SOFIA, December 18, 2013—Economic growth in the EU11* countries has been gradually recovering from a slow start in early 2013, according to the World Bank’s latest EU11 Regular Economic Report (EU11 RER).
“Growth in the EU11 countries was close to zero in the beginning of the year, with declining investment and subdued consumption,” said Theo Thomas, Lead Economist in the World Bank’s Europe and Central Asia region and Team Leader of the EU11 RER. “Nonetheless, economic prospects improved during the year, as the situation in the Euro Area stabilized, exports picked up, and domestic policies supported growth.”
According to the report, economic activity in the EU11 region started strengthening in the second quarter amid improved confidence triggered by signs of a recovery in the Euro Area, which exited from recession in the second quarter. Overall, GDP increased by 0.3 percent in the EU11 in the first half of 2013. Both GDP estimates for the third quarter of 2013 and high frequency economic indicators suggest that a modest economic recovery continues.
“The Euro Area continued to contract during 2013 – output in the EU15** shrank by 1.5 percent in the first quarter – before rebounding through the third quarter,” said Mamta Murthi, World Bank Regional Director for Central Europe and the Baltic Countries.
“Meanwhile,” Murthi added, “the modest upturn in the EU11 initially relied on net export growth, notably in Romania, Slovakia, and Poland, to offset falling investment and subdued private consumption across the region. Looking forward, economic growth across the EU11 is expected to pick up in 2014 and to become more balanced, with less reliance on exports as domestic demand strengthens, particularly investment. However, the recovery is expected to be protracted, with growth not reaching pre-crisis rates for some time.”
The report highlights the varied economic performance among the EU11 countries in the first three quarters of 2013. Latvia and Lithuania recorded the highest growth rates not only in the EU11, but also in the entire European Union. However, even this good performance represented a downward adjustment compared to 2012 amid a decline in private investment in Latvia and a slowdown in exports in Lithuania. Poland’s growth slowed to the lowest rate since 2001 in the first quarter of the year, due to declines in investment and consumption. Growth in Romania was mainly driven by robust export performance on account of the automotive industry, despite flat consumption and contracting investment. Similarly, strong exports supported growth in Bulgaria but still weak domestic demand is likely to keep Bulgaria’s growth rate below the average for the region. Slovenia and Croatia were in recession in the first three quarters of the year, and were strongly affected by declines in domestic demand, while Hungary grew in the third quarter after five consecutive quarters of contraction.
The labor market has yet to benefit significantly from the nascent recovery as unemployment rates continue to be at their highest level since early 2007, with especially high rates for the youth and low-skilled. Currently around 4.9 million people in the EU11 are jobless, representing an increase of 1.8 million from the historic low recorded in August 2008. In Bulgaria the number of jobless more than doubled during this period reaching 449 thousand, 65 thousand of which are young people. According to the report, stronger growth and labor market reforms will be needed to reduce unemployment in the face of a weak recovery.
Despite the continued easing of monetary policy coupled with low inflation across the region and the Euro Area, the report says that credit growth remains subdued. Resolving the high level of non-performing loans, addressing financial regulatory uncertainty and enhancing the business environment are key for alleviating constraints, yet the report warns that credit conditions may remain tight in the near-term.
Fiscal adjustment will resume in 2014, with domestic demand helping to rebuild revenue, but at a relatively gradual pace in order to support economic growth. However, there is a need for larger adjustments in Croatia and Slovenia to achieve sustainable deficit and debt levels. Bulgaria’s planned fiscal deficit is one of the lowest in the region.
The report warns that EU11 countries continue to face significant downside risks. Rising global interest rates coupled with volatile capital markets, could slow the Euro Area recovery and hamper domestic demand, particularly investment, in EU11. Tackling the systemic financial sector risks in Europe could also lead to a near-term tightening of credit conditions in the EU11 if more capital is needed, thereby constraining investment.
The report analyzes the issue of poverty reduction and shared prosperity in the EU11, building on the World Bank’s two institutional goals of reducing extreme poverty and promoting shared prosperity. The report notes that while many countries did well before the crisis in promoting shared prosperity – i.e., bolstering the incomes of the bottom 40 percent of the population – these gains have since been diminished throughout the EU11, and completely wiped out in Hungary, Latvia, and Lithuania. While income growth for the bottom 40 percent has been positive elsewhere, it has been higher than average in four countries – Bulgaria, Estonia, Poland, and Romania.
Shared prosperity depends critically on economic growth, jobs, and well-targeted social insurance programs. “One challenge going forward is to promote shared prosperity in what may be a prolonged period of weak growth,” emphasized Kenneth Simler, Senior Economist in the World Bank’s Europe and Central Asia region, and co-author of the EU11 RER. “Countries need to find ways to accelerate economic growth and job creation and ensure that growth is inclusive, in an environment in which fiscal and credit constraints are more binding and household coping mechanisms have been weakened by the crisis.”
Simler pointed out that “Achieving such inclusive and sustainable growth requires policies that build skills, ensure labor mobility, and encourage private sector competitiveness, with better-targeted social protection mechanisms that protect the vulnerable while avoiding barriers and disincentives to work.”
The EU11 RER is a semiannual publication of the World Bank’s Europe and Central Asia Region. It monitors macroeconomic and reform developments in the EU11 countries, and provides in-depth analyses of key policy issues. To obtain an online copy of the new report, please visit:
*The EU11 refers to the 11 European Union (EU) member states that joined the EU after 2004 – Bulgaria, Croatia, the Czech Republic, Estonia, Hungary, Latvia, Lithuania, Poland, Romania, the Slovak Republic, and Slovenia.
** EU15 countries refer to the pre-2004 EU Member States: Austria, Belgium, Denmark, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, Netherlands, Portugal, Spain, Sweden, and the United Kingdom.