9 0.7 2.5 3.3 2.2 2.5- Iceland 0.0 7.5 4.6 6.0 1.4 -6.9 -3.5 1.5 2.5 0.7 2.1- Montenegro 0.0 4.2 8.6 10.7 6.9 -5.7 1.2 2.4 4.0 : :Potential candidates 0.1 5.1 5.3 6.5 6.0 -1.6 1.9 3.2 3.7 3.4 3.7USA 20.5 3.1 2.7 1.9 0.0 -2.7 2.9 2.6 2.7 2.1 2.5Japan 6.0 1.9 2.0 2.4 -1.2 -6.3 3.9 0.5 1.6 1.3 1.7Canada 1.8 3.0 2.8 2.2 0.5 -2.5 3.2 3.1 2.7 2.3 2.8Norway 0.4 2.7 2.3 2.7 0.8 -1.4 0.4 2.7 2.5 2.1 2.2Switzerland 0.5 2.6 3.6 3.6 1.9 -1.9 2.6 1.9 1.7 1.8 2.0Australia 1.2 3.1 3.8 3.7 1.1 3.0 2.8 2.1 3.3 3.8 3.1New Zealand 0.2 3.2 0.9 2.9 -1.4 -1.6 1.7 1.0 3.2 3.7 3.3Advanced economies 53.2 2.6 3.0 2.6 0.2 -3.6 2.7 2.1 2.3 2.0 2.3CIS 4.3 6.6 8.7 8.9 5.3 -6.8 4.5 4.7 4.5 4.1 4.2- Russia 3.0 6.4 8.2 8.5 5.2 -7.9 4.0 4.5 4.2 3.8 4.0- Other 1.2 7.3 10.2 9.9 5.3 -4.0 6.0 5.3 5.2 4.7 4.6MENA 5.0 5.4 5.8 6.0 4.8 1.4 3.8 3.1 3.7 4.0 4.0Asia 26.4 8.7 9.6 10.3 6.9 6.1 9.2 7.7 7.7 7.6 7.5- China 13.0 11.3 12.7 14.2 9.6 9.1 10.3 9.3 9.0 9.2 8.9- India 5.2 9.5 9.7 9.2 6.7 7.4 10.4 8.0 8.2 8.3 7.8- Hong Kong 0.4 7.1 7.0 6.4 2.2 -2.8 6.8 6.3 5.5 6.5 8.1- Korea 2.0 4.0 5.2 5.1 2.3 0.2 6.4 4.4 4.6 4.5 4.5- Indonesia 1.4 5.7 5.5 6.4 6.0 4.5 6.2 6.1 6.2 6.1 6.2Latin America 8.5 4.6 5.6 5.8 4.3 -1.7 5.9 4.2 3.9 4.0 4.2- Brazil 2.9 3.2 4.0 6.1 5.1 -0.2 7.5 4.4 4.3 4.8 5.1- Mexico 2.1 3.3 5.1 3.4 1.5 -6.0 5.3 4.5 4.0 3.6 4.0Sub-Saharan Africa 2.5 5.9 6.6 7.1 5.6 2.8 5.0 5.5 6.0 5.5 6.0Emerging and developing economies 46.8 7.2 8.2 8.7 6.0 2.8 7.3 6.2 6.2 6.1 6.1World 100.0 4.8 5.4 5.4 2.9 -0.6 4.9 4.0 4.1 3.9 4.0World excluding EU 78.7 5.5 6.0 6.1 3.5 0.4 5.7 4.6 4.7 4.5 4.6World excluding euro area 84.8 5.4 5.9 5.9 3.4 0.1 5.5 4.5 4.6 4.4 4.5

(a) Relative weights in %, based on GDP (at constant prices and PPS) in 2009.

230

Statistical Annex

TABLE 54 : World exports of goods and services, volume (percentage change on preceding year, 2005-2012) 2.5.2011Spring 2011 Autumn 2010


EU (b) 38.8 5.8 9.4 5.5 1.5 -12.4 10.7 7.3 6.5 6.4 6.7Euro area (b) 29.3 5.1 8.6 6.3 0.9 -13.1 11.2 6.9 6.2 6.1 6.3Candidate countries 1.1 7.4 6.1 7.3 2.6 -6.3 3.4 6.2 6.6 5.8 6.0- Croatia 0.1 3.5 5.8 3.7 2.2 -17.3 6.0 4.0 4.3 3.8 4.2- Turkey 0.9 7.9 6.6 7.3 2.7 -5.0 2.6 6.7 7.1 6.7 7.1- The former Yugoslav

Republic of Macedonia 0.0 13.4 8.2 11.8 -6.3 -10.7 22.7 6.7 8.4 5.9 6.5- Iceland 0.0 7.5 -4.6 17.7 7.0 7.0 0.7 2.3 3.4 2.4 3.0- Montenegro 0.0 : : : : : 13.0 12.0 11.3 : :USA 10.2 6.7 9.0 9.3 6.0 -9.5 11.9 7.8 9.3 8.4 7.4Japan 4.1 7.0 9.7 8.4 1.6 -23.9 24.2 1.0 3.8 4.8 5.1Canada 2.5 1.9 0.6 1.2 -4.6 -14.2 6.5 7.3 7.4 6.0 7.1Norway 1.0 1.1 0.0 2.3 1.0 -4.0 -1.4 1.8 1.9 1.6 1.5Switzerland 1.6 7.8 10.3 9.6 3.3 -8.7 9.3 3.5 5.1 3.5 5.1Australia 1.2 3.0 2.2 3.0 1.2 -1.1 8.9 6.2 4.5 5.5 5.8New Zealand 0.2 -1.7 1.9 3.8 -1.2 3.3 8.0 5.9 4.7 6.1 4.7Advanced economies 60.8 5.8 8.6 6.2 2.0 -12.1 11.2 6.7 6.6 6.4 6.5CIS 3.3 4.1 6.6 5.1 9.9 -15.4 12.3 8.8 6.2 4.3 4.1- Russia 2.2 6.5 7.3 6.3 0.6 -4.7 12.1 7.7 4.5 4.9 4.5- Other 1.1 -0.8 5.1 2.6 29.1 -37.5 12.7 11.0 9.6 3.2 3.2MENA 5.5 12.3 6.5 8.0 10.4 -12.6 2.3 4.5 5.3 4.5 4.9Asia 23.4 11.7 12.3 19.5 5.8 -10.8 17.0 10.5 9.9 10.0 8.8- China 8.6 15.1 16.9 36.0 5.9 -11.5 18.0 12.4 11.2 11.6 9.5- India 1.7 20.0 20.5 7.7 16.9 -7.4 17.3 16.3 16.6 12.4 8.6- Hong Kong 2.6 10.8 9.3 8.0 2.9 -12.4 18.3 9.9 9.8 9.5 8.8- Korea 2.8 8.0 12.0 11.8 12.9 3.0 24.5 11.1 8.2 8.8 8.8- Indonesia 0.9 62.9 8.1 6.7 12.2 -17.6 15.0 7.3 5.8 7.3 5.8Latin America 5.2 8.5 7.9 6.7 2.2 -4.5 7.9 5.8 6.8 7.5 7.4- Brazil 1.2 4.0 6.0 7.8 3.1 -3.4 13.3 7.6 8.0 9.4 8.7- Mexico 1.6 6.0 11.2 5.6 1.1 -10.2 15.4 7.9 7.5 6.1 6.9Sub-Saharan Africa 1.8 25.1 0.9 6.3 16.7 -33.3 13.5 7.8 8.1 7.2 6.6Emerging and developing economies 39.2 11.4 9.9 14.4 6.8 -11.7 13.2 8.8 8.5 8.3 7.6World 100.0 8.0 9.1 9.4 3.9 -11.9 12.0 7.5 7.4 7.2 6.9World excluding EU 61.2 9.4 9.0 11.9 5.4 -11.7 12.8 7.7 7.9 7.6 7.1World excluding euro area 70.7 9.2 9.4 10.8 5.1 -11.5 12.3 7.7 7.8 7.6 7.2

(a) Relative weights in %, based on exports of goods and services (at current prices and current exchange rates) in 2009.


TABLE 55 : Export shares in EU trade (goods only - 2009)Other Sub

Euro Candidate advanced Rest Latin SaharanEU area countries USA Japan economies China Asia CIS MENA America Africa

EU 66.5 50.5 1.7 6.4 1.2 5.6 2.7 4.4 2.8 4.8 2.2 1.7Euro area 66.5 50.3 1.7 6.1 1.2 5.5 2.9 4.5 2.6 5.0 2.3 1.7Belgium 77.0 64.0 1.0 4.8 0.7 2.8 1.7 4.3 1.1 3.5 1.3 1.6Bulgaria 67.9 52.1 10.7 1.7 0.3 1.8 1.2 3.5 6.1 4.5 0.6 1.7Czech Republic 84.5 67.2 1.3 1.7 0.4 2.7 0.8 1.6 3.4 2.1 1.0 0.5Denmark 67.3 41.9 1.1 6.3 2.2 9.4 2.4 4.0 2.0 2.5 2.0 0.6Germany 62.2 42.9 1.7 6.6 1.4 7.1 4.8 5.2 3.3 3.9 2.4 1.2Estonia 71.1 36.3 1.3 3.2 0.7 5.3 0.9 1.2 11.1 1.3 0.4 3.4Ireland 60.0 41.5 0.7 20.6 2.8 5.8 2.0 3.9 0.5 1.8 1.1 0.7Greece 66.2 45.9 8.6 4.9 0.3 3.7 0.8 2.4 3.1 7.6 1.0 1.6Spain 70.3 58.8 1.9 3.8 0.9 3.5 1.5 2.6 1.3 7.3 5.3 1.6France 61.6 49.1 1.6 6.4 1.6 5.3 2.4 5.6 1.9 8.3 2.4 2.9Italy 56.7 43.5 2.8 6.4 1.4 7.4 2.5 5.2 3.3 9.5 3.2 1.7Cyprus 74.6 57.0 0.2 1.9 0.8 1.1 0.9 4.9 3.4 10.3 0.2 1.8Latvia 68.4 34.9 0.7 1.7 0.5 3.3 0.3 2.8 15.4 5.5 0.8 0.6Lithuania 64.6 34.5 0.8 3.6 0.2 4.3 0.2 1.7 21.3 1.6 0.4 1.3Luxembourg 86.8 72.4 0.8 2.3 0.2 3.6 1.0 1.3 0.9 1.7 0.8 0.5Hungary 79.4 58.1 2.7 2.6 0.7 2.4 1.7 1.4 5.6 2.5 0.6 0.5Malta 46.0 37.0 3.6 7.3 3.6 1.7 3.9 22.6 0.5 7.5 1.4 1.8Netherlands 78.0 62.5 1.0 3.8 0.7 3.3 1.4 3.5 1.6 3.1 1.5 2.0Austria 71.4 54.2 2.0 4.4 0.9 7.2 2.2 3.4 3.3 2.8 1.7 0.8Poland 79.8 56.9 1.7 1.8 0.3 3.4 1.2 1.3 7.3 1.7 0.7 0.7Portugal 73.9 63.8 0.9 3.7 0.4 2.2 0.8 1.1 0.5 3.3 2.9 10.2Romania 73.1 56.8 6.3 1.6 0.4 2.6 0.9 2.2 5.8 5.5 0.9 0.7Slovenia 74.7 57.3 9.5 1.6 0.1 1.9 0.5 1.5 6.1 3.2 0.5 0.3Slovakia 85.8 48.9 2.2 1.2 0.2 2.0 1.6 0.8 4.7 0.9 0.5 0.3Finland 56.0 33.6 1.4 7.1 1.7 6.4 4.4 5.3 9.6 3.7 3.1 1.4Sweden 59.1 39.8 1.7 6.4 1.3 12.5 3.4 5.1 2.1 4.1 2.3 2.0United Kingdom 55.3 49.4 1.1 14.2 1.5 6.9 2.4 7.0 1.3 5.8 2.0 2.5

231


TABLE 56 : World imports of goods and services, volume (percentage change on preceding year, 2005-2012) 2.5.2011Spring 2011 Autumn 2010


EU (b) 38.6 6.2 9.4 5.7 1.1 -12.3 9.7 5.6 5.7 5.4 6.1Euro area (b) 28.9 5.8 8.5 5.8 0.8 -11.9 9.4 5.4 5.9 5.1 6.0Candidate countries 1.2 11.4 7.3 9.9 -3.4 -15.3 12.1 5.7 4.9 6.1 4.9- Croatia 0.2 4.2 8.3 6.2 3.3 -20.4 -1.3 2.5 4.2 4.0 4.6- Turkey 1.0 12.2 6.9 10.7 -4.1 -14.3 14.7 6.3 5.0 6.3 5.0- The former Yugoslav

Republic of Macedonia 0.0 8.2 10.1 16.1 0.8 -11.1 10.7 6.1 7.5 5.6 6.6- Iceland 0.0 29.3 10.4 -0.7 -18.4 -24.0 3.8 4.0 4.8 3.2 3.1- Montenegro 0.0 : : : : : 8.7 11.4 12.4 : :USA 13.0 6.1 6.1 2.7 -2.6 -13.8 12.7 6.7 9.3 8.0 6.9Japan 4.1 5.8 4.2 1.6 0.4 -15.3 9.3 4.5 3.7 5.4 4.3Canada 2.7 7.1 4.9 5.9 1.2 -13.9 11.0 8.0 8.0 6.2 6.1Norway 0.7 8.7 8.4 8.6 4.3 -11.4 8.7 2.4 1.0 2.4 2.3Switzerland 1.3 6.6 6.5 6.1 0.3 -5.4 6.8 6.4 5.1 6.4 6.4Australia 1.3 7.4 6.8 10.3 -6.6 6.1 13.7 9.5 7.5 8.1 6.6New Zealand 0.2 5.1 0.3 7.0 1.1 -9.9 8.9 5.8 5.0 5.8 3.9Advanced economies 63.1 6.3 8.0 5.1 0.1 -12.4 10.4 5.9 6.4 6.1 6.1CIS 2.8 9.8 15.2 20.1 13.3 -27.8 12.8 9.5 7.8 6.2 5.7- Russia 1.7 16.6 21.3 26.2 14.8 -30.4 11.7 7.7 7.0 7.8 7.0- Other 1.2 0.1 6.5 11.4 11.3 -24.1 14.4 11.9 9.0 3.9 4.0MENA 5.0 13.5 8.3 11.3 11.9 -2.7 3.1 4.4 5.5 5.8 6.5Asia 21.9 12.7 11.4 7.2 7.9 -6.8 17.5 11.1 10.4 9.9 9.4- China 7.4 14.8 16.1 10.3 7.1 1.4 19.4 12.3 12.0 11.6 10.8- India 2.2 46.1 24.0 12.2 27.6 -2.8 16.9 17.2 18.4 12.3 12.6- Hong Kong 2.6 7.5 9.2 8.3 2.2 -10.5 17.3 9.0 9.1 9.0 7.2- Korea 2.6 5.8 9.5 9.8 6.0 -3.6 26.5 13.9 8.5 9.0 8.4- Indonesia 0.7 24.9 -2.0 5.5 21.0 -16.8 17.4 7.2 6.4 7.0 6.3Latin America 5.1 6.1 12.0 12.6 6.1 -17.5 20.5 8.9 9.0 9.6 8.0- Brazil 1.2 -5.7 6.4 14.0 6.5 -12.6 31.8 12.2 10.4 12.4 8.1- Mexico 1.7 7.4 12.5 7.3 3.3 -16.9 21.2 7.1 8.6 6.8 6.8Sub-Saharan Africa 2.1 15.9 9.3 8.8 12.7 -18.7 13.0 7.1 8.1 5.8 3.5Emerging and developing economies 36.9 11.8 11.2 9.6 8.8 -10.0 15.4 9.5 9.2 8.8 8.2World 100.0 8.4 9.2 6.7 3.3 -11.5 12.2 7.3 7.4 7.1 6.9World excluding EU 61.4 9.7 9.1 7.4 4.7 -11.0 13.8 8.3 8.5 8.1 7.3World excluding euro area 71.1 9.4 9.5 7.2 4.3 -11.3 13.3 8.0 8.0 7.8 7.2

(a) Relative weights in %, based on imports of goods and services (at current prices and current exchange rates) in 2009.


TABLE 57 : Import shares in EU trade (goods only - 2009)Other Sub

Euro Candidate advanced Rest Latin SaharanEU area countries USA Japan economies China Asia CIS MENA America Africa

EU 65.3 51.1 1.3 4.8 1.6 5.2 6.0 5.1 4.1 3.1 2.2 1.4Euro area 65.5 51.1 1.3 4.7 1.6 4.7 5.9 4.9 3.9 3.7 2.4 1.5Belgium 71.7 61.8 0.7 6.2 2.1 2.9 3.8 4.6 1.6 2.6 2.5 1.1Bulgaria 63.6 45.5 7.5 1.0 0.4 1.5 2.8 1.8 17.4 1.1 2.8 0.3Czech Republic 79.5 64.5 0.6 1.1 1.7 1.7 5.5 3.9 5.5 0.2 0.2 0.1Denmark 72.0 47.8 1.1 3.0 0.5 8.2 6.1 5.1 1.6 0.3 1.8 0.3Germany 66.4 47.4 1.3 4.5 2.0 6.6 6.4 5.1 3.5 1.3 1.9 1.0Estonia 78.8 37.9 0.7 1.5 0.4 2.1 2.5 2.1 10.2 0.1 0.9 0.8Ireland 68.5 26.2 0.6 14.7 1.2 3.8 3.7 4.8 0.2 1.0 1.1 0.5Greece 66.1 54.0 3.3 3.6 1.4 2.4 6.4 8.5 3.0 2.7 2.0 0.6Spain 63.9 53.4 1.2 3.2 1.0 2.8 5.4 4.4 2.4 8.2 4.6 2.9France 70.5 59.4 1.1 4.7 1.1 4.7 4.1 3.5 2.8 4.1 1.3 1.9Italy 59.0 47.7 2.0 3.1 1.2 4.9 6.0 4.4 6.3 9.4 2.4 1.3Cyprus 68.7 54.0 0.8 1.5 2.2 1.4 7.4 4.8 4.0 8.0 0.9 0.3Latvia 63.8 33.5 0.5 1.6 0.2 2.9 2.1 1.8 26.4 0.3 0.2 0.1Lithuania 60.7 33.9 1.0 1.8 0.2 1.4 2.8 2.0 28.8 0.3 1.0 0.1Luxembourg 75.4 71.9 0.1 3.8 0.3 0.9 16.0 2.9 0.1 0.1 0.4 0.1Hungary 70.1 55.5 0.9 1.7 2.5 1.1 8.3 6.7 8.2 0.2 0.4 0.0Malta 55.9 44.6 7.5 2.6 2.2 4.4 9.9 10.0 3.2 0.7 0.4 3.0Netherlands 49.5 37.7 0.8 7.5 2.9 4.5 10.6 8.0 6.2 3.3 4.5 2.2Austria 80.5 69.0 1.4 1.7 0.6 7.2 2.1 2.1 2.4 1.3 0.4 0.3Poland 74.0 59.7 1.0 1.5 0.9 1.8 4.9 4.3 9.5 0.4 1.0 0.5Portugal 78.3 70.9 0.7 1.7 0.6 2.3 2.3 2.4 1.3 3.2 3.2 4.1Romania 74.5 53.8 4.3 1.3 0.5 1.4 4.9 3.0 7.9 1.0 1.0 0.2Slovenia 76.1 64.1 7.2 1.4 0.4 1.7 3.0 4.7 1.1 1.6 2.6 0.2Slovakia 77.8 40.8 0.6 0.5 0.8 0.8 3.4 7.8 7.9 0.3 0.1 0.0Finland 64.9 39.6 0.4 2.4 1.2 3.9 5.4 3.9 15.7 0.3 1.5 0.4Sweden 70.8 49.1 0.8 3.8 1.5 9.0 4.4 3.7 3.4 0.5 1.3 0.9United Kingdom 54.4 47.0 1.4 9.4 2.2 9.8 7.9 7.4 1.7 2.0 2.2 1.7

232

Statistical Annex

TABLE 58 : World merchandise trade balances (fob-fob, in billions of US dollar, 2004-2012) 2.5.2011Spring 2011 Autumn 2010

forecast forecast2004 2005 2006 2007 2008 2009 2010 2011 2012 2011 2012

EU 61.6 -12.0 -86.0 -115.1 -196.9 -36.5 -58.0 -52.1 -4.2 -7.5 9.7EU, adjusted ¹ -51.9 -120.6 -204.9 -212.1 -319.0 -119.4 -137.3 -137.3 -90.6 -91.7 -74.4Euro area 164.3 109.4 66.9 101.1 30.1 80.5 80.7 84.8 105.8 130.2 148.3Euro area, adjusted ¹ : : : : -33.0 52.2 53.6 55.6 76.2 : :Candidate countries -34.2 -44.9 -54.9 -65.4 -71.5 -49.1 -80.0 -95.3 -106.7 -96.3 -107.3USA -684.7 -801.9 -860.5 -839.6 -853.7 -524.8 -670.9 -814.4 -882.6 -801.8 -855.9Japan 128.6 93.9 81.4 104.7 39.0 43.0 101.0 8.6 -7.3 85.4 87.9Norway 32.4 46.8 55.9 53.2 78.6 50.4 53.1 64.7 67.5 61.5 61.8Switzerland 5.4 2.4 4.0 7.8 13.9 15.4 17.1 25.0 25.2 21.8 18.6Advanced economies -459.9 -680.1 -828.0 -829.7 -924.3 -509.0 -633.7 -841.0 -904.3 -727.5 -768.4CIS 90.9 124.1 142.9 121.9 213.8 103.4 157.6 228.0 260.3 118.1 121.4- Russia 85.8 118.5 139.6 130.9 177.8 110.7 156.9 209.5 239.6 149.3 152.9MENA 118.5 212.0 292.8 275.1 409.7 151.0 181.8 379.5 170.0 272.7 291.7Asia 150.3 213.1 311.1 412.5 341.4 320.6 173.9 -73.0 -27.7 259.8 276.8- China 59.0 134.2 217.7 315.4 360.7 249.5 169.4 72.6 81.7 243.4 265.4Latin America 58.9 81.3 100.1 71.6 47.7 58.5 39.7 56.0 20.0 78.2 63.0Sub-Saharan Africa 22.2 37.0 47.3 49.7 62.5 20.2 65.9 100.1 87.7 53.8 75.3Emerging and developing economies 440.9 667.5 894.1 930.8 1075.1 653.6 618.8 690.6 510.2 782.6 828.3World -19.0 -12.6 66.1 101.1 150.8 144.6 -14.9 -150.4 -394.1 55.2 59.9¹ See note 7 on concepts and sources.

TABLE 59 : World current-account balances (in billions of US dollar, 2004-2012)Spring 2011 Autumn 2010

forecast forecast2004 2005 2006 2007 2008 2009 2010 2011 2012 2011 2012

EU 44.9 -33.2 -62.9 -81.9 -182.8 -97.2 -86.2 -39.9 -1.6 -17.1 23.8EU, adjusted ¹ -44.4 -103.8 -175.2 -172.4 -373.8 -157.5 -143.8 -101.8 -64.4 -89.7 -48.7Euro area 94.4 20.1 28.7 29.4 -107.4 -77.8 -52.5 -27.3 -13.4 3.3 19.0Euro area, adjusted ¹ : : : : -208.8 -35.8 -12.3 15.9 30.5 : :Candidate countries : : : -48.2 -55.5 -19.8 -51.6 -66.0 -76.7 -60.0 -70.4USA -624.6 -740.5 -798.3 -716.9 -670.4 -379.7 -480.2 -609.9 -632.8 -605.1 -661.5Japan 172.2 165.9 170.6 210.7 158.7 141.9 199.8 78.7 63.1 220.2 225.9Norway 32.9 49.1 58.1 54.8 80.2 49.7 54.5 59.8 62.9 56.5 56.8Switzerland 43.3 53.5 52.3 39.3 12.3 69.5 87.5 51.2 58.5 55.7 57.2Advanced economies : : : -603.5 -711.4 -321.5 -350.1 -585.1 -607.6 -431.4 -440.3CIS 61.6 86.4 94.3 66.4 98.8 34.6 81.2 143.8 165.9 40.3 40.7- Russia 59.0 84.5 95.2 78.0 102.1 49.4 85.6 132.3 153.1 76.7 75.0MENA 89.9 189.3 266.1 239.6 352.0 84.2 88.0 220.8 176.8 111.9 126.0Asia 170.2 238.8 366.3 523.5 515.6 455.5 360.5 284.4 360.9 278.6 323.8- China 68.7 160.8 253.3 371.8 436.1 297.1 306.1 325.0 370.0 325.0 370.0Latin America 22.8 37.1 50.9 15.6 -26.0 -15.3 -37.2 -66.2 -114.6 -45.8 -45.9Sub-Saharan Africa 2.4 20.8 21.0 0.0 -6.2 -21.7 12.6 39.0 20.4 -5.5 14.6Emerging and developing economies 347.0 572.4 798.5 845.0 934.2 537.2 505.0 621.9 609.3 379.5 459.2World : : : 241.6 222.8 215.7 154.9 36.8 1.7 -51.9 18.8¹ See note 7 on concepts and sources.

TABLE 60 : Primary commodity prices (in US dollar, percentage change on preceding year, 2004-2012)Spring 2011 Autumn 2010

SITC forecast forecastClassification 2004 2005 2006 2007 2008 2009 2010 2011 2012 2011 2012Food (0 + 1) 12.4 2.3 10.3 12.6 21.6 -11.1 11.0 19.2 -2.3 9.7 -3.6Basic materials (2 + 4) 17.0 8.3 32.5 12.3 8.7 -23.7 40.0 28.9 -4.9 1.2 -1.6- of which :

Agricultures non-food 5.9 -2.4 9.1 11.3 7.7 -20.2 30.2 35.2 -10.4 -2.1 -4.2- of which :

Wood and pulp 13.2 3.5 8.5 0.3 3.0 -10.3 7.5 12.2 -3.9 -8.1 -4.3Minerals and metals 32.0 20.0 53.4 12.9 9.3 -25.9 46.5 25.2 -1.5 4.0 0.4

Fuel products (3) 32.3 44.0 19.7 9.0 36.4 -36.5 28.8 45.6 -0.3 10.9 2.0- of which :

Crude petroleum 33.4 44.7 20.2 9.5 35.9 -37.1 29.5 46.4 -0.2 11.2 2.1Primary commodities- Total excluding fuels 14.8 5.5 22.3 12.4 14.1 -18.1 26.0 24.8 -3.9 4.9 -2.5- Total including fuels 28.1 35.8 20.1 9.6 32.4 -33.8 28.3 41.9 -0.8 9.8 1.3

Crude petroleum - price per barrelBrent (usd) 38.0 55.1 66.2 72.5 98.5 62.0 80.2 117.4 117.2 88.9 90.8Brent (euro) 30.6 44.3 52.7 52.9 67.2 44.6 60.3 82.1 80.8 64.0 65.3

233


234

Note on concepts and sources

1. The directorate general for economic and financial affairs (DG Tables 47 - 50, 58 and 59 show also EU and euro-area "adjusted"ECFIN) produces, under its own responsibility, short-term fully- balances. Theoretically, balances of EU and euro area vis-à-visfledged economic forecasts twice a year : in the spring and in third countries should be identical to the sum of the balances ofthe autumn. These forecasts cover the principal macroeconomic the individual countries in the EU or the euro area. However,aggregates for the Member States, the candidate countries, intra-EU or intra-euro-area balances are non-zero because ofthe European Union as a whole, the euro area and the reporting errors. The creation of the internal market in 1993international environment. Interim forecasts, updating the outlook reduced border controls and formalities, and accordingly thefor the seven largest Member States, EU and the euro area, scope and precision of intra-EU trade coverage. Typically,are presented in between the fully-fledged forecasts. intra-EU imports are underestimated compared to intra-EU exports,

leading to an overestimation of the surplus. For the past the2. Data for 2010, 2011 and 2012 are forecasts. "adjusted" balances are Eurostat estimates for EU and ECB

The source for all tables is the European Commission, estimates for the euro area. For the future, they are ECFIN'sunless otherwise stated. forecasts based on the extrapolation of the discrepanciesHistorical data for the Member States are based on the European observed in 2009. Break in the series for Italy in 2011 for tablesSystem of Accounting (ESA 1995). Most Member States have 48 and 49, as the forecast incorporates the recent revision ofnow introduced chain-linking in their national accounts to measure Italy's balance of payments made by the Bank of Italy that isthe development of economic aggregates in volume terms. not yet reflected in historical National Account data.For the USA and Japan the definitions are as in the SNA.

8. With respect to the 12 RAMS (recently-acceded Member States),3. Tables 5 and 6 on domestic demand and final demand respectively, which are currently in a transition phase, the quality of statistical

present data including inventories. data may not always be directly comparable to most EU15Member States.

4. In Tables 16 and 17, the data are based on the national index for USAand Japan, and for EU Member States and aggregates prior to 1996. 9. Geographical zones are defined as follows :

Euro area :5. The potential output gap is calculated with reference to potential EA17 (BE,DE,EE,IE,EL,ES,FR,IT,CY,LU,MT,NL,AT,PT,SI,SK,FI)

output as estimated via a production function, where the increase in Candidate countries :the capital stock and the difference between actual unemployment Croatia, Turkey, the former Yugoslav Republic of Macedoniaand the NAWRU play a key role. Iceland and Montenegro.

Potential candidates :6. Employment data used in tables 21-25, 27 and 31-32 are based on Albania, Bosnia-Herzegovina, Kosovo and Serbia.

full-time-equivalents (FTEs), where available. Currently, Germany, Advanced economies :Estonia, Spain, France, Italy, Hungary and the Netherlands EU, candidate countries, USA, Japan, Canada, Norway,report FTE data (taken together, these countries represent Switzerland, Australia and New Zealand.over 80% of euro-area GDP and more than 60% of EU GDP). In the MENA (Middle East and Northern Africa) :absence of FTE data, employment is based on numbers of persons. Algeria, Bahrain, Egypt, Iran, Iraq, Israel, Jordan, Kuwait,In the calculation of EU and euro-area aggregates, priority is given to Lebanon, Libya, Morocco, Oman, Qatar, Saudi Arabia, Syria,FTE data, as this is regarded as more representative of diverse Tunisia, and the United Arab Emirates.patterns of working time. Asia :

All countries in that region except Japan and7. EU and euro-area data are aggregated using exchange rates. the Asian MENA countries.

World GDP is aggregated using Purchasing Power Standards (PPS). Latin America :In the tables on world trade and international payments, the All countries in that region.aggregation is carried out on the basis of current exchange rates. Sub-Saharan Africa :

All countries in that region except the African MENA countries.

European Commission

European Economy – European Economic Forecast – Spring 2011

Luxembourg: Publications Office of the European Union

2011 — x, 234 pp. — 21 x 29.7 cm

ISBN 978-92-79-19146-6doi: 10.2765/10433

Price (excluding VAT) in Luxembourg: 15 EUR

How to obtain EU publications

Free publications

● via EU Bookshop (http://bookshop.europa.eu);● at the European Commission’s representations or delegations.

You can obtain their contact details on the internet ( http://ec.europa.eu )or by sending a fax to +352 2929-42758.

Priced publications:

● via EU Bookshop (http://bookshop.europa.eu);

● Priced subscriptions (e.g annual series of the Official Journal of the European Union,and the reports of cases before the Court of Justice as well before the Court of Justiceof the European Union):

via one of the sales agents of the Publications Office of the European Union(http://publications.europa.eu/others/agents/index_en.htm).

KC-A

R-11-001-EN-C

The European Commission publishes comprehensive macroeconomic forecasts twice-yearly in thespring and autumn. These are presented in the publication titled ‘European Economic Forecast’(EEF), where the Commission discusses the economic situation and outlook for the euro area and theEU, its 27 Member States, the Candidate Countries as well as the EU’s main economic partners. Thepublication also includes thematic chapters which elaborate in greater detail on issues of relevancefor the EU outlook.

The global economic recovery continues to make headway, but it is becoming more uneven, acrossmajor regions and within them. In the EU, the moderate economic recovery is generally developingas expected, with pronounced differences across countries and uncertainty at elevated levels.A positive contribution from the external side has started to impact positively on components ofprivate domestic demand. The process of achieving a more balanced composition of economicgrowth has made further progress in the faster growing EU countries. Conversely, countries facingsubstantial economic adjustment challenges are understandably lagging behind, though there areencouraging signals that the recovery could materialise and gain momentum in 2011 and 2012. Thisleaves the European economies with a multi-speed recovery and the area as a whole, as with mostother advanced economies, lagging behind the group of emerging market economies.

Economic growth in both the euro area and the EU is expected to continue along a trajectory of around2%, slightly higher in 2011 than forecast last autumn, but broadly unchanged in 2012. On the backof higher commodity prices, inflation rates are forecast to increase to close to 2½-3% in 2011, beforefalling back to around 2% in 2012. The resulting pressure on real disposable income is dampeningprivate consumption growth in 2011. More moderate inflation and, with the usual lagged response todevelopments in output, higher employment are set to brighten growth prospects in 2012. Economicgrowth is expected to be strong enough to support the progressing fiscal consolidation.

The two thematic chapters in the EEF spring 2011 publication provide in-depth-analysis of twoissues that are highly topical at the current juncture: (i) the macroeconomic impact of developmentsin sovereign risk premia, and (ii) savings and investment developments across the EU.

Price (excluding VAT) in Luxembourg: EUR 15European Economy (6 issues minimum per year): EUR 100The annual subscription runs from 1 January to 31 December of each year.Payments to be made only to sales agents on the list (see inside backcover for details).These are surface mail rates. For air subscription rates, please apply to the sales offices.www.ec.europa.eu/economy_finance

Documents

European Economic Forecast - Spring 2011ec.europa.eu/economy_finance/publications/european...European Economic Forecast Spring 2011 EUROPEAN ECONOMY 1/2011 CONTENTS iii Overview 1