## A Broadening Recovery

_Europe, May 11, 2017_

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**Canonical URL:** [A Broadening Recovery](https://www.imf.org/en/publications/reo/eu/issues/2017/05/10/a-broadening-recovery)

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## Bibliographic details
- Published: May 11, 2017
- Series: Europe

---

### EXECUTIVE SUMMARY
- Growth has broadened across Central, Eastern, and Southeastern Europe (CESEE).
- Outside the Commonwealth of Independent States (CIS) and Turkey, growth has remained strong, driven by accommodative policies.
- Russia and the rest of the CIS are finally on the road to recovery, with firming oil prices lifting activity.
- Growth in Turkey has rebounded partially after dropping sharply in the wake of elevated political uncertainty.
- Inflation has started to increase in many countries; labor markets have tightened, with unemployment rates now falling to pre-crisis levels along with strong wage growth.
- Output gaps appear largely closed.
- CESEE headline inflation has picked up with commodity prices and euro area inflation higher.
- In Russia, inflation is in retreat; inflation remains high in Turkey.

### NEAR-TERM PROSPECTS
- Near-term prospects are favorable, helped by strengthening global activity and continued supportive domestic macroeconomic policies.
- Outside the CIS and Turkey, growth is projected to pick up, fueled by domestic demand and greater absorption of European Union (EU) structural funds.
- The recovery in Russia will support activity in other CIS and Baltic countries.
- In Turkey, growth is expected to remain weak amid ongoing political and economic uncertainty.

### RISKS TO THE OUTLOOK
- Risks are two sided, but tilted to the downside, notably over the medium term.
- Potential upside risks:
  - Stronger external demand, notably higher growth in the euro area and the United States.
  - Firmer recovery in commodity prices, which would help the CIS.
  - Lower political uncertainty following key elections in Western Europe.
- Key downside risks:
  - A global shift toward inward-looking policies and protectionism.
  - A sudden tightening in global financial conditions.
  - New shocks in advanced European economies.
  - Further wage increases that could hurt competitiveness.

### MACROECONOMIC POLICY RECOMMENDATIONS
- In countries with largely closed output gaps, macroeconomic policy normalization needs to begin.
- Fiscal policy:
  - Priority is to start reducing still relatively large cyclically adjusted fiscal deficits to achieve medium-term fiscal targets, which will help lower vulnerabilities.
  - A tighter fiscal stance would allow monetary policy to normalize more gradually in most inflation targeters, helping maintain hard-won gains in competitiveness.
- Monetary policy:
  - Where inflation is picking up on a sustained basis, monetary policy will soon need to gradually withdraw accommodation.
  - Turkey needs to tighten monetary policy further to lower inflation and reduce elevated external vulnerabilities.
  - Russia can continue with monetary policy easing as inflation declines toward the central bank’s target and fiscal policy is adjusting to lower oil prices.

### MEDIUM-TERM STRUCTURAL CHALLENGES
- The main medium-term policy challenge is to boost potential growth and income convergence with structural reforms.
- Gains from past reforms are largely exhausted and speeding up convergence is now more challenging.
- Required reforms include:
  - Strengthening institutions.
  - Improving public sector efficiency, including through restructuring state-owned enterprises and enhancing public sector investment management frameworks.
  - Improving labor supply by raising participation rates and reducing structural unemployment.

*IMF Regional Economic Outlook: A Broadening Recovery, May 2017*

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## Content in this bundle

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## References

- [Russian Federation and the IMF](http://www.imf.org/external/country/RUS/index.htm)
- [Republic of Türkiye and the IMF](http://www.imf.org/external/country/TUR/index.htm)
- [Central and Eastern Europe: A Broadening Recovery, But Slower Catching-up with Advanced Europe](https://www.imf.org/en/news/articles/2017/05/10/na051117-central-and-eastern-europe-a-broader-recovery-but-slower-catch-up-with-advanced-europe)
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- [https://www.imf.org/en/publications/gfsr](https://www.imf.org/en/publications/gfsr)
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_Source: https://www.imf.org/en/publications/reo/eu/issues/2017/05/10/a-broadening-recovery_