Economic Developments & Outlook
GDP growth in the Europe and Central Asia region will reach 2.2% in 2017, its strongest growth in six years and 0.3 percentage points more than previously forecast. Almost all parts of the region show stronger growth than earlier expected, which reflects a strengthening of industrial production and exports in recent months.
The region’s export volume growth continues to exceed the global average. Central Europe and the Western Balkans continue to register solid GDP growth, while the Russian Federation and Belarus have come out of recession. Only Azerbaijan, the country that was hardest hit by the fall in oil prices, and that responded with some delay, is expected to remain in recession this year.
The improved growth outlook comes with a normalization of inflation, lower unemployment rates, and in many countries, moderate fiscal deficits. Average inflation in the European Union is approaching 2% this year, after close to zero inflation a year ago. Inflation in Kazakhstan and Russia has plummeted from the double-digit rates after the fall in oil prices.
In several countries, unemployment rates have fallen below pre-2008 levels and labor participation rates are above pre-crisis levels. The average fiscal deficit this year is 1.6% of GDP, down from 5% in 2009.
Despite this robust cyclical performance, however, daunting challenges have come to the surface. In many countries, the share of full-time permanent jobs in total employment has declined. The rising share of flexible contracts is driven by a wave of new technologies and the rapid growth of digital platforms for commercial activities. These new technologies will increase efficiency, but they will also change the distributions of wealth and income.
The banking sector remains fragile in many countries, and weaknesses have become more exposed in countries that directly or indirectly depend on commodity exports. Moreover, the financial sectors in the region are struggling to absorb new technologies and meet new demand for risky capital.
Regional economic and political cohesion is being tested. After the European banking crises, enthusiasm for deeper and broader integration has waned in the western part of the region. Meanwhile, the fall in oil prices has somewhat diminished the expected economic benefits of the Eurasian Economic Union. The eastern part of the region has still not fully adjusted to the change in relative prices and the dramatic fall in income triggered by the drop in oil prices.
Migration & Mobility
Across Europe and Central Asia, public concerns have risen over the issue of immigration, following a sharp increase in asylum seekers and undocumented migrants. This seems to reflect broader anxiety about reduced job security, caused by the technological developments and the internationalization of production and work.
The public debate often overlooks, however, that the number of forced migrants in Europe and Central Asia is not unprecedented, that an influx of refugees tends to be temporary in nature, and that there are stark differences between refugees and other types of migrants.
Migration has been vital in the region’s social and economic history. For centuries, it has helped vulnerable households to escape poverty and political persecution, while in recent decades, the region’s economies have benefited from cross-border labor mobility.
Migration patterns in the region are likely to change, along with technological advancement and further cross-border connectivity. The competition for high quality jobs will become more intense. The share of high-skilled and circular migration may increase, and the duration of skilled migration may decline.
Policy reforms should not focus on migration challenges in isolation. Rather, reforms should help both migrants and non-migrants cope with increased and unavoidable flexibility in labor markets. Successful reforms will likely improve the portability of benefits, increase income security for workers with flexible contracts, and better integrate migrants in host countries. Maintaining supportive policies toward migration would make a critical contribution to prosperity in the Europe and Central Asia region.
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