IMF Survey : Emerging Europe Moves Ahead but Slower

IMF News, May 6, 2016

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Most Central, Eastern, and Southeastern European economies (CESEE) continue to record robust growth, while Russia and other countries in the Commonwealth of Independent States (CIS) remain in recession.
Date of publication: May 6, 2016.
CESEE growth: Central and Eastern European (CEE), Southeastern European (SEE) and Turkish economies expanded at around 3-4 percent in 2015.
CIS outlook: IMF forecasts CIS contraction in 2016 to moderate to 1.5 percent, from 4.25 percent in 2015.
Average growth across the region remains well below pre-crisis levels, implying a longer path to catch-up with advanced Europe.

Primary drivers of growth in much of the region:
- Domestic consumption, supported by supportive macroeconomic policies and rising real wages.
- In EU member countries, a boost to investment owing to increased utilization of EU funds before their expiration in 2015.
Key downside risks to CESEE:
- Stagnation in the euro zone—the largest trading partner for many CESEE countries—would be the strongest brake on growth.
- Lower-than-expected growth in the United States and China.
- Tighter global financial conditions.
- Political instability and the rise of populist parties increasing regional uncertainty.
Policy stance suggested under heightened risks: supportive monetary policy combined with medium-term fiscal consolidation for many economies in the region.

With a less supportive global economy in the medium term, lower growth may become "the new normal" for the region, slowing convergence to advanced Europe.
To close the gap faster, CESEE countries need stronger policies focused on:
- Improving labor supply.
- Boosting investment.
- Increasing efficiency through structural reforms.

Demographic and labor-force challenges:
- Most CESEE countries face severe declines in the working-age population, a trend expected to continue or worsen in some cases.
- Emigration has removed 20 million people (or 6.25 percent of the working-age population) from the workforce in the past 25 years.
Policy recommendations to bolster labor supply:
- Reduce structural unemployment and skill mismatches.
- Extend work opportunities to underemployed groups such as women and seniors.
- Improve health care to raise life expectancy.
- Strengthen institutions to retain and attract skilled workers.

Investment gaps:
- Capital stock per capita in a typical CESEE economy is still about one-third of that in advanced Europe.
- Investment shortfalls are especially large in infrastructure; public investment could help but would not be sufficient alone.
Constraints on investment:
- Lingering crisis-era issues in some cases—high debt burdens and nonperforming loans.
- Deeper structural issues that depress private investment and returns.
Policy focus to raise investment:
- Institutional reforms to reduce inefficiencies and increase returns on private investment and savings.
- Address domestic savings shortfalls: in most of the region, domestic savings are lower than needed to sustain investment rates high enough to close income gaps with advanced Europe within a generation or so.

Importance of structural reforms to boost productivity and speed convergence.
Suggested reform areas:
- Upgrade legal systems.
- Improve health care.
- Ensure a supportive environment for high-productivity sectors and firms.
- Increase government efficiency and reduce regulatory burdens on businesses.
- Improve affordability of financial services, particularly for small but productive firms.
Country-specific needs highlighted:
- Belarus: deeper reforms to re-orient the economy toward more private-sector-led growth.
- Moldova: reinforce the independence of the judiciary system.
- Ukraine: fight corruption and reform tax administration.

Source: IMF Survey : Emerging Europe Moves Ahead but Slower (May 6, 2016).