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World BankEU10 Regular Economic Report
Safeguarding RecoveryBrussels, 16 July 2010
MESSAGES
• Return to growth but volatile financial markets, fiscal pressures, and high unemployment cast shadow on future prospects
• Bolstering financial sector stability, shoring up fiscal sustainability, and tackling structural unemployment are essential for safeguarding the recovery
Return to Growth
Back in positive territory …
Source: Eurostat, World Bank staff calculations
Year-on-year GDP growth in EU10 and EU15, percent
… helped by the base effect …
Source: Eurostat, World Bank staff calculations
Quarter-on-quarter GDP growth in EU10 and EU15, percent
… with continued contraction in some countries
Year-on-year GDP growth in EU10 and EU15, percent
Source: Eurostat, World Bank staff calculations
-20
-15
-10
-5
0
5
10
15
1Q 0
7
2Q 0
7
3Q 0
7
4Q 0
7
1Q 0
8
2Q 0
8
3Q 0
8
4Q 0
8
1Q 0
9
2Q 0
9
3Q 0
9
4Q 0
9
1Q 1
0
BG
CZ
EE
LV
LT
HU
PL
RO
SI
SK
Recovery will be slow …
Source: Convergence Program Updates 2010, EC Spring Forecast 2010, World Bank
Forecasted GDP growth rates, percent
… synchronized with EU15 …
Source: Eurostat, World Bank staff calculations
EU10 and EU15 GDP growth, exports growth, credit growth, percent
-30
-20
-10
0
10
20
30
40
1Q 0
7
2Q 0
7
3Q 0
7
4Q 0
7
1Q 0
8
2Q 0
8
3Q 0
8
4Q 0
8
1Q 0
9
2Q 0
9
3Q 0
9
4Q 0
9
1Q 1
0
EU15_Credit EU15_Growth EU15_Exports
EU10_Credit EU10_Growth EU10_Exports
… reliant on net exports in 2010…
Source: EC Ameco database, World Bank staff calculations
Forecasted contribution of net exports and domestic demand to GDP growth in EU10 and EU15 countries, percent
… and public investment in 2010 and 2011 …
Source: EC Ameco database, World Bank staff calculations
Forecasted growth of consumption and investment in EU10 and EU15 countries, percent
-15
-10
-5
0
5
10
2009 2010 2011 2009 2010 2011
EU10 EU15
Public investment Private investment
-15
-10
-5
0
5
10
2009 2010 2011 2009 2010 2011
EU10 EU15
Public consumption Private consumption
… and varied within EU10
Source: World Bank
Forecasted GDP growth rates for EU10 countries, percent
-18.0
-14.8 -14.1
-7.8 -7.1 -6.3-5.0 -4.7 -4.1
1.8
-3.5
0.5 1.0 1.5
-0.5
0.9 0.2
3.71.9
3.03.3 3.14.0
2.13.6 3.0
2.0
4.02.9
3.7
-20
-15
-10
-5
0
5
LV LT EE SI RO HU BG SK CZ PL
2009 2010 2011
Volatile Financial Markets
Risk appetite receding …
Source: Bloomberg, Reuters, World Bank staff calculationsNotes: Decrease indicates deterioration
Asset class performance, percent change
0102030405060708090100
-900-800-700-600-500-400-300-200-100
0100
2008 peak 2009 trough 2010 peak current
Banks 5Y CDS spreads Sovereign 5Y CDS spreads
Interbank rates spreads Stocks market performance (RHS)
… and capital flows stalling in May …
Source: DECPG, World Bank staff calculations
Capital inflows to global emerging markets, USD billions
0
20
40
60
80
100
120
1Q 0
8
1Q 0
9
1Q 1
0
Jan-
10
Feb-
10
Mar
-10
Apr
-10
May
-10
Total flows to Emerging Markets Flows to Eastern Europe
… and negative credit growth to enterprises in most countries
Source: ECB, World Bank staff calculations
Credit growth from December 2009 to April 2010, percent
-3
-2
-1
0
1
2
3
4
5
EU10 PL CZ RO SI SK HU BG EE LV LT
Credit to HHS Credit to enterprises Credit growth
Fiscal Pressures
As financial markets focus on sovereign debt …
Source: Eurostat, World Bank staff calculations
MT
CY BE
DKDE
IEGR
ES
FR
IT
LU
NL
AT
PT
FI
SE
UK
BG
CZ
EE
LVLT
HU
PL
RO
SI
SK EU15EU10
-16
-14
-12
-10
-8
-6
-4
-2
0
0 20 40 60 80 100 120 140
Fisc
al d
efici
t as
perc
ent o
f GD
P, 2
009
Public debt as percent of GDP, 2009
Forecasted general government overall and primary deficits in EU10 and EU15
Source: Convergence and Stability Program Updates from January/February 2010, EC Spring Forecast 2010, World Bank staff calculations
… governments reduce fiscal deficits gradually …
-4.2 -3.9-3.5
-4.3
-3.3
-2.2
-4.3 -4.5
-3.6
-6.5 -6.4 -6.1-6.5
-5.8
-4.7
-7.2 -7.4
-6.7
-8
-7
-6
-5
-4
-3
-2
-1
0
2009 2010 2011 2009 2010 2011 2009 2010 2011
EU10_EC EU10_CP EU15_EC
Forecasted general government debt in EU10 countries and EU15
Source: Convergence and Stability Program Updates from January/February 2010, EC Spring Forecast 2010, World Bank staff calculations
… to keep public debt sustainable
0
10
20
30
40
50
60
70
80
90
CP EC CP EC
EU10 EU15
2009
2010
2011
High Unemployment
Unemployment remains high …
Source: EC Ameco database, World Bank staff calculations
Forecasted unemployment rates for EU10 countries, percent
7.5
8.0
8.5
9.0
9.5
10.0
2009 2010 2011
EU10 EU15
… especially for young and less educated …
Source: Eurostat, World Bank staff calculations
Change in unemployment rate by subgroup, percent
0
5
10
15
20
25
EU10 EU15 EU10 EU15 EU10 EU15
Overall Young Less educated
1Q 08 Increase up to 1Q 10
… and in Latvia, Estonia, Lithuania & Slovakia …
Source: EC Ameco database, World Bank staff calculations
Forecasted unemployment rates, percent
4
6
8
10
12
14
16
18
20
22
SI CZ BG RO PL HU SK LT EE LV
2009
2010
2011
… with employment falling more than output in few countries …
Source: Eurostat, World Bank staff calculations
Change in output vs. change in employment, percent
-25
-20
-15
-10
-5
0
5
EU15 EU10 LV EE LT SI RO BG HU CZ SK PL
Change in output 1Q 08 - 1Q 10 Change in employment 1Q 08 - 1Q 10
… even though wages are moderating in most countries
Total nominal hourly labor costs, % change, yoy, working day adjusted
Source: Eurostat, World Bank staff calculations.
-15
-10
-5
0
5
10
15
LT LV EE CZ HU SK AT MT PT NL PL DE CY ES LU
EU27 NO SE FR UK SI FI
*RO BG
Safeguarding Recovery
Answering the 1.7% question …Potential growth in 2007 and 2011 by EU member country
Source: European Commission Ameco database, World Bank staff calculations.
EU10
BGCZ
EE
LV
LTHU
PL
RO
SI
SK
EU15
BE
DK
DE
IE
GRESFRIT
LU
NLAT
PT
FI
SE
UK
-4
-2
0
2
4
6
8
-4 -2 0 2 4 6 8
Pote
ntial
gro
wth
in 2
011
Potential growth in 2007
… requires a stable European banking system with stable exposure to EU10 region …
European Banks’ 5-year CDS (bps)
Source: Bloomberg, Datastream, World Bank staff calculations
0
100
200
300
400
500
600
Jan-
08
Apr
-08
Jul-0
8
Oct
-08
Jan-
09
Apr
-09
Jul-0
9
Oct
-09
Jan-
10
Apr
-10
Jul-1
0
Raiffeisen
Deutsche Bank
Soc Generale
Unicredit
Intesa
ERSTE
SEB Bank
… and lower expenditures and higher revenues …
Composition of fiscal deficit reduction from 2009 to 2011, percent of GDP
Source: Convergence and Stability Program Updates from January/February 2010, EC Spring Forecast 2010, World Bank staff calculations
… to keep borrowing costs low …
Yield curves, percent
Source: Bloomberg, World Bank staff calculations
PL 1.03.2009
PL 1.02.2010
PL 7.07.2010
RO 1.03.2009
RO 1.02.2010
RO 7.07.2010
0
2
4
6
8
10
12
14
16
1M 2M 3M 6M 1Y 2Y 3Y 4Y 5Y 8Y 10Y 20Y 30Y
CZ 1.03.2009
CZ 1.02.2010 CZ 7.07.2010
HU 1.03.2009
HU 1.02.2010 HU 7.07.2010
0
2
4
6
8
10
12
14
16
3M 6M 1Y 2Y 3Y 4Y 5Y 6Y 7Y 9Y 10Y 11Y 13Y 15Y 30Y
… as well as more people working longer… Employment rate of 15-64 year-olds, EU27=100
Source: Eurostat, World Bank staff calculations.
50
52
54
56
58
60
62
64
66
68
70
HU RO PL LT SK LV BG EE CZ SI
2003 2009
EU15 2003
EU15 2009
… in productive jobsChange in employment by a skill level from 1Q 08 to 1Q 10, percent
Source: Eurostat, World Bank staff calculations.
-40
-35
-30
-25
-20
-15
-10
-5
0
5
10
BG CZ EE LV LT HU PL RO SI SK
White collar workers Blue collar workers Employment growth
… also to get ready for the euro area
Compliance with convergence criteria, March to May 2010
Source: Poland Ministry of Finance, World Bank staff calculations.
Government
deficit Government debt
Inflation rate
Long-term interest rates
ERM II Membership
2010 Reference
value below 3% of GDP below 60% of GDP
less than 0.8%
less than 6.0% minimum 2
years BG
CZ
EE
LV
LT
HU
PL
RO
SI
Euro Area
SK
Euro Area
THANK YOU
For more information visit:www.worldbank.org/eca/eu10rer