## eur-chapter-1-v2

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### Growth dynamics and drivers
- Expansion largely driven by domestic demand, initially mainly by vibrant private consumption but now also by investment.
- Advanced European economies grew by 2.4 percent in 2017, up from 1.9 percent in 2016.
- Upward revision of 0.2 percentage point since the November 2017 Regional Economic Outlook: Europe due to higher-than-expected net exports growth.
- Emerging Europe (most of region) more than doubled annual real GDP growth to 3.7 percent in 2017, from 1.6 percent in 2016 (a six-year high).
- Actual growth exceeded November 2017 REO projections by 0.6 percentage point in emerging Europe despite an unexpectedly large drag from net exports of about 1 percentage point.

### Advanced Europe: country and sector highlights
- Euro area:
  - Quarterly growth positive for the last 19 quarters.
  - Annual growth in 2017 reached 2.3 percent, up from 1.8 percent in 2016.
  - Headline inflation declined to 1.1 percent in February 2018; core inflation remains low.
- Germany:
  - Household consumption grew by 2.1 percent in 2017, the largest increase since 2000.
  - Business investment spurred by high capacity utilization, accommodative financing conditions, and gradually rising corporate profitability.
- Nordics:
  - Expanded by 2.2 percent in 2017, broadly the same as in 2016.
  - Sweden: growth revised down to 2.4 percent in 2017 from 3.1 percent in November 2017 REO due to weaker-than-forecast net exports in H2 2017; unemployment declined to near precrisis lows.
  - Norway: economy accelerated to 1.8 percent in 2017 from 1.1 percent in 2016.
- United Kingdom:
  - GDP growth slowed to 1.7 percent in 2017.
  - Domestic demand held back by slower real income growth following the sharp depreciation of the pound and Brexit-related uncertainties; exports rose due to favorable foreign demand and a cheaper pound.
- Czech Republic:
  - Economic activity surged to 4.3 percent in 2017, driven by strong private demand and increased absorption of the new round of EU Structural and Investment Funds.

### Emerging Europe: country and region specifics
- Central Europe: growth increased to 4.4 percent in 2017.
- SEE-EU (Southeastern European EU member states): growth increased to 5.8 percent in 2017.
- EU funds:
  - In 2017, EU funds financed an equivalent of about half of public investment in Romania and Hungary, and a third elsewhere.
  - Absorption of the new round of EU Structural and Investment Funds picked up pace after a slow start.
- Poland and Romania:
  - Growth further supported by discretionary fiscal spending in Poland and procyclical fiscal policy in Romania.
- Turkey:
  - Growth accelerated to 7 percent in 2017 from 3.2 percent in 2016.
  - A sizable credit impulse and strong policy stimulus following the 2016 coup attempt stimulated domestic demand; exports increased on stronger external demand and a sizable depreciation of the lira.
- Russia and CIS:
  - Russia expanded by 1.5 percent in 2017; momentum softened in H2 2017.
  - Other CIS members picked up to 2.2 percent in 2017; Belarus recorded growth of 2.4 percent.
- Western Balkans:
  - Growth moderated to 2.3 percent in 2017 from 3.1 percent in 2016, reflecting a temporary slowdown in Serbia due to a prolonged drought and electricity disruptions.

### Investment, potential growth, and output gaps
- Pickup in investment led to higher estimates of potential growth in 2018:
  - By 0.2 percentage point in advanced Europe.
  - By 0.1 percentage point in emerging Europe.
- Output gaps appear largely closed in most of the region, though estimates are uncertain.
- Mixed indicators of overheating pressures in largest European economies; many countries show buoyant activity and unemployment below historical averages, with exceptions including France, Italy, and Spain.

### High-frequency indicators and near-term outlook
- Manufacturing PMIs remain in expansion territory, but March readings softened.
  - Russia’s PMI barely above 50.
  - Euro area composite index declined by a cumulative 4 points since end-2017—the largest three-month decrease since May 2012.
- Confidence among euro area and Nordic households eased in March but remains historically high.
- Industrial output in January 2018: about 3.6 percent in advanced Europe and 4.6 percent in emerging Europe; most recent growth rates lower than in H2 2017.
  - Germany: industrial orders fell almost 4 percent, and factory sales edged down 0.2 percent month over month in January 2018.
- Citigroup’s Economic Surprise Index suggests upside surprises less frequent than last year, especially in the euro area.

### Inflation developments
- Region-wide:
  - Price pressures diverging across the region, mostly visible in headline rates due to different energy and food weights.
  - Core inflation remains quite low in most economies despite higher wage growth.
- Advanced Europe:
  - Inflation remains subdued; Nordics at 1.5 percent in February 2018.
  - United Kingdom: inflation reached 2.7 percent in February 2018.
- Other advanced economies:
  - Czech Republic: inflation surpassed 2 percent starting in early 2017 before declining at the beginning of 2018.
  - Baltics: inflation almost 4 percent in Q2 2017, dropped to 2.8 percent in February 2018.
- Emerging Europe:
  - Headline inflation in Central and Southeastern Europe increased to about 2 percent at end-2017; core inflation about 1 percent.
  - Poland: headline inflation hit 2.5 percent in November 2017 but has fallen since; core inflation around 0.8 percent recently.
  - SEE economies: Romania saw steep headline inflation increases as effects of tax and administrative adjustments dissipated; non-EU SEE countries saw headline inflation pick up to 2½ percent in mid-2017 then decline in H2 2017 as Serbia’s inflation fell to 3 percent.
- Russia:
  - Headline and core inflation reached record lows of 2.2 and 2 percent, respectively, during January–February 2018.
- Turkey:
  - Core inflation picked up to about 12 percent in recent months, from about 10 percent in August 2017.

### Wage and labor market dynamics
- Wage growth low in most advanced Europe, but strong in newer EU member states.
- Employment growth robust and labor market slack declined, yet wage growth subdued in the euro area and many advanced economies.
- Newer EU member states (Czech Republic, Baltics, Central Europe, SEE) show wage growth significantly outpacing inflation as unemployment dips below precrisis lows.
- Wage Phillips curves modest in the EU15 and especially strong in newer EU member states.
- Corporate profitability declined moderately in Eastern Europe but remains about 10 percentage points higher than in advanced Europe.

### Credit, nonperforming loans, and banking sector implications
- Bank credit to the private sector picking up in the euro area and other advanced European countries.
- Credit to businesses remains uneven and particularly weak in countries with high NPLs.
- Nordic economies: credit to businesses robust; credit growth to households slowed after macroprudential measures.
- Emerging Europe (outside CIS): credit growth increasing for nonfinancial corporations and households, particularly in Central Europe and SEE-EU.
- Transactional credit growth may be higher where loan-portfolio cleanup lowered credit stocks (e.g., Albania, Croatia, Hungary).
- Russia: decline in credit seems stabilized; rest of CIS: credit continued to contract albeit more slowly.
- Turkey: credit growth rebounded strongly to about 20 percent year over year in early 2018 following stimulus measures.
- NPL levels declined since 2014 peak in the euro area but remain high in some countries; NPLs declining across emerging Europe but remain higher than 10 percent in half of the countries.
- For a sizable part of the banking system in advanced Europe, return on equity persistently below the cost of equity.
- High NPL levels weigh on bank profitability and credit growth; more actions needed to repair bank balance sheets and facilitate corporate restructuring.

### Exchange rates, external positions, and current accounts
- Since beginning of 2017, the euro appreciated by 7 percent in real effective terms.
- Czech koruna appreciated about 10 percent following lifting of the Koruna-euro floor in early 2017.
- Polish zloty and Hungarian forint experienced some appreciation.
- Turkish lira depreciated in 2017 by about 6 percent.
- Russian ruble depreciated by 6 percent since February 2017.
- Swiss franc depreciated since early 2017 given negative interest rate differential with the euro.
- Current account balances stronger than before the global financial crisis in most countries; negative net foreign asset positions remain elevated in many countries.
- Excess current account surpluses persisted in Germany and the Netherlands; in Germany they remained stronger than implied by medium-term fundamentals.
- Turkey: current account deficit stayed around 5 percent of GDP.

### External environment and commodity prices
- Global growth projected to edge up from 3.8 percent in 2017 to 3.9 percent in 2018 and 2019.
- Recovery in global investment has spurred stronger manufacturing activity and an upturn in global trade.
- Agreement for a 21-month Brexit transition period mitigates risk of disorderly exit.
- Oil prices increased to above $65 a barrel (about 30 percent above October 2017 WEO projection); futures point to some oil price declines over next few years from current levels.
- Higher oil prices aid cyclical recovery in Russia and could put upward pressure on headline inflation elsewhere.

### Financial conditions and monetary policy
- Financial conditions supportive of growth though signs of tightening gradually appearing.
- Sovereign bond yields edged up in many euro area economies; yields declined in about a quarter of European economies (notably Greece, Portugal, Ukraine).
- Euro area: still-easy financial conditions underpinned by large ECB asset holdings; net purchases expected to remain substantial at least through September 2018 relative to projected net issuance of government debt.
- Market volatility rose substantially for European equities in early February 2018 but declined to 2016–17 average thereafter.
- Portfolio flows to emerging Europe robust through January 2018, especially bond flows; mild reversal amid early-February equity correction but recovery since then.
- Almost all central banks in the region maintaining negative real policy rates.
- Bank of England raised policy rate for the first time in 10 years, to 0.5 from 0.25 of a percent.
- Czech National Bank raised rates three times since August 2017 and expected to continue gradual normalization.
- Romania’s policy rate raised twice in 2018 by a cumulative 50 basis points.
- Turkey increased effective interest rate by almost 5 percentage points in 2017; markets expect further tightening in 2018.
- Russia’s central bank cut policy rates by a cumulative 275 basis points since March 2017 as inflation stabilized below 4 percent target.
- Russia and Turkey are the only large European economies with positive real policy rates.

### Fiscal policy and near-term growth outlook
- Fiscal policy projected to continue supporting activity; fiscal stance expected neutral or expansionary in 2018 except in Iceland, Italy, Russia, the Slovak Republic, and the United Kingdom.
- Aggregate fiscal stance in the euro area forecast broadly neutral in 2018–19 and to tighten only gradually in 2020.
- Procyclical loosening projected in Southeastern Europe and Turkey.
- Europe’s growth forecasts for 2018 and 2019 revised up relative to November 2017 REO, driven largely by stronger domestic demand and investment (investment accounts for almost half of the revision).
- Euro area growth forecast revised up by 0.4 and 0.3 percentage point for 2018 and 2019, respectively; growth now forecast to reach 2.3 percent in 2018 and 2 percent in 2019.
- Germany’s growth revision particularly large, reaching about ¾ percentage point for 2018.
- While investment growth has raised potential GDP, most growth revisions attributed to cyclical factors.

### Monetary policy guidance and recommendations
- Monetary policy should remain strongly accommodative until inflation durably converges to central bank targets.
- Commitment to raising inflation and expectations key to lifting sluggish wages.
- Recalibration of asset purchases with forward guidance to keep policy rates low well past net asset purchases recommended.
- United Kingdom: future policy rate increases should be guided by evolving inflation and Brexit-related uncertainties.
- Czech Republic: steady, data-driven normalization appropriate.
- Emerging Europe:
  - Central Europe: monitor inflation pressure with readiness to adjust policy.
  - Hungary: policy can remain supportive short term but prepared to remove stimulus if underlying inflation picks up.
  - Poland: data-dependent decisions accounting for fiscal stance and transmission lags.
  - Russia: room for further policy easing given declining inflation.
  - Turkey: monetary policy should tighten further beyond what is needed to keep pace with US Federal Reserve hikes; credible tightening would support the currency and rebuild official reserves.

### Fiscal policy recommendations
- Trade-off tilted toward consolidation to rebuild buffers; only about a third of countries saw improvements in cyclically adjusted balances.
- Euro area:
  - Countries with limited fiscal space should consolidate in a growth-friendly way before monetary accommodation ends.
  - Countries with ample fiscal space should promote higher potential growth through more public investment to assist external rebalancing.
- Nordic economies: mildly contractionary fiscal stance appropriate.
- United Kingdom: balance preserving flexibility for shocks with committing to fiscal discipline and rebuilding buffers.
- Emerging Europe:
  - Priority to reduce structural fiscal deficits toward medium-term “close-to-balance” targets and lower high debt levels.
  - Russia: planned deficit reduction in 2018–20 under new fiscal rule warranted; improve tax collection and return on state assets; consider parametric pension reform, means-testing social assistance, and reductions in subsidies and tax expenditures.
  - Turkey: front-loaded fiscal consolidation above authorities’ medium-term program targets, backed by well-defined revenue and spending measures.

### Financial policy, macroprudential measures, and NPL resolution
- Further bank balance-sheet cleanup needed despite progress.
- EU and ECB actions targeting NPLs are positive.
- Recommendations for euro area:
  - Reduce impediments to NPL resolution from jurisdictional fragmentation by establishing minimum standards for collateral valuation, consistent NPL definitions, and minimum standards for insolvency and creditor rights.
  - Single Supervisory Mechanism should monitor bank-specific NPL reduction targets backed by Pillar 2 powers.
  - European Banking Authority should advance its NPL sales platform.
- Nordic economies: use macroprudential policy to reduce housing-sector vulnerabilities.
- Czech Republic: central bank should be given binding powers over loan-to-value, debt-to-income, and debt-servicing-to-income ratios.
- Hungary: monitor housing price risks carefully.
- Emerging and Eastern Europe: continue NPL reduction efforts while recovery improves prospects for asset sales.
- Turkey: strengthen oversight and governance of the banking sector; revisit macroprudential policies where vulnerabilities highest, particularly for a highly leveraged corporate sector.

### Structural policy priorities
- Advance structural reforms to boost competitiveness, potential growth, and resilience.
- Recommended reforms: ambitious labor and product market reforms; quality education and training tailored to labor market needs; shift taxes away from labor; better apprenticeship programs; active labor market policies to reduce youth unemployment.
- EU level: combine targeted support from EU structural funds and outcome-based benchmarks with stricter enforcement of the Macroeconomic Imbalance Procedure.
- Emerging Europe: enhance institutions and public sector efficiency; improve investment environment; boost labor participation of women and older workers; reduce youth unemployment.
- Western Balkans: strengthen institutions to support EU engagement.
- Russia: institutional improvements prerequisite to reap dividends from investment in innovation.
- Turkey: reforms to increase labor market flexibility and improve business environment.

### EMU architecture recommendations
- Use recovery to deepen EMU:
  - Complete banking union: institute a backstop from the European Stability Mechanism to the Single Resolution Fund and set up a European deposit insurance scheme with a fiscal backstop.
  - Upgrade supervisory capacity to oversee financial intermediation migrating due to Brexit and support the Capital Markets Union (CMU).
  - CMU aims: widen financing choices for SMEs, increase investor base, promote harmonization of insolvency regimes, and protect cross-border investor rights.
  - Establish a central fiscal capacity (CFC) for macroeconomic stabilization; build support over time, make access conditional on compliance with fiscal rules, and design mechanisms to prevent permanent transfers across countries.

### Annex — Key projections and statistics (preserved exactly as in source)
- Annex Table 1.1. GDP Growth (Year-over-year percent change) — April 2018 WEO
  - Europe: 1.8, 2.8, 2.6, 2.2
  - Advanced European Economies: 1.9, 2.4, 2.3, 2.0
  - Euro Area: 1.8, 2.3, 2.4, 2.0
  - Ireland: 5.1, 7.8, 4.5, 4.0
  - Germany: 1.9, 2.5, 2.5, 2.0
  - Spain: 3.3, 3.1, 2.8, 2.2
  - Turkey: 3.2, 7.0, 4.4, 4.0
  - Memorandum — world: 3.2, 3.8, 3.9, 3.9; Advanced Economies: 1.7, 2.3, 2.5, 2.2; Emerging Market and Developing Economies: 4.4, 4.8, 4.9, 5.1; European Union: 2.0, 2.7, 2.5, 2.1; United states: 1.5, 2.3, 2.9, 2.7; China: 6.7, 6.9, 6.6, 6.4; Japan: 0.9, 1.7, 1.2, 0.9
- Annex Table 1.6. Inflation (Year-over-year percent change; period average)
  - Europe: 2.0, 2.9, 2.8, 2.8
  - Advanced European Economies: 0.4, 1.7, 1.7, 1.7
  - Euro Area: 0.2, 1.5, 1.5, 1.6
  - Germany: 0.4, 1.7, 1.6, 1.7
  - Turkey: 7.8, 11.1, 11.4, 10.5
  - Russia: 7.1, 3.7, 2.8, 3.7
  - Ukraine: 13.9, 14.4, 11.0, 8.0
  - Memorandum — world: 2.8, 3.0, 3.5, 3.4; Advanced Economies: 0.8, 1.7, 2.0, 1.9; China: 2.0, 1.6, 2.5, 2.6
- Annex Table 1.5. Gross Investment (Percent of GDP)
  - Europe: 21.4, 21.9, 22.0, 22.2
  - Advanced European Economies: 20.3, 20.5, 20.7, 20.9
  - Euro Area: 20.4, 20.9, 21.1, 21.3
  - Ireland: 32.4, 24.2, 25.9, 26.8
  - Germany: 19.2, 19.7, 19.7, 20.0
  - Turkey: 28.2, 30.9, 31.3, 31.1

*Prepared by a staff team comprising Vizhdan Boranova, Raju Huidrom, Sylwia Nowak, Faezeh Raei, and Yan Sun; chapter led by Emil Stavrev under the general guidance of Jörg Decressin. The chapter reflects data and developments as of April 19, 2018.*

### 2016. The expansion is largely driven by domestic

### eur-chapter-1-v2 - 2016. The expansion is largely driven by domestic

### Growth dynamics and drivers
- The expansion is largely driven by domestic demand, initially mainly by vibrant private consumption but now also by investment.
- Advanced European economies grew by 2.4 percent in 2017, up from 1.9 percent in 2016.
- The upward revision of 0.2 percentage point since the November 2017 Regional Economic Outlook: Europe is due to higher-than-expected net exports growth.
- In most of emerging Europe, the region more than doubled its annual real GDP growth rate to 3.7 percent in 2017, from 1.6 percent in 2016, a six-year high.
- Actual growth exceeded projections in the November 2017 Regional Economic Outlook: Europe by 0.6 percentage point, despite an unexpectedly large drag from net exports of about 1 percentage point.

### Advanced Europe: country and sector highlights
- Euro area:
  - Quarterly growth has been positive for the last 19 quarters.
  - Annual growth in 2017 reached 2.3 percent, up from 1.8 percent in 2016.
  - Recovery is broad-based across countries and sectors, with a positive feedback loop between jobs, consumption, and investment.
  - Headline inflation declined to 1.1 percent in February 2018, below the ECB’s target; core inflation remains low.
- Germany:
  - Household consumption grew by 2.1 percent in 2017, the largest increase since 2000.
  - Business investment spurred by high capacity utilization, accommodative financing conditions, and gradually rising corporate profitability.
- Nordics:
  - Expanded by 2.2 percent in 2017, broadly the same as in 2016.
  - Sweden enjoyed robust growth with unemployment declining to near precrisis low levels.
  - Sweden’s growth was revised down to 2.4 percent in 2017, from 3.1 percent in the November 2017 Regional Economic Outlook: Europe, due to weaker-than-forecast net exports in the second half of 2017.
  - Norway’s economy accelerated to 1.8 percent in 2017 from 1.1 percent in 2016.
- United Kingdom:
  - GDP growth slowed to 1.7 percent in 2017.
  - Domestic demand held back by slower real income growth following the sharp depreciation of the pound and Brexit-related uncertainties; exports rose due to favorable foreign demand and a cheaper pound.
- Czech Republic:
  - Economic activity surged to 4.3 percent in 2017, driven by strong private demand and increased absorption of the new round of EU Structural and Investment Funds.

### Emerging Europe: country and region specifics
- Central Europe: growth increased to 4.4 percent in 2017.
- Southeastern European EU member states (SEE-EU): growth increased to 5.8 percent in 2017.
- EU funds:
  - In 2017, EU funds financed an equivalent of about half of public investment in Romania and Hungary, and a third elsewhere.
  - Absorption of the new round of EU Structural and Investment Funds picked up pace after a slow start.
- Poland and Romania:
  - Growth further supported by discretionary fiscal spending in Poland and procyclical fiscal policy in Romania.
- Turkey:
  - Growth accelerated sharply to 7 percent in 2017, from 3.2 percent the previous year.
  - A sizable credit impulse (driven by state loan guarantees and relaxed macroprudential measures) and strong policy stimulus following the 2016 coup attempt stimulated domestic demand; exports increased on stronger external demand and a sizable depreciation of the lira.
- Russia and CIS:
  - Russia expanded by 1.5 percent in 2017, supported by higher oil prices, easier domestic financial conditions, and improved domestic demand; momentum softened in the second half of 2017.
  - Other members of the Commonwealth of Independent States (CIS) picked up to 2.2 percent in 2017, with Belarus recording growth of 2.4 percent.
- Western Balkans:
  - Growth moderated to 2.3 percent in 2017 from 3.1 percent in 2016, reflecting a temporary slowdown in Serbia due to a prolonged drought and electricity disruptions.

### Investment, potential growth, and output gaps
- The pickup in investment has led to higher estimates of potential growth in 2018:
  - By 0.2 percentage point in advanced Europe.
  - By 0.1 percentage point in emerging Europe.
- Output gaps appear largely closed in most of the region, though estimates of potential growth and output gaps are uncertain.
- A broader set of indicators paints a mixed picture of overheating pressures in the largest European economies; many countries show buoyant activity and unemployment rates below historical averages, with exceptions including France, Italy, and Spain.

### High-frequency indicators and near-term outlook
- Manufacturing PMIs remain in expansion territory, but March readings softened from their long string of gains.
  - Russia’s PMI came in barely above 50.
  - The composite index for the euro area declined by a cumulative 4 points since the end of 2017—the largest three-month decrease since May 2012.
- Confidence among euro area and Nordic households eased in March but remains historically high.
- Industrial output continued to expand in January 2018 at about 3.6 percent in advanced Europe and 4.6 percent in emerging Europe, but most recent growth rates are lower than in the second half of 2017.
  - In Germany, industrial orders fell almost 4 percent, and factory sales edged down 0.2 percent month over month in January 2018.
- Citigroup’s Economic Surprise Index suggests upside surprises are now less frequent than last year, especially in the euro area.

### Inflation developments
- Region-wide pattern:
  - Price pressures are diverging across the region, mostly visible in headline rates due to different energy and food weights.
  - Core inflation remains quite low in most economies despite higher wage growth.
- Advanced Europe:
  - Inflation remains subdued.
  - Nordic economies: readings at 1.5 percent in February 2018.
  - United Kingdom: inflation reached 2.7 percent in February 2018.
- Other advanced economies:
  - Czech Republic: inflation surpassed the 2 percent target starting in early 2017 before declining at the beginning of 2018.
  - Baltics: inflation reached almost 4 percent in Q2 2017, then dropped to 2.8 percent in February 2018.
- Emerging Europe:
  - Headline inflation in Central and Southeastern Europe increased to about 2 percent at end-2017, mostly owing to higher energy prices.
  - Core inflation remains subdued at about 1 percent despite strong wage growth.
  - Poland: headline inflation hit 2.5 percent in November 2017 (the central bank’s target) but has fallen since; core inflation has hovered around 0.8 percent in recent months.
  - SEE economies: Romania saw steep headline inflation increases as the effects of tax and administrative adjustments dissipated; non-EU SEE countries saw headline inflation pick up to 2½ percent in mid-2017 then decline in H2 2017 as Serbia’s inflation fell to 3 percent.
- Russia:
  - Inflation declined further amid tight monetary policy, a weaker-than-expected recovery, and a good harvest.
  - Both headline and core inflation reached record lows of 2.2 and 2 percent, respectively, during January–February 2018.
- Turkey:
  - Inflation remains elevated, reflecting strong domestic demand, expansionary fiscal and insufficiently tight monetary policies, and the pass-through of lira depreciation.
  - Core inflation picked up to about 12 percent in recent months, from about 10 percent in August 2017.

### Wage and labor market dynamics
- Wage growth:
  - Continues to be low in most of advanced Europe, but strong in newer EU member states.
  - Employment growth has been robust and indicators of labor market slack have declined, yet wage growth remains subdued in the euro area and many other advanced European economies.
  - Recent wage negotiations in some euro area economies (such as Germany) suggest employers are willing to accommodate higher wage growth in tightening labor markets.
  - Newer EU member states (Czech Republic, Baltics, Central Europe, SEE economies) show wage growth significantly outpacing inflation as unemployment dips below precrisis lows.
- Drivers and consequences:
  - Differences in wage dynamics reflect differences in labor productivity growth, wage-setting mechanisms, and inflation expectations.
  - Wage Phillips curves exhibit a modest slope in the EU15 and especially strong wage responses to slack in the newer EU member states.
  - Wage growth has generally been synchronized with labor productivity in most advanced Europe; in newer EU member states wage growth has outpaced productivity growth, though the gap narrowed as labor productivity rose strongly in late 2017.
  - Low inflation expectations and external competition have muted wage responses to slack in advanced Europe, keeping corporate profitability broadly stable.
  - Corporate profitability declined moderately in Eastern Europe in recent years but remains about 10 percentage points higher than in advanced Europe.

### Credit and financial conditions
- Credit growth:
  - After a long creditless recovery, credit growth has been picking up since 2016 in many European countries, but continues to lag domestic demand and output.
  - As investment strengthens, credit growth is expected to follow, with beneficial effects for bank profitability and balance sheets.

*Prepared by a staff team comprising Vizhdan Boranova, Raju Huidrom, Sylwia Nowak, Faezeh Raei, and Yan Sun; chapter led by Emil Stavrev under the general guidance of Jörg Decressin. The chapter reflects data and developments as of April 19, 2018.*

### Box 1.2 for an in-depth discussion comparing the

### eur-chapter-1-v2 - Box 1.2 for an in-depth discussion comparing the

### Credit, nonperforming loans, and banking sector implications
- Bank credit to the private sector is picking up in the euro area and other advanced European countries (Figure 1.9).
- Growth in credit to businesses remains uneven across countries and is particularly weak in countries with high levels of nonperforming loans (NPLs).
- In the Nordic economies, credit to businesses is robust, while credit growth to households has slowed following recent macroprudential measures.
- In emerging Europe (outside the CIS), credit growth to both nonfinancial corporations and households is increasing, particularly in Central Europe and the SEE-EU region.
- On a transactional basis, credit growth may be even higher in countries where loan-portfolio cleanup has lowered credit stocks (for example in Albania, Croatia, and Hungary).
- In Russia, the decline in credit seems to have stabilized as the economy has exited the recession. In the rest of the CIS, credit has continued to contract, albeit at a slower pace.
- In Turkey, credit growth rebounded strongly to about 20 percent year over year in early 2018 following stimulus measures, notably a credit guarantee program for lending to businesses (Figure 1.9, panel 4).
- NPL levels have declined since their 2014 peak in the euro area but remain high in some countries (Figure 1.10).
- NPL levels have been declining across emerging Europe but remain higher than 10 percent in half of the countries.
- High NPL levels are weighing on bank profitability and credit growth; more actions are needed to repair bank balance sheets and facilitate corporate restructuring.
- For a sizable part of the banking system in advanced Europe, the return on equity is persistently below the cost of equity.

### Labor market slack, profitability, and wages
- The source highlights continuing labor market slack measures (additional slack comprises persons available but not seeking work, seeking work but not immediately available, and underemployed part-time workers).
- Corporate profit share is reported as a four-quarter average of seasonally unadjusted data; wage growth and corporate profit share dynamics are shown in Figure 1.8 (year-over-year percent change).
- In Central Europe and the SEE-EU region, economy-wide profit shares are higher than the EU average, suggesting companies have some room to absorb higher labor costs.
- The impact of high wage growth on competitiveness requires close monitoring.

### Exchange rates, external positions, and current accounts
- Since the beginning of 2017, the euro has appreciated by 7 percent in real effective terms (Figure 1.11).
- The Czech koruna appreciated about 10 percent following the lifting of the Koruna-euro floor in early 2017.
- The Polish zloty and Hungarian forint experienced some appreciation due to strong growth and subdued inflation.
- The Turkish lira depreciated in 2017 by about 6 percent (following a similar-sized depreciation after the coup in the second half of 2016).
- The Russian ruble has depreciated by 6 percent since February 2017, following the 2014–16 depreciation and recovery.
- The Swiss franc has depreciated since early 2017 given the negative interest rate differential with the euro.
- Current account balances remain noticeably stronger than before the global financial crisis in most countries, with net external debtor countries that had large deficits prior to the crisis seeing sizable adjustments.
- In advanced Europe, euro area members that had current account deficits prior to the crisis have achieved surpluses (Estonia, Portugal, Spain) or reduced deficits appreciably (Greece, Latvia, Lithuania).
- Negative net foreign asset positions remain elevated in many countries despite current account improvements (Figure 1.12, panel 3).
- Excess current account surpluses have persisted in Germany and the Netherlands; in Germany they remained stronger than implied by medium-term fundamentals and desirable policy settings.
- In emerging Europe, many economies adjusted from large current account deficits to small surpluses, but net external liability positions remain elevated.
- In Central Europe and the SEE-EU region, real effective exchange rates have edged up as wages outstripped productivity in the last two years.
- In Turkey, the current account deficit has stayed around 5 percent of GDP; higher fuel prices and strong domestic demand contributed to a wider deficit.

### External environment and commodity prices
- The synchronized global expansion remains on track, with global growth projected to edge up from 3.8 percent in 2017 to 3.9 percent in 2018 and 2019.
- The continued recovery in global investment has spurred stronger manufacturing activity and an upturn in global trade (Figure 1.13).
- The recent agreement for a 21-month Brexit transition period mitigates the risk of a disorderly UK exit and reduces uncertainty.
- Oil prices increased to above $65 a barrel (about 30 percent above the projection in the October 2017 World Economic Outlook). Futures markets point to some oil price declines over the next few years from current levels.
- Higher oil prices will aid the cyclical recovery in Russia and could put some upward pressure on headline inflation elsewhere.

### Financial conditions and monetary policy
- Financial conditions remain supportive of growth, although signs of tightening are gradually appearing in some markets (Figure 1.14).
- Sovereign bond yields edged up in many euro area economies in response to better-than-expected growth and expectations of earlier monetary policy normalization; yields declined in about a quarter of European economies (notably Greece, Portugal, and Ukraine).
- In the euro area, still-easy financial conditions are underpinned by large asset holdings by the ECB. Net purchases are expected to remain substantial at least through September 2018 relative to projected net issuance of government debt (Figure 1.14, panel 3).
- Market volatility rose substantially for European equities in early February 2018 but declined to the average level observed in 2016–17 thereafter (Figure 1.14, panel 4).
- Portfolio flows to emerging Europe remained robust through January 2018, especially bond flows; weekly data show a mild reversal amid the early-February equity correction but recovery since then.
- Continued accommodative macroeconomic policies will further support activity, with almost all central banks in the region maintaining negative real policy rates (Figure 1.15, panel 2).
- Monetary policy normalization in large advanced economies is expected to be gradual and predictable.
- The Bank of England raised the policy rate for the first time in 10 years, to 0.5 from 0.25 of a percent.
- The Czech National Bank has raised rates three times since August 2017 and is expected to continue gradually normalizing monetary conditions.
- In emerging Europe, markets expect modest tightening of policy rates in almost all countries, although some central banks are maintaining a very accommodative stance (Hungary, Poland).
- Romania’s policy rate was raised twice in 2018 by a cumulative 50 basis points.
- Turkey increased the effective interest rate by almost 5 percentage points in 2017, but this was not enough to contain inflation and inflation expectations, prompting markets to expect further tightening in 2018.
- Russia’s central bank cut policy rates by a cumulative 275 basis points since March 2017 as inflation stabilized below its 4 percent target.
- Russia and Turkey are the only large European economies with positive real policy rates.

### Fiscal policy and the near-term growth outlook
- Fiscal policy is projected to continue supporting activity; the fiscal stance is expected to be neutral or expansionary in the region in 2018 except in Iceland, Italy, Russia, the Slovak Republic, and the United Kingdom (Figure 1.16, panel 1).
- The aggregate fiscal stance in the euro area is forecast to remain broadly neutral in 2018–19 and to tighten only gradually in 2020.
- Procyclical loosening is projected in Southeastern Europe and Turkey.
- Europe’s growth forecasts for 2018 and 2019 have been revised up relative to the November 2017 Regional Economic Outlook: Europe, driven largely by stronger domestic demand and investment (investment accounts for almost half of the revision).
- In advanced Europe, the euro area growth forecast was revised up by 0.4 and 0.3 percentage point for 2018 and 2019, respectively, with growth now forecast to reach 2.3 percent in 2018 and 2 percent in 2019.
- The revision to Germany’s growth is particularly large, reaching about ¾ percentage point for 2018.
- While investment growth has raised potential GDP, most of the growth revisions are attributed to cyclical factors.

*International Monetary Fund | May 2018*

### 1. Major Advanced Economies: Policy Rate Expectations

### 1. Major Advanced Economies: Policy Rate Expectations

### Growth and Forecast Revisions
- Domestic demand (including investment) in most emerging European economies appears stronger than initially projected.
- Revisions to growth projections:
  - Central Europe: revised up by 0.7 and 0.5 percentage point for 2018 and 2019, respectively.
  - SEE-EU: revised up by about 0.6 percentage point for 2018.
  - Russia: growth for 2018 revised slightly upward on account of higher oil prices.
  - Turkey: revised up by 0.9 and 0.5 percentage point for 2018 and 2019, respectively, as demand has surprised on the upside due to supportive policies.
- From Table 1.2 (WEO April 2018): Europe overall (year-over-year percent change)
  - 2016: 1.8
  - 2017: 2.8
  - 2018: 2.6
  - 2019: 2.2
  - Difference from October 2017 WEO: 2017: 0.4; 2018: 0.4; 2019: 0.3

### Inflation Trajectory and Specific Revisions
- Overall assessment: the inflation trajectory is broadly similar to the November 2017 forecast; inflation expected to remain subdued in advanced Europe and moderate in most of emerging Europe.
- Selected country and area revisions:
  - Euro area: revised up by 0.1 percentage point to 1.5 percent in 2018, and down by 0.1 percentage point in 2019 to 1.6 percent.
  - Poland: revised up by 0.3 percentage point to 2.5 percent in 2018.
  - Romania: revised up by 1.3 percentage points to 4.7 percent in 2018 (above the upper end of the central bank target), reflecting strong wage growth and demand pressure.
  - Russia: inflation revised significantly downward to below 3 percent in 2018 and to about 3¾ percent in 2019.
  - Turkey: inflation revised significantly upward, reflecting pass-through from exchange rate depreciation and higher energy prices.
- From Table 1.3 (WEO April 2018): selected aggregate (year-over-year percent change) examples in the report (pink shading indicates downward revision).

### Risks: Near Term and Medium Term
- Near-term risks broadly balanced:
  - Upside: potential for growth surprises; robust business and consumer confidence; high-frequency indicators supportive.
  - Downside: overstretched asset valuations and compressed term premiums could trigger a financial market correction and rapid tightening of global financial conditions; faster-than-expected increase in inflation in advanced economies; worsening trade tensions and imposition of trade barriers.
- Medium-term risks tilted to the downside:
  - External downside risks: financial vulnerabilities, inward-looking policies globally, noneconomic factors.
  - Financial vulnerabilities accumulated under easy financial conditions could lead to rapid tightening with repercussions for growth.
  - Inward-looking policies, increases in tariffs and nontariff barriers, and disruptions to supply chains could reduce global productivity and investment.
  - Other risks: significant slowdown in China, geopolitical tensions, cyberattacks.
- Region-specific vulnerabilities:
  - Highly indebted euro area countries could face challenges with higher financing costs absent fiscal adjustments and structural reforms.
  - Remaining vulnerabilities in parts of the euro area banking system could reignite financial distress, particularly for weaker internationally active banks with lower capital and provisions.
  - Political and policy uncertainty, including post-Brexit negotiation outcomes and newly elected governments, could weigh on growth.

### Monetary Policy Guidance
- Advanced Europe and euro area:
  - Monetary policy should remain strongly accommodative until inflation durably converges to central bank targets.
  - Commitment to raising inflation and inflation expectations is key to lifting sluggish wages.
  - The ECB’s decision to drop an explicit reference to possible future increases in the monthly pace of net asset purchases reflects an improving balance of risks; net asset purchases were downsized in January 2018.
  - Well-communicated recalibration of asset purchases, plus forward guidance to keep policy rates low well past the horizon of net asset purchases, will support favorable financing conditions.
- United Kingdom:
  - Following the rate increase in November 2017, future policy rate increases should be guided by evolving inflation conditions and Brexit-related uncertainties.
- Czech Republic:
  - Steady, data-driven normalization approach remains appropriate.
- Emerging Europe:
  - Central European economies: monitor inflation pressure carefully amid strong wage growth; ready to adjust policy if inflation reaches or exceeds targets.
  - Hungary: policy can remain supportive short term but should be prepared to remove stimulus if underlying inflation pressure picks up.
  - Poland: policy decisions should be data dependent and account for fiscal stance and monetary transmission lags to avoid inflation overshooting targets.
  - Russia: room for further policy easing given declining inflation.
  - Turkey: monetary policy should tighten further beyond what is needed to keep pace with US Federal Reserve hikes to lower inflation meaningfully and reanchor expectations; credible tightening would help support the currency and rebuild official reserves.

### Fiscal Policy Recommendations
- General stance:
  - Economic expansion has buoyed revenues and improved headline fiscal balances, but only about a third of countries have seen improvements in cyclically adjusted balances.
  - The trade-off between protecting growth and fiscal consolidation is now tilted more favorably toward consolidation to rebuild buffers.
- Euro area:
  - Countries with limited fiscal space should consolidate in a growth-friendly way before monetary accommodation ends.
  - Countries with ample fiscal space should promote higher potential growth through more public investment to assist external rebalancing.
- Nordic economies:
  - A mildly contractionary fiscal stance is appropriate given cyclical positions.
- United Kingdom:
  - Fiscal framework should balance preserving flexibility for shocks with committing to fiscal discipline and rebuilding fiscal buffers.
- Emerging Europe:
  - With a strong cyclical recovery, priority is to reduce structural fiscal deficits toward medium-term “close-to-balance” targets and to lower high debt levels.
  - Russia: planned deficit reduction in 2018–20 under the new fiscal rule is warranted; improve tax collection and return on state assets, consider parametric pension reform, means-testing social assistance, and reductions in subsidies and tax expenditures.
  - Turkey: front-loaded fiscal consolidation—above authorities’ medium-term program targets and backed by well-defined revenue and spending measures—would support internal and external rebalancing and investor sentiment.

### Financial Policy and Macroprudential Measures
- Bank balance-sheet cleanup progress made, but further action needed.
- EU and ECB actions targeting NPLs are positive steps.
- Recommendations for the euro area:
  - Reduce impediments to NPL resolution caused by fragmentation across jurisdictions by establishing minimum standards for valuation of loan collateral, consistent definitions of NPLs, and minimum standards for insolvency and creditor rights.
  - The Single Supervisory Mechanism should monitor bank-specific NPL reduction targets backed by Pillar 2 powers.
  - The European Banking Authority should advance its NPL sales platform.
- Nordic economies:
  - Use macroprudential policy to reduce housing-sector vulnerabilities.
- Czech Republic:
  - Central bank should be given binding powers over loan-to-value, debt-to-income, and debt-servicing-to-income ratios.
- Hungary:
  - Monitor housing price risks carefully.
- Emerging Europe and Eastern Europe:
  - Continue NPL reduction efforts while the economic recovery improves prospects for asset sales.
- Turkey:
  - Strengthen oversight and governance of the banking sector and implement Financial Sector Assessment Program recommendations.
  - Revisit macroprudential policies where vulnerabilities are highest, particularly for a highly leveraged corporate sector.

### Structural Policy Priorities
- Advanced Europe:
  - Push structural reforms to boost competitiveness and potential growth and enhance resilience to shocks.
  - Recommended reforms: ambitious labor and product market reforms, quality education and training tailored to labor market needs, shift taxes away from labor, better apprenticeship programs, and active labor market policies to reduce youth unemployment.
  - At the EU level: combine targeted support from EU structural funds and outcome-based benchmarks with stricter enforcement of the Macroeconomic Imbalance Procedure.
- Emerging Europe:
  - Focus on enhancing institutions and improving public sector efficiency.
  - Priorities for some countries (especially SEE non-EU and some CIS): improve the investment environment, boost labor participation of women and older workers, and reduce high youth unemployment.
  - Western Balkans: strengthen institutions to support EU engagement.
- Russia:
  - Institutional improvements are prerequisites to reap dividends from investment in innovation and other reforms.
- Turkey:
  - Reforms should focus on increasing labor market flexibility and improving the business environment.

### European Economic and Monetary Union (EMU) Architecture Recommendations
- Use the recovery to deepen EMU:
  - Complete the banking union: institute a backstop from the European Stability Mechanism to the Single Resolution Fund and set up a European deposit insurance scheme with a fiscal backstop to enhance risk sharing.
  - Upgrade supervisory capacity to oversee financial intermediation migrating due to Brexit and to support the Capital Markets Union (CMU).
  - CMU aims: widen financing choices for small and medium-size enterprises, increase investor base, promote harmonization of insolvency regimes, and protect cross-border investor rights.
  - Establish a central fiscal capacity (CFC) for macroeconomic stabilization; build support over time, make access conditional on compliance with fiscal rules, and design mechanisms to prevent permanent transfers across countries.

*Source: Regional Economic Outlook: Europe, International Monetary Fund | May 2018 (chapter content provided).*

### 1. MANAGING ThE UpswING IN UNCERTAIN TIMEs

### eur-chapter-1-v2 - 1. MANAGING ThE UpswING IN UNCERTAIN TIMEs

### Box 1.1. The Capital Expenditure Recovery Cycle: Insights from the European Investment Bank Survey
- Data source: 2017 EIB Investment Survey (EIBIS).
- Investment purpose (2017 findings):
  - About half of firms’ investment undertaken in 2017 was for replacement purposes.
  - Investment in capacity expansion accounted for slightly more than a quarter of total investment.
  - 17 percent of investment was for innovation purposes.
- Expected future investment (comparison with 2016):
  - Looking ahead, investment in capacity expansion and new products is expected to account for more than half of the investment.
  - Compared with 2016, firms are increasingly prioritizing capacity expansion and investment in new activities.
- Employment and productivity implications:
  - Investment for expanding capacity and innovation purposes tends to support more employment than investment for replacement purposes.
  - The shift toward capacity expansion and new products bodes well for productivity and employment.
- Barriers and regional differences:
  - Lack of staff with the right skills is considered by many firms as the most important factor limiting investment, closely followed by uncertainty about the future.
  - Skill constraints are particularly acute for newer member states; emigration of skilled labor is a long-standing issue.
  - Investment in intangible assets (research and development, training, information and communication technology capital, improvement of organizational processes) is weaker in Central, Eastern, and Southeastern Europe (CESEE) than in the rest of the European Union.
  - Europe’s largely bank-based financial sector poses difficulties for using intangibles as collateral.
- Contributors to box: Phillip-Bastian Brutscher and Miroslav Kollar (European Investment Bank) and Raju Huidrom and Faezeh Raei (IMF).

### Box 1.2. How Different Is the Current Recovery in Europe Compared with Previous Ones?
- Context and comparison:
  - Europe’s recovery from the Great Recession took about 10 years after the crisis for all countries in Europe to grow again in 2017.
  - Recovery dynamics since the global financial crisis are compared with the recovery from the 1991 global recession (chosen among 1975, 1982, 1991, and 2009 episodes).
  - Similarities: both recoveries preceded by boom and bust in credit and stock markets in advanced economies; initial recovery years involved complicating events (1992–93 ERM crisis, euro area debt crisis in 2011–13).
  - Main difference: the monetary union.
- Key comparative findings:
  - Real GDP:
    - In advanced Europe, growth gained momentum only five years after the global financial crisis as opposed to three years after 1991.
    - The recent crisis was sharper and more globally synchronized than the 1991 recession; the euro area debt crisis (2011–13) slowed recovery.
    - Emerging Europe excluding the CIS and Turkey: recovery stronger than in advanced Europe and on average similar to post-1991.
  - Investment:
    - Sustained weakness in investment in both advanced and emerging Europe after the global financial crisis.
    - Deterioration traced to weaknesses in housing and credit markets; in some countries may reflect need for housing market correction.
  - Unemployment:
    - Both episodes marked by higher unemployment rates; broadly similar rise in the first three years in advanced Europe despite sharper 2009 output contraction.
    - After the double dip of 2011–13, unemployment remains somewhat more elevated than in the previous crisis and has not yet returned to precrisis levels.
    - Emerging Europe: unemployment trajectory more favorable than following 1991, reflecting stronger macroeconomic frameworks and avoidance of structural rise tied to transition in early 1990s.
  - Inflation:
    - Both episodes show declines in inflation after crises; initial drop after the global financial crisis was sharper.
    - After seven years, average inflation has been lower by about 3 percentage points compared with the precrisis year.
    - Initial inflation levels differed: average inflation around 5 percent in 1991 and 3 percent in 2009 in advanced Europe.
  - Equity prices:
    - In advanced Europe, equity prices weaker in the current episode compared with 1991.
  - Credit growth:
    - The current recovery in both advanced and emerging Europe has been creditless compared with 1991.
    - In advanced Europe, credit has remained flat even a decade after the initial shock, compared with recovery five years after 1991.
    - In emerging Europe, current creditless recovery contrasts with strong credit growth during the 1991 transition to market economies.
- Growth outlook implication:
  - Few compelling reasons to believe recovery in emerging economies of Eastern Europe would go on for longer than the post-1991 recovery.
  - Weakness of investment may increasingly constrain potential growth across countries.
- Contributor to box: Faezeh Raei.

### Box 1.3. What Do Large Stock Price Drops Mean for an Economy?
- Scope:
  - Sample: G7 countries, Spain, and Sweden from 1980 to 2017.
  - Definition: sharp asset price corrections defined as asset price drops within the fifth percentile of the distribution of quarterly changes.
- Average effects after a sharp asset price decline:
  - GDP growth on average declines by 0.5 percentage point (quarter over quarter) in the first quarter.
  - Growth remains lower by 0.1 percentage point after eight quarters.
  - Annual inflation lower by 0.3 percentage point in the quarter after a sharp asset price drop and by 1.2 percentage points after eight quarters.
  - After eight quarters of sharp asset price drops, unemployment is higher by 1 percentage point on average.
  - Monetary policy responses:
    - Generally limited in the first quarter: –0.5 percentage point reduction in short-term rates in the first quarter.
    - Followed by larger responses over the medium term (eight quarters later); the scope for large responses is much more limited today.
- Contributor to box: Faezeh Raei.

### Box 1.4. Policies to Get People to Work: The European Experience
- Demographic and labor force context:
  - Emerging European countries face declining working-age population due to aging, persistent outward migration, and relatively low life expectancy.
  - Labor force participation among certain demographic groups—women and older workers—is low compared with advanced Europe.
  - Labor force participation has fallen in many advanced European economies in the last decade; male participation declined in most countries, female participation rose in about three-quarters of advanced European economies.
  - Workforce attachment has markedly increased among older workers and declined slightly among youth.
- Policy levers highlighted for raising participation (European experience):
  - Prime-age women:
    - Work flexibility, childcare and preschool availability and affordability, parental leave policies, and tax policy affect participation.
    - Sweden: parental leave, subsidized childcare, scope for shorter working hours for parents, individual taxation that does not discourage second earners.
    - Germany: “Hartz reforms” (2003–05) increased part-time work opportunities; 2007 maternity leave reform encouraged faster return to work after childbirth.
    - Spain: 2012 labor market reforms promoted part-time work.
    - Israel: 2003 reform of untargeted child allowances reduced benefits and eliminated progressivity linked to number of children to encourage work.
- Contributor to box: Sylwia Nowak.

*International Monetary Fund | May 2018*

### 1. Female

### 1. Female

### Labor market participation: older workers, the young, and immigrants
- Older workers:
  - Participation decisions are influenced by the statutory retirement age, the generosity of pension schemes, and the generosity of disability insurance.
  - Germany: the 2007 pension reform gradually increases the statutory retirement age to 67 from 65 by 2030; replacement rates were reduced (pension system became less generous). More recently, Germany introduced financial incentives to encourage work past the mandatory retirement age, coupled with more flexible work schedules, while lowering the retirement age for certain workers.
  - Sweden: an earned income tax credit reform in 2007 encouraged increased labor supply; the size of the tax credit was larger for workers older than 65. The payroll tax rate was more than halved for these workers. These reforms were combined with stricter eligibility criteria in the disability insurance program (Laun and Palme 2017).
- The young:
  - High labor costs (both the tax wedge and minimum wages) affect employment opportunities for entry-level workers who require on-the-job training (Banerji and others 2014).
  - Germany: about 50 percent of all high school graduates receive dual vocational training (company-based apprenticeships + theoretical classes). Apprentices are exempted from minimum wage regulations and receive a “training allowance” of about 50 percent of the national minimum wage; lower wages early in careers finance training and result in higher productivity and better lifetime incomes.
- Immigrants:
  - Policies that encourage labor market integration of migrants are associated with higher participation of prime-age workers.
  - Sweden: immigrants integrated mainly through general measures for the unemployed, supplemented by targeted support for newly arrived refugees. Since 2008, newly arrived refugees and relatives eligible for up to two years of personalized language training; employment assistance (validation of education and prior work experience); and personal counseling. Participation is voluntary, but financial benefits and housing support are conditional on full-time participation.
  - Germany: intensive vocational language training used to help integrate more than 1 million refugees into the labor market.

### Active labor market policies and reforms
- Germany — Hartz reforms:
  - Focus on improving job-search efficiency, modernizing public employment services, increasing employment flexibility, and activating the unemployed by making unemployment benefits conditional on tighter rules for job search and acceptance.
  - Introduced wage subsidies to employers for hiring hard-to-place workers and start-up subsidies.
  - Deregulated labor market institutions to allow temporary and fixed-term contract work.
- United Kingdom:
  - The 2008 reform of the welfare program for low-income single parents (“Lone Parent Obligations”) provided out-of-work single parents with financial incentives to look for paid employment, alongside support for finding jobs.

### Annex key projections and statistics (preserved exactly as in source)

- Annex Table 1.1. GDP Growth (Year-over-year percent change) — April 2018 WEO
  - Europe: 1.8, 2.8, 2.6, 2.2
  - Advanced European Economies: 1.9, 2.4, 2.3, 2.0
  - Euro Area: 1.8, 2.3, 2.4, 2.0
  - Ireland: 5.1, 7.8, 4.5, 4.0
  - Germany: 1.9, 2.5, 2.5, 2.0
  - Spain: 3.3, 3.1, 2.8, 2.2
  - Turkey: 3.2, 7.0, 4.4, 4.0
  - Memorandum — world: 3.2, 3.8, 3.9, 3.9; Advanced Economies: 1.7, 2.3, 2.5, 2.2; Emerging Market and Developing Economies: 4.4, 4.8, 4.9, 5.1; European Union: 2.0, 2.7, 2.5, 2.1; United states: 1.5, 2.3, 2.9, 2.7; China: 6.7, 6.9, 6.6, 6.4; Japan: 0.9, 1.7, 1.2, 0.9

- Annex Table 1.2. GDP Growth: Comparison between WEO and Consensus Forecast (Year-over-year percent change)
  - Euro Area (April 2018 WEO / Consensus Forecast): 2.3, 2.4, 2.0 / 2.4, 1.9, Difference: 0.0, 0.1
  - Ireland: 7.8, 4.5, 4.0 / 4.4, 3.4, Difference: 0.1, 0.6
  - Germany: 2.5, 2.5, 2.0 / 2.4, 1.9, Difference: 0.1, 0.1
  - Poland: 4.6, 4.1, 3.5 / 4.0, 3.4, Difference: 0.0, 0.2
  - Romania: 7.0, 5.1, 3.5 / 4.7, 3.6, Difference: 0.4, 0.1
  - Turkey: 7.0, 4.4, 4.0 / 4.1, 3.9, Difference: 0.3, 0.1
  - Memorandum — world: 3.8, 3.9, 3.9; United states: 2.3, 2.9, 2.7 / 2.8, 2.6, Difference: 0.1, 0.1; China: 6.9, 6.6, 6.4 / 6.5, 6.3, Difference: 0.0, 0.1

- Annex Table 1.3. Growth Rate of GDP per Capita (Year-over-year percent change; in 2011 international dollars at purchasing power parity)
  - Europe: 1.4, 2.5, 2.3, 2.0, 1.8, 1.7, 1.7 (2016–2022)
  - Advanced European Economies: 1.4, 2.0, 2.0, 1.7, 1.4, 1.4, 1.3
  - Euro Area: 1.5, 2.3, 2.2, 1.9, 1.6, 1.5, 1.4
  - Ireland: 4.1, 7.2, 3.5, 3.0, 2.5, 2.0, 1.8
  - Romania: 5.4, 7.6, 5.7, 4.1, 3.7, 3.7, 3.8
  - Turkey: 1.8, 5.7, 3.1, 2.7, 2.4, 2.3, 2.4
  - Memorandum — world: 1.9, 2.4, 2.7, 2.7, 2.5, 2.5, 2.5; China: 6.1, 6.3, 6.0, 5.9, 5.8, 5.6, 5.3; Japan: 1.0, 1.9, 1.4, 1.2, 0.7, 1.1, 0.9

- Annex Table 1.4. Domestic Demand (Year-over-year percent change)
  - Europe: 2.0, 2.8, 2.5, 2.2
  - Advanced European Economies: 2.4, 2.0, 2.2, 1.9
  - Euro Area: 2.4, 2.0, 2.2, 1.9
  - Ireland: 2.1, 7.8, 5.7, 4.3
  - Germany: 2.4, 2.4, 2.3, 2.0
  - Spain: 2.6, 2.9, 2.6, 2.1
  - Turkey: 4.4, 6.2, 3.9, 3.7
  - Memorandum — world: 3.0, 3.9, 4.1, 4.0; United states: 1.7, 2.4, 3.5, 3.2; China: 7.6, 6.4, 6.7, 6.6

- Annex Table 1.5. Gross Investment (Percent of GDP)
  - Europe: 21.4, 21.9, 22.0, 22.2
  - Advanced European Economies: 20.3, 20.5, 20.7, 20.9
  - Euro Area: 20.4, 20.9, 21.1, 21.3
  - Ireland: 32.4, 24.2, 25.9, 26.8
  - Germany: 19.2, 19.7, 19.7, 20.0
  - Turkey: 28.2, 30.9, 31.3, 31.1
  - Memorandum — European Union: 20.0, 20.4, 20.6, 20.8; United states: 19.7, 19.8, 20.2, 20.8; China: 44.1, 44.4, 44.2, 43.7

- Annex Table 1.6. Inflation (Year-over-year percent change; period average)
  - Europe: 2.0, 2.9, 2.8, 2.8
  - Advanced European Economies: 0.4, 1.7, 1.7, 1.7
  - Euro Area: 0.2, 1.5, 1.5, 1.6
  - Germany: 0.4, 1.7, 1.6, 1.7
  - Turkey: 7.8, 11.1, 11.4, 10.5
  - Russia: 7.1, 3.7, 2.8, 3.7
  - Ukraine: 13.9, 14.4, 11.0, 8.0
  - Memorandum — world: 2.8, 3.0, 3.5, 3.4; Advanced Economies: 0.8, 1.7, 2.0, 1.9; China: 2.0, 1.6, 2.5, 2.6

*International Monetary Fund | May 2018*

### 1. MANAGING ThE UpswING IN UNCERTAIN TIMEs

### 1. MANAGING ThE UpswING IN UNCERTAIN TIMEs

### Annex Table 1.7. Inflation: Comparison between WEO and Consensus Forecast (Year-over-year percent change; period average)
- Europe: 2.9 2.8 2.8
- Advanced European Economies: 1.7 1.7 1.7
- Euro Area: 1.5 1.5 1.6 | Consensus 1.5 1.5 | Difference 0.0 0.1
- Selected country highlights (April 2018 WEO / Consensus / Difference where shown):
  - Greece: 1.1 0.7 1.1 0.9 1.2 | Difference 0.2 0.1
  - Ireland: 0.3 0.9 1.3 1.0 1.3 | Difference 0.0 0.0
  - Lithuania: 3.7 2.2 2.2 3.0 2.7 | Difference 0.8 0.5
  - United Kingdom: 2.7 2.7 2.2 3.5 3.0 | Difference 0.7 0.8
  - Turkey: 11.1 11.4 10.5 10.0 8.6 1.4 1.9

### Annex Table 1.8. Unemployment (Percent)
- Europe: 8.1 7.5 7.2 7.0 7.6 7.3 7.2 | Difference 0.1 0.1 0.1
- Advanced European Economies: 8.6 7.8 7.3 7.1 7.9 7.5 7.3 | Difference 0.1 0.2 0.2
- Euro Area: 10.0 9.1 8.4 8.1 9.2 8.7 8.3 | Difference 0.1 0.2 0.3
- Selected country highlights (2016 2017 2018 2019; October 2017 WEO 2017 2018 2019; Difference 2017 2018 2019):
  - Greece: 23.6 21.5 19.8 18.0 22.3 20.7 19.5 | Difference 0.8 0.9 0.0
  - Spain: 19.6 17.2 15.5 14.8 17.1 15.6 15.0 | Difference 0.1 0.2
  - Germany: 4.2 3.8 3.6 3.5 3.8 3.7 3.7 | Difference 0.1 0.2 0.1
  - Ireland: 8.4 6.7 5.5 5.2 6.4 5.9 5.8 | Difference 0.5 0.5
  - Turkey: 10.9 11.0 10.7 10.7 11.2 10.7 10.4 | Difference 0.2 0.0 0.2

### Annex Table 1.9. General Government Overall Balance (Percent of GDP)
- Europe (April 2018 WEO / October 2017 WEO / Difference): 21.9 21.2 20.9 20.8 21.7 21.4 21.0 | Difference 0.5 0.5 0.2
- Advanced European Economies: 21.5 20.9 20.7 20.6 21.3 21.0 20.6 | Difference 0.4 0.3 0.1
- Euro Area: 21.5 20.9 20.6 20.5 21.3 21.0 20.7 | Difference 0.3 0.3 0.2
- Selected country highlights:
  - France: 23.4 22.6 22.4 23.1 23.0 23.0 23.2 | Difference 0.4 0.6 0.1
  - Germany: 0.8 1.1 1.5 1.7 0.7 0.8 1.0 0.4 0.7 0.6
  - Italy: 22.5 21.9 21.6 20.9 22.2 21.3 20.3 | Difference 0.3 0.2 0.6
  - United Kingdom: 23.0 22.3 21.8 21.5 22.9 22.3 21.4 | Difference 0.6 0.5 0.1
  - Russia: 23.7 21.5 0.0 0.1 22.1 21.5 21.0 | Difference 0.7 1.6 1.1

### Annex Table 1.10. General Government Gross Debt (Percent of GDP)
- Europe: 68.8 67.3 66.0 64.5 68.2 67.1 65.7 | Difference 0.9 2.1 21.2
- Advanced European Economies: 85.4 83.5 81.5 79.4 84.3 82.8 81.0 | Difference 0.8 2.1 21.6
- Euro Area: 88.9 86.6 84.2 81.7 87.4 85.6 83.5 | Difference 0.8 2.1 21.8
- Selected country highlights:
  - Greece: 183.5 181.9 191.3 181.8 180.2 184.5 177.9 | Difference 1.7 6.8 3.8
  - Italy: 132.0 131.5 129.7 127.5 133.0 131.4 128.8 | Difference 2.1 1.7 1.2
  - Portugal: 129.9 125.6 121.2 117.5 125.7 122.5 119.8 | Difference 0.1 21.2 22.3
  - United Kingdom: 88.2 87.0 86.3 85.9 89.5 89.7 88.9 | Difference 2.5 2.3 23.0
  - Japan: 235.6 236.4 236.0 234.2 240.3 240.0 238.5 | Difference 23.9 24.1 24.3

### Annex Table 1.11. Current Account (Percent of GDP)
- Europe: 2.0 2.3 2.5 2.4 2.4 2.3 2.3 | Difference 20.1 0.1 0.1
- Advanced European Economies: 2.5 2.9 2.9 2.9 2.9 2.9 2.8 | Difference 0.0 0.0 0.1
- Euro Area: 3.4 3.5 3.2 3.2 3.1 3.0 2.9 | Difference 0.5 0.2 0.3
- Selected country highlights:
  - Germany: 8.5 8.0 8.2 8.2 8.1 7.7 7.5 | Difference 20.1 0.5 0.8
  - Netherlands: 8.4 9.8 9.6 8.9 10.0 10.0 9.6 | Difference 20.2 20.4 20.8
  - Ireland: 3.3 12.5 9.8 8.7 3.4 3.5 3.6 9.2 6.3 5.1
  - Norway: 3.8 5.1 6.1 6.1 5.5 5.7 5.9 | Difference 20.4 0.4 0.6
  - Turkey: 2.3 8.2 5.5 2.4 8.4 6.2 4.6 | Difference 20.9 20.8 20.4

### Annex Table 1.12. Net Financial Assets (Percent of GDP)
- Advanced European Economies (aggregate line entries as shown): 3.8 5.5 6.4 8.3 7.2 9.1 11.1 | Difference 21.8 22.7 22.8
- Euro Area: 9.2 11.1 11.8 13.8 13.4 15.2 17.3 | Difference 22.3 23.4 23.5
- Selected country highlights (April 2018 WEO entries where shown):
  - Cyprus: 49.2 47.4 43.3 42.3 45.5 43.1 42.3 1.9 0.1 0.0
  - Finland: 235.3 231.7 225.3 222.2 233.5 226.9 223.0 | Difference 1.8 1.6 0.8
  - Netherlands: 45.3 44.8 44.3 44.0 46.9 46.6 46.2 | Difference 22.2 22.2 22.2
  - Sweden: 199.2 221.6 214.6 210.9 197.5 193.4 190.0 | Difference 24.1 21.3 20.9
  - United Kingdom: 114.8 123.2 110.6 108.2 112.8 110.0 112.4 10.4 0.6 24.2

*Sources: Consensus Forecast (March 2018); IMF, World Economic Outlook (WEO); and IMF staff calculations.*

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_Source: https://www.imf.org/-/media/files/publications/reo/eur/2018/may/eur-chapter-1-v2.pdf_