![Page 1: WILL CHINA’S SLOWDOWN BRING ECA Economic Update …bruegel.org/wp-content/uploads/2016/04/Maurizio... · • The nature of the slowdown is important because its consequences on](https://reader033.vdocuments.net/reader033/viewer/2022042219/5ec5a5676738132b3d0ec1d7/html5/thumbnails/1.jpg)
ECA Economic Update April 2016
1
Report site: www.worldbank.org/en/region/eca/publication/europe-and-central-asia-economic-update-april-2016
WILL CHINA’S SLOWDOWN BRING HEADWINDS OR OPPORTUNITIES FOR EUROPE AND CENTRAL ASIA?
April 29, 2016 Bruegel , Brussels, Belgium
Maurizio Bussolo Chief Economist Office Europe and Central Asia Region
![Page 2: WILL CHINA’S SLOWDOWN BRING ECA Economic Update …bruegel.org/wp-content/uploads/2016/04/Maurizio... · • The nature of the slowdown is important because its consequences on](https://reader033.vdocuments.net/reader033/viewer/2022042219/5ec5a5676738132b3d0ec1d7/html5/thumbnails/2.jpg)
• Low growth is expected in Europe and Central Asia (ECA), as global headwinds remain strong.
• The headwinds are of structural, rather than cyclical nature. They are part of a new normal.
• This is also true for the slowdown in China, which has a pervasive impact on ECA. The impact creates challenges but also opportunities.
• Policies have to adjust to new circumstances.
2
Overview
Growth moderation and rebalancing in China Growth moderation and rebalancing in China
![Page 3: WILL CHINA’S SLOWDOWN BRING ECA Economic Update …bruegel.org/wp-content/uploads/2016/04/Maurizio... · • The nature of the slowdown is important because its consequences on](https://reader033.vdocuments.net/reader033/viewer/2022042219/5ec5a5676738132b3d0ec1d7/html5/thumbnails/3.jpg)
Growth prospects and policy challenges differ across the Europe and Central Asia region
3
Part I
![Page 4: WILL CHINA’S SLOWDOWN BRING ECA Economic Update …bruegel.org/wp-content/uploads/2016/04/Maurizio... · • The nature of the slowdown is important because its consequences on](https://reader033.vdocuments.net/reader033/viewer/2022042219/5ec5a5676738132b3d0ec1d7/html5/thumbnails/4.jpg)
4
Country Groups
Western Europe Southern Europe Central Europe Northern Europe Western BalkansAustria Greece Bulgaria Denmark Albania Belgium Italy Croatia Finland Bosnia and HerzegovinaFrance Portugal Czech Republic Sweden KosovoGermany Spain Hungary Estonia FYR MacedoniaIreland Cyprus Poland Latvia MontenegroLuxemburg Malta Romania Lithuania SerbiaThe Netherlands Slovak RepublicUnited Kingdom Slovenia
South Caucasus Central Asia Russia Turkey Other Eastern EuropeArmenia Kazakhstan BelarusAzerbaijan Kyrgyz Republic Moldova Georgia Tajikistan Ukraine
TurkmenistanUzbekistan
Europe and Central Asia
European Union and Western
Balkans
Eastern Europe and Central Asia
![Page 5: WILL CHINA’S SLOWDOWN BRING ECA Economic Update …bruegel.org/wp-content/uploads/2016/04/Maurizio... · • The nature of the slowdown is important because its consequences on](https://reader033.vdocuments.net/reader033/viewer/2022042219/5ec5a5676738132b3d0ec1d7/html5/thumbnails/5.jpg)
5
Subdued growth in new forecast
![Page 6: WILL CHINA’S SLOWDOWN BRING ECA Economic Update …bruegel.org/wp-content/uploads/2016/04/Maurizio... · • The nature of the slowdown is important because its consequences on](https://reader033.vdocuments.net/reader033/viewer/2022042219/5ec5a5676738132b3d0ec1d7/html5/thumbnails/6.jpg)
• Collapse in oil revenues amounts to large terms-of-trade losses and sharp depreciations.
• Reductions in remittances (deflated by import prices) imply large declines in household incomes.
• Diverging monetary policies and reversals of capital flows lead to changes in competitiveness.
6
Big shifts in relative prices are affecting consumption and exports
![Page 7: WILL CHINA’S SLOWDOWN BRING ECA Economic Update …bruegel.org/wp-content/uploads/2016/04/Maurizio... · • The nature of the slowdown is important because its consequences on](https://reader033.vdocuments.net/reader033/viewer/2022042219/5ec5a5676738132b3d0ec1d7/html5/thumbnails/7.jpg)
7
Consumption has sharply declined in Eastern Europe and Central Asia
Annual growth rates, 2015
-25.0
-20.0
-15.0
-10.0
-5.0
0.0
5.0
10.0
Ukraine Belarus RussianFederation
Azerbaijan Moldova Kazakhstan Armenia Georgia KyrgyzRepublic
Turkey Tajikistan Uzbekistan
GDP growth (%) Private consumption growth (%)
![Page 8: WILL CHINA’S SLOWDOWN BRING ECA Economic Update …bruegel.org/wp-content/uploads/2016/04/Maurizio... · • The nature of the slowdown is important because its consequences on](https://reader033.vdocuments.net/reader033/viewer/2022042219/5ec5a5676738132b3d0ec1d7/html5/thumbnails/8.jpg)
8
Euro Area export growth now outpaces global average
-6.0
-5.0
-4.0
-3.0
-2.0
-1.0
0.0
1.0
2.0
2003m12 2006m12 2009m12 2012m12 2015m12
Percentage points difference between growth export volume euro area and global export growth, 12m/12m
![Page 9: WILL CHINA’S SLOWDOWN BRING ECA Economic Update …bruegel.org/wp-content/uploads/2016/04/Maurizio... · • The nature of the slowdown is important because its consequences on](https://reader033.vdocuments.net/reader033/viewer/2022042219/5ec5a5676738132b3d0ec1d7/html5/thumbnails/9.jpg)
9
European export growth accelerates as U.S. and Chinese exports slow down
[CELLRANGE]
[CELLRANGE]
[CELLRANGE]
[CELLRANGE]
[CELLRANGE] [CELLRANGE]
[CELLRANGE]
[CELLRANGE] [CELLRANGE]
[CELLRANGE] [CELLRANGE]
[CELLRANGE]
[CELLRANGE]
-15
-10
-5
0
5
10
15
-6.0 -5.0 -4.0 -3.0 -2.0 -1.0 0.0 1.0 2.0 3.0 4.0
Chan
ge o
f rea
l effe
ctiv
e ex
chan
ge ra
te (%
)
Change of export volume growth (%)
![Page 10: WILL CHINA’S SLOWDOWN BRING ECA Economic Update …bruegel.org/wp-content/uploads/2016/04/Maurizio... · • The nature of the slowdown is important because its consequences on](https://reader033.vdocuments.net/reader033/viewer/2022042219/5ec5a5676738132b3d0ec1d7/html5/thumbnails/10.jpg)
• Unemployment in European Union is declining as the EU enters fourth year of recovery.
• Crisis in many countries in eastern part of region starts showing in rising unemployment.
• Digital technologies, sharing economy, migration, and globalization are fundamentally changing labor markets, and requires new social contract.
10
Labor markets affected by cyclical and structural factors
![Page 11: WILL CHINA’S SLOWDOWN BRING ECA Economic Update …bruegel.org/wp-content/uploads/2016/04/Maurizio... · • The nature of the slowdown is important because its consequences on](https://reader033.vdocuments.net/reader033/viewer/2022042219/5ec5a5676738132b3d0ec1d7/html5/thumbnails/11.jpg)
Growth moderation and rebalancing in China: headwinds or opportunities?
11
Part II
![Page 12: WILL CHINA’S SLOWDOWN BRING ECA Economic Update …bruegel.org/wp-content/uploads/2016/04/Maurizio... · • The nature of the slowdown is important because its consequences on](https://reader033.vdocuments.net/reader033/viewer/2022042219/5ec5a5676738132b3d0ec1d7/html5/thumbnails/12.jpg)
• Slowdown is result of slower expansion of production capacity
• Rebalancing entails
– Shift from investments to consumption
– Shift from low-skilled to high-skilled production
– Shift from inward FDI to outward FDI
12
Growth moderation and rebalancing in China
![Page 13: WILL CHINA’S SLOWDOWN BRING ECA Economic Update …bruegel.org/wp-content/uploads/2016/04/Maurizio... · • The nature of the slowdown is important because its consequences on](https://reader033.vdocuments.net/reader033/viewer/2022042219/5ec5a5676738132b3d0ec1d7/html5/thumbnails/13.jpg)
• The nature of the slowdown is important because its consequences on the rest of the world are quite different
• Cyclical slowdown (a reduction of domestic demand) implies an increase in trade surplus (i.e. a reduction of Chinese demand on global production);
• Structural slowdown (a reduction of production) implies a reduction of both imports and exports – Need of a structural (supply side) analytical approach
13
Chinese Growth moderation and demand for the rest of the world
![Page 14: WILL CHINA’S SLOWDOWN BRING ECA Economic Update …bruegel.org/wp-content/uploads/2016/04/Maurizio... · • The nature of the slowdown is important because its consequences on](https://reader033.vdocuments.net/reader033/viewer/2022042219/5ec5a5676738132b3d0ec1d7/html5/thumbnails/14.jpg)
14
Slowdown in China coincides with decelerating potential growth
5.0
7.0
9.0
11.0
13.0
15.0
1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
potential GDP growth actual GDP growth
Annual percentage change
![Page 15: WILL CHINA’S SLOWDOWN BRING ECA Economic Update …bruegel.org/wp-content/uploads/2016/04/Maurizio... · • The nature of the slowdown is important because its consequences on](https://reader033.vdocuments.net/reader033/viewer/2022042219/5ec5a5676738132b3d0ec1d7/html5/thumbnails/15.jpg)
15
China is catching up to the European Union
0
10
20
30
40
50
60
70
80
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
starting share cumulative volume effect cumulative price effect
China’s nominal GDP as percentage of EU’s nominal GDP
![Page 16: WILL CHINA’S SLOWDOWN BRING ECA Economic Update …bruegel.org/wp-content/uploads/2016/04/Maurizio... · • The nature of the slowdown is important because its consequences on](https://reader033.vdocuments.net/reader033/viewer/2022042219/5ec5a5676738132b3d0ec1d7/html5/thumbnails/16.jpg)
The evolution of ECA’s links with China: is the region exporting to China at its potential?
16
China and ECA trade links
![Page 17: WILL CHINA’S SLOWDOWN BRING ECA Economic Update …bruegel.org/wp-content/uploads/2016/04/Maurizio... · • The nature of the slowdown is important because its consequences on](https://reader033.vdocuments.net/reader033/viewer/2022042219/5ec5a5676738132b3d0ec1d7/html5/thumbnails/17.jpg)
17
China’s share of imports by ECA has expanded rapidly
Share of imports from China in total imports, percent
0
5
10
15
20
25
30
35
Central Asia Central Europe Eastern Europe Northern Europe Russia South Caucasus Southern Europe Turkey Western Balkans Western Europe
1996 2014
![Page 18: WILL CHINA’S SLOWDOWN BRING ECA Economic Update …bruegel.org/wp-content/uploads/2016/04/Maurizio... · • The nature of the slowdown is important because its consequences on](https://reader033.vdocuments.net/reader033/viewer/2022042219/5ec5a5676738132b3d0ec1d7/html5/thumbnails/18.jpg)
• Exports are not as big as gravity model predicts. There seem to be special factors impeding exports to China.
• Sharp real depreciations vis-à-vis China have made producers much more competitive.
18
But region can export even more to China
![Page 19: WILL CHINA’S SLOWDOWN BRING ECA Economic Update …bruegel.org/wp-content/uploads/2016/04/Maurizio... · • The nature of the slowdown is important because its consequences on](https://reader033.vdocuments.net/reader033/viewer/2022042219/5ec5a5676738132b3d0ec1d7/html5/thumbnails/19.jpg)
19
Eastern ECA may have greater potential than western ECA to increase exports to China
Exports to China by sector from ECA sub-regions, US$ million
0
500
1000
1500
2000
2500
CentralAsia
CentralEurope
EasternEurope
NorthernEurope
Russia SouthCaucasus
SouthernEurope
Turkey WesternBalkans
WesternEurope
Agriculture
Actual Predicted
0
5000
10000
15000
20000
25000
CentralAsia
CentralEurope
EasternEurope
NorthernEurope
Russia SouthCaucasus
SouthernEurope
Turkey WesternBalkans
WesternEurope
Low Skill Manufacturing
Actual Predicted
020000400006000080000
100000120000140000160000
CentralAsia
CentralEurope
EasternEurope
NorthernEurope
Russia SouthCaucasus
SouthernEurope
Turkey WesternBalkans
WesternEurope
High Skill Manufacturing
Actual Predicted
05000
100001500020000250003000035000
CentralAsia
CentralEurope
EasternEurope
NorthernEurope
Russia SouthCaucasus
SouthernEurope
Turkey WesternBalkans
WesternEurope
Natural Resources
Actual Predicted
![Page 20: WILL CHINA’S SLOWDOWN BRING ECA Economic Update …bruegel.org/wp-content/uploads/2016/04/Maurizio... · • The nature of the slowdown is important because its consequences on](https://reader033.vdocuments.net/reader033/viewer/2022042219/5ec5a5676738132b3d0ec1d7/html5/thumbnails/20.jpg)
20
ECA currencies depreciated sharply over past year
Percent change in real exchange rate with China, Jan-Feb 2015 to Jan-Feb 2016
-50
-45
-40
-35
-30
-25
-20
-15
-10
-5
0
Azer
baija
nBe
laru
sRu
ssia
n Fe
dera
tion
Kaza
khst
anU
krai
neGe
orgi
aM
oldo
vaKy
rgyz
Rep
ublic
Pola
ndTu
rkey
Swed
enCy
prus
Rom
ania
Gree
ceHu
ngar
ySp
ain
Bosn
ia a
nd H
erze
govi
naLi
thua
nia
Croa
tiaSl
oven
iaEs
toni
aSl
ovak
Rep
ublic
Mac
edon
ia, F
YRIre
land
Finl
and
Fran
ceBu
lgar
iaGe
rman
yIta
lyLa
tvia
Denm
ark
Luxe
mbo
urg
Port
ugal
Net
herla
nds
Aust
riaM
alta
Belg
ium
Czec
h Re
publ
icAl
bani
aU
nite
d Ki
ngdo
mAr
men
iaTa
jikist
an
![Page 21: WILL CHINA’S SLOWDOWN BRING ECA Economic Update …bruegel.org/wp-content/uploads/2016/04/Maurizio... · • The nature of the slowdown is important because its consequences on](https://reader033.vdocuments.net/reader033/viewer/2022042219/5ec5a5676738132b3d0ec1d7/html5/thumbnails/21.jpg)
21
Exchange rate depreciation could boost ECA’s exports to China
Percent change in volume of total exports as a result of real exchange rate depreciation in ECA
0
2
4
6
8
10
12
14
CentralAsia
CentralEurope
EasternEurope
NorthernEurope
Russia SouthCaucasus
SouthernEurope
Turkey WesternBalkans
WesternEurope
Agriculture
02468
101214161820
CentralAsia
CentralEurope
EasternEurope
NorthernEurope
Russia SouthCaucasus
SouthernEurope
Turkey WesternBalkans
WesternEurope
High Skill Manufacturing
0
5
10
15
20
25
CentralAsia
CentralEurope
EasternEurope
NorthernEurope
Russia SouthCaucasus
SouthernEurope
Turkey WesternBalkans
WesternEurope
Low Skill Manufacturing
0
2
4
6
8
10
12
14
CentralAsia
CentralEurope
EasternEurope
NorthernEurope
Russia SouthCaucasus
SouthernEurope
Turkey WesternBalkans
WesternEurope
Natural Resources
![Page 22: WILL CHINA’S SLOWDOWN BRING ECA Economic Update …bruegel.org/wp-content/uploads/2016/04/Maurizio... · • The nature of the slowdown is important because its consequences on](https://reader033.vdocuments.net/reader033/viewer/2022042219/5ec5a5676738132b3d0ec1d7/html5/thumbnails/22.jpg)
22
Exchange rate depreciation has created opportunities to compete with imports
Percent change in potential imports as a result of real exchange rate depreciation in ECA
-9-8-7-6-5-4-3-2-101
CentralAsia
CentralEurope
EasternEurope
NorthernEurope
Russia SouthCaucasus
SouthernEurope
Turkey WesternBalkans
WesternEurope
Agriculture
-14
-12
-10
-8
-6
-4
-2
0
CentralAsia
CentralEurope
EasternEurope
NorthernEurope
Russia SouthCaucasus
SouthernEurope
Turkey WesternBalkans
WesternEurope
High Skill Manufacturing
-16
-14
-12
-10
-8
-6
-4
-2
0
CentralAsia
CentralEurope
EasternEurope
NorthernEurope
Russia SouthCaucasus
SouthernEurope
Turkey WesternBalkans
WesternEurope
Low Skill Manufacturing
-4-3-2-101234567
CentralAsia
CentralEurope
EasternEurope
NorthernEurope
Russia SouthCaucasus
SouthernEurope
Turkey WesternBalkans
WesternEurope
Natural Resources
![Page 23: WILL CHINA’S SLOWDOWN BRING ECA Economic Update …bruegel.org/wp-content/uploads/2016/04/Maurizio... · • The nature of the slowdown is important because its consequences on](https://reader033.vdocuments.net/reader033/viewer/2022042219/5ec5a5676738132b3d0ec1d7/html5/thumbnails/23.jpg)
• The impact of a slowdown in China would hurt resource exporters in the East, while reducing competition for exporters in the West;
• A rebalancing (towards consumption, high skill production, and outward FDI) will benefit more the East;
• Factorial distribution of income will change favoring labor versus capital and low skill vs high skill.
23
China growth slowdown and rebalancing
![Page 24: WILL CHINA’S SLOWDOWN BRING ECA Economic Update …bruegel.org/wp-content/uploads/2016/04/Maurizio... · • The nature of the slowdown is important because its consequences on](https://reader033.vdocuments.net/reader033/viewer/2022042219/5ec5a5676738132b3d0ec1d7/html5/thumbnails/24.jpg)
24
China imports primary goods and exports manufactures
Net surplus as a percent of world trade, 2016 forecast
-50
-40
-30
-20
-10
0
10
20
Agriculture Livestock Oil and Gas Natural Resources Low-skilled manufactures High-skilled manufactures
Reduction in demand
Reduction in supply
![Page 25: WILL CHINA’S SLOWDOWN BRING ECA Economic Update …bruegel.org/wp-content/uploads/2016/04/Maurizio... · • The nature of the slowdown is important because its consequences on](https://reader033.vdocuments.net/reader033/viewer/2022042219/5ec5a5676738132b3d0ec1d7/html5/thumbnails/25.jpg)
25
China’s slowdown has a mixed impact on ECA’s exports
Percentage difference in export volumes in slowdown compared to business as usual scenario
-3.5
-3
-2.5
-2
-1.5
-1
-0.5
0
0.5
1
1.5
Russia Kazakhstan Azerbaijan Kyrgyz Republic Ukraine Poland Bulgaria Turkey and OtherECA
EU and EFTA
![Page 26: WILL CHINA’S SLOWDOWN BRING ECA Economic Update …bruegel.org/wp-content/uploads/2016/04/Maurizio... · • The nature of the slowdown is important because its consequences on](https://reader033.vdocuments.net/reader033/viewer/2022042219/5ec5a5676738132b3d0ec1d7/html5/thumbnails/26.jpg)
26
China’s slowdown improves wages, particularly of unskilled workers
Percent change in China slowdown versus business as usual scenarios
-0.1
0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
0.9
Russia Kazakhstan Azerbaijan Kyrgyz Republic Ukraine Poland Bulgaria Turkey andOther ECA
EU and EFTA
wage/rental rate unskilled/skilled wages
![Page 27: WILL CHINA’S SLOWDOWN BRING ECA Economic Update …bruegel.org/wp-content/uploads/2016/04/Maurizio... · • The nature of the slowdown is important because its consequences on](https://reader033.vdocuments.net/reader033/viewer/2022042219/5ec5a5676738132b3d0ec1d7/html5/thumbnails/27.jpg)
• Investment at 42% of GDP is simulated to go down by 15 ppt; with corresponding rise in consumption;
• The share of skilled workers in China will almost double over the next 10 years, implying an increase of 100 million skilled workers;
• A rise of China’s FDI outflows equal to 5 percentage points of GDP over the next 10 years.
27
China rebalancing
![Page 28: WILL CHINA’S SLOWDOWN BRING ECA Economic Update …bruegel.org/wp-content/uploads/2016/04/Maurizio... · • The nature of the slowdown is important because its consequences on](https://reader033.vdocuments.net/reader033/viewer/2022042219/5ec5a5676738132b3d0ec1d7/html5/thumbnails/28.jpg)
28
Change in private consumption relative to business as usual scenario
Percent
1.8
3.3
5.7
3.0
1.4 1.6
-1.0
-1.2
-1.1
-4.7
-0.5
-0.9
-6
-4
-2
0
2
4
6
8
Russian Federation Kazakhstan Azerbaijan Kyrgyz Rep Ukraine EU and EFTA
Full Rebal Slow Down
![Page 29: WILL CHINA’S SLOWDOWN BRING ECA Economic Update …bruegel.org/wp-content/uploads/2016/04/Maurizio... · • The nature of the slowdown is important because its consequences on](https://reader033.vdocuments.net/reader033/viewer/2022042219/5ec5a5676738132b3d0ec1d7/html5/thumbnails/29.jpg)
29
China rebalancing reduces the skill premium globally
Percentage difference in skill premium between rebalancing and business as usual scenarios
-2.500 -2.000 -1.500 -1.000 -0.500 0.000
India
North Am excl Mex
Russian Federation
Kazakhstan
Azerbaijan
Kyrgyz Rep
Ukraine
Poland
Bulgaria
Turkey and other ECA
EU and EFTA
Major Opec
Rest of the world
![Page 30: WILL CHINA’S SLOWDOWN BRING ECA Economic Update …bruegel.org/wp-content/uploads/2016/04/Maurizio... · • The nature of the slowdown is important because its consequences on](https://reader033.vdocuments.net/reader033/viewer/2022042219/5ec5a5676738132b3d0ec1d7/html5/thumbnails/30.jpg)
• Expected slow GDP growth tells only part of the story. Big changes in relative prices have far-reaching consequences.
• Slowdown and rebalancing in China are key elements of structural changes in global environment.
• There are some silver linings in the outlook. Unemployment is declining in EU and export opportunities are improving.
• Policies challenges most complicated for Eastern Europe and Central Asia.
30
Conclusions
![Page 31: WILL CHINA’S SLOWDOWN BRING ECA Economic Update …bruegel.org/wp-content/uploads/2016/04/Maurizio... · • The nature of the slowdown is important because its consequences on](https://reader033.vdocuments.net/reader033/viewer/2022042219/5ec5a5676738132b3d0ec1d7/html5/thumbnails/31.jpg)
ECA Economic Update April 2016
31
Maurizio Bussolo Chief Economist Office Europe and Central Asia Region
Thank you!
April 29, 2016 Brussels, Belgium