After Being Hit Hardest Among Emerging Markets, Weak Recovery Expected for EU New Member States and Croatia in 2010 and 2011

World Bank ‘EU10 Regular Economic Report’ says the growth will be lower than pre-crisis rates, and higher unemployment will hurt households in many countries

WARSAW/ZAGREB, April 1, 2010 — The EU’s newest member countries – the EU10 – and Croatia are set to return to growth in 2010 and 2011, but the rate of growth will be lower than before the pre-crisis. According to the World Bank’s new EU10 Regular Economic Report, after contracting by 3.6 percent in 2009, the latest government projections have the EU10 countries set to expand by a modest 1.6 percent in 2010, and 3.6 percent in 2011. Croatian output, after declining by 5.8 percent in 2009, is projected to recover by 0.5 percent in 2010 and 3 percent in 2011. While the EU10 and Croatia region is set to outgrow the EU15 region in both 2010 and 2011, the recovery is weak compared with pre-crisis rates, and it will take until 2012 before real output will regain its pre-crisis level.

Overview of EU10, EU15 and Croatia Forecasts and Outcome

Note: 2010 forecasts are based on government projections from the Convergence and Stability Programs 2010. For Croatia – GFS1986 methodology and staff projections.

The year-on-year decline in the region moderated from first and the second quarters of 2009 till the year-end by some 2.5 percentage points, in line with the improvement over the same period in the EU15 region. High-frequency indicators suggest that economic activity in the region continued its gradual recovery in early 2010. Trade volumes in Europe are stabilizing, as demand for durable goods and capital equipment is rising. Overall, a global recovery, the return of confidence to financial markets, low interest rates, and better use of EU funds could support a modest recovery in the region in 2010.

“While the recovery in the global economy is under way, the outlook for the EU10 region and Croatia remains uncertain. Unemployment is still rising and is expected to decline only in 2011,” said Kaspar Richter, Senior Economist in the World Bank’s Europe and Central Asia Region and lead author of the report. “In view of the weak recovery, companies are likely to postpone hiring of new workers until growth expectations are firmer, especially since many businesses reduced the average per worker work hours during the crisis. In addition, some EU10 countries, including Bulgaria, Czech Republic, Romania, and Slovakia, have begun consolidating their governments because of fiscal pressures and a desire to make public administration more efficient.”

Unemployment rates in the EU10 and Croatia rose by some 3 percentage points since the crisis outbreak and are hovering around 10 percent in early 2010, affecting some 4.6 million persons. Governments in all EU10 countries, with the exception of Romania, project higher unemployment in 2010 than in 2009.

According to the EU10 Regular Economic Report, men and youth have been hit the hardest. Job market prospects for workers with basic education and little work experience are likely to stay weak for several years. Unemployment among 15-24 year old job-seekers rose by 8 percentage points between June 2008 and January 2010, compared with an overall increase of 3 percentage points. Because the economic crisis hit construction and manufacturing hardest, job losses have been concentrated among men. In January 2010, unemployment among men exceeded that of women in all EU10 countries, except in Croatia, with the largest differences in Estonia, Lithuania and Latvia.

The EU10 countries and Croatia need to secure their recovery through fiscal consolidation that makes governments slimmer and more efficient, and a better investment climate that raises productivity and creates jobs. The EU’s new “Europe 2020” strategy for smart, sustainable, and inclusive growth calls for efforts to bolster potential growth and reorient the economies towards exports. This will require big changes in the policies affecting public finance, education, innovation, and the business climate. Done right, these reforms will prevent a cyclical rise in the number of jobless from becoming structurally unemployed.

“Acceleration of structural reforms in Croatia would be important not only for fiscal sustainability reasons, but also for strengthening long-term growth prospects which have weakened due to the crisis. The reform agenda ranges from spending rationalization, increasing labor force participation and strengthening higher education and innovation, to cutting red tape and reducing costs for doing business”, said Andras Horvai, World Bank Country Manager for Croatia. “There is a window of opportunity with public support for reforms. However, this might narrow quickly, in particular with political elections coming in 2011 in Croatia.”

The EU10 Regular Economic Report and the Croatia Supplement are published three times a year. They monitor macroeconomic and reform developments in the region, and provide in-depth analyses of key policy issues.