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Europe
Regional Economic Outlook: Europe Hitting Its Stride
November 2017
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Europe
November 2017
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Spending Smarter: How Efficient and Well-Allocated Public Spending Can Boost Economic Growth
The European recovery is strengthening and broadening appreciably. Real GDP growth is projected at 2.4 percent in 2017, up from 1.7 percent in 2016, before easing to 2.1 percent in 2018. These are large upward revisions-0.5 and 0.2 percentage points for 2017 and 2018, respectively—relative to the April World Economic Outlook. The European recovery is spilling over to the rest of the world, contributing significantly to global growth. In a few advanced and many emerging economies, unemployment rates have returned to precrisis levels. Most emerging European economies are now seeing robust wage growth. In many parts of Europe, however, wage growth is sluggish despite falling unemployment.
Chapter 1 reports that growth is strengthening and broadening across Europe, driven by buoyant domestic demand. Following a pickup in economic activity in the second half of 2016, the European economy accelerated further in the first half of 2017, with growth outcomes surprising on the upside in most countries. In advanced Europe, growth is running about 2 percent on average, with some economies seeing appreciably higher rates panel. All euro area countries are growing, and the dispersion of growth rates is the lowest in nearly two decades. The Nordic economies and other advanced European economies are seeing similarly strong domestic demand. In the United Kingdom, weakness in the pound has led to a squeeze of real incomes and some slowdown in demand. In emerging Europe, growth increased to about 3 percent in the first half of 2017, up from 1.5 percent in 2016. This has been helped by a rebound from recession in Russia and a strong, policy-assisted pickup in activity in Turkey, following a dip related to the failed coup attempt. Several economies, especially those that are EU members, are seeing growth much faster than 3 percent. In these economies, private consumption is expanding rapidly, as low unemployment and labor shortages have pushed up wages and boosted household confidence; investment is also strengthening.
Based on the experience of Central, Eastern, and Southeastern Europe in the past 25 years, Chapter 2 offers some insights on how countries could improve the effectiveness of their judiciary. Much progress was achieved, but setbacks also happened. A more equal distribution of resources and opportunities, stronger state capacity, and greater transparency resulted in more independent, impartial, and efficient justice systems. The EU and the Council of Europe helped catalyze reforms, but their durability depended more on domestic factors. Moving forward, reforms should focus on strong competition policies, lower trade and entry barriers, and redistributive fiscal policies that expand opportunities. Public officials need to be selected and promoted strictly on merit. Besides guaranteeing freedom of information, transparency can be enhanced by providing information on government performance, the use of public resources, financial interests, and ownership structures.
Chapter 3 discusses the specific banking challenges facing the Western Balkan economies. In many ways, banks in this region are still reeling from the effects of a boom and bust credit cycle. This legacy is constraining credit growth at a time when it is most needed. In most countries in the region, credit-to-GDP ratios are still below their potential and show little sign of improvement. Policymakers should act on several fronts. Nonperforming loans can be reduced and profitability increased through asset quality reviews and supervisory action plans. Funding bases can be enhanced through better communication with parent banks and home supervisors and by diversifying funding sources. Addressing weak bankruptcy and insolvency regimes, improving cadastral systems, and speeding up slow court procedures should help ease the structural impediments to credit growth.
