Front Matter

Front Matter

Author(s):
International Monetary Fund. European Dept.
Published Date:
May 2018
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    World Economic and Financial Surveys

    Regional Economic Outlook

    Europe

    Managing the Upswing in Uncertain Times

    MAY 18

    © 2018 International Monetary Fund

    Cataloging-in-Publication Data

    Names: International Monetary Fund.

    Title: Regional economic outlook. Europe : managing the upswing in uncertain times.

    Other titles: Europe : managing the upswing in uncertain times. | | World economic and financial surveys

    Description: [Washington, DC] : International Monetary Fund, 2018. | World economic and financial surveys, 0258–7440 | May 2018. | Includes bibliographical references.

    Identifiers: ISBN 9781484339909 (paper)

    Subjects: LCSH: Economic forecasting—Europe. | Economic development—Europe. | Europe—Economic conditions.

    Classification: LCC HC240.A1 R44 2018

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    Preface

    The May 2018 Regional Economic Outlook: Europe was prepared by a staff of the IMF’s European Department under the general guidance of Jörg Decressin. Chapter 1 was prepared by a staff team including Vizhdan Boranova, Raju Huidrom, Sylwia Nowak, Faezeh Raei, and Yan Sun and was led by Emil Stavrev. Chapter 2 was prepared by a staff team including Vizhdan Boranova, Jiaqian Chen, Dilyana Dimova, Christian Ebeke, Raju Huidrom, Nemanja Jovanovic, Li Lin, Aiko Mineshima, Jean-Marc Natal, Faezeh Raei, Tiberiu Scutaru, Jesse Siminitz, Yan Sun, Peichu Xie, and Sophia Zhang and was led by Craig Beaumont and Emil Stavrev. Laura Papi and the European Department country teams provided useful feedback on the report.

    In addition, Phillip-Bastian Brutscher and Miroslav Kollar of the European Investment Bank contributed to Box 1.2 in Chapter 1. The chapter benefited from the exchange of views with the Central, Eastern, and Southeastern European authorities during the 2018 Spring Meetings of the International Monetary Fund and the World Bank in Washington, DC, and their subsequent comments.

    Administrative support was provided by Lian Veluz. Colleagues of the Communications Department Marjorie Henriquez, Wiktor Krzyzanowski, David Pedroza, and Rhoda Weeks provided invaluable support, and Linda Long coordinated editing and production, with editing help from David Einhorn and Lucy Morales. Heidi Grauel performed layout services.

    Approved by Poul M. Thomsen.

    Abbreviations

    The following abbreviations are used:

    ALB

    Albania

    AUT

    Austria

    BGR

    Bulgaria

    BiH

    Bosnia and Herzegovina

    BIS

    Bank for International Settlements

    BLR

    Belarus

    CE

    Central Europe

    CEE

    Central and Eastern Europe

    CESEE

    Central, Eastern, and Southeastern Europe

    CFC

    Central fiscal capacity

    CHE

    Switzerland

    CIS

    Commonwealth of Independent States

    CMU

    Central Markets Union

    CYP

    Cyprus

    CZE

    Czech Republic

    DEU

    Germany

    DNK

    Denmark

    EA

    Euro area

    ECB

    European Central Bank

    ECM

    Error correction model

    EIB

    European Investment Bank

    EM

    Emerging market

    ESP

    Spain

    EST

    Estonia

    EU

    European Union

    EU15

    European Union-15

    EMU

    Economic and Monetary Union

    FBiH

    Federation of Bosnia and Herzegovina

    FDI

    Foreign direct investment

    FIN

    Finland

    FRA

    France

    FSI

    Financial soundness indicators

    GBR

    United Kingdom

    GDP

    Gross domestic product

    GRC

    Greece

    GVC

    Global value chain

    HICP

    Harmonized Index of Consumer Prices

    HP filter

    Hodrick-Prescott filter

    HRV

    Croatia

    HUN

    Hungary

    IFS

    International Financial Statistics

    IMF

    International Monetary Fund

    IRL

    Ireland

    ISL

    Iceland

    ISO

    Interational Organization for Standardization

    ISR

    Israel

    ITA

    Italy

    LTU

    Lithuania

    LVA

    Latvia

    LUX

    Luxembourg

    MDA

    Moldova

    MKD

    Former Yugoslav Republic of Macedonia

    MLT

    Malta

    MNE

    Montenegro

    NAIRU

    Nonaccelerating inflation rate of unemployment

    NDL

    Netherlands

    NMS

    New member states (newer EU members)

    NOR

    Norway

    NPL

    Nonperforming loan

    OECD

    Organisation for Economic Co-operation and Development

    PMI

    Purchasing managers’ index

    POL

    Poland

    PRT

    Portugal

    REER

    Real effective exchange rate

    ROU

    Romania

    RS

    Republika Srpska

    RUS

    Russia

    SA

    Seasonally adjusted

    SEE

    Southeastern Europe

    SEE-EU

    Southeastern European EU member states

    SEE-non-EU

    Southeastern European non-EU member states

    SMR

    San Marino

    SRB

    Serbia

    SVK

    Slovak Republic

    SVN

    Slovenia

    SWE

    Sweden

    TUR

    Turkey

    UKR

    Ukraine

    ULC

    Unit labor cost

    UVK

    Kosovo

    VAR

    Vector autoregression

    WEO

    World Economic Outlook

    Regional Economic Outlook: Europe

    Europe: Country Groups

    Europe: Country Groups and Weights (2017)
    Group/CountryAbbreviationWeights
    Europe100.0
    Advanced European EconomiesAEUR100.068.7
    Euro areaEA100.073.450.5
    AustriaAUT3.02.21.5
    BelgiumBEL3.62.61.8
    CyprusCYP0.20.20.1
    EstoniaEST0.30.20.1
    FinlandFIN1.71.20.8
    FranceFRA19.214.19.7
    GermanyDEU28.320.814.3
    GreeceGRC2.01.51.0
    IrelandIRL2.41.81.2
    ItalyITA15.711.57.9
    LatviaLVA0.40.30.2
    LithuaniaLTU0.60.50.3
    LuxembourgLUX0.40.30.2
    MaltaMLT0.10.10.1
    NetherlandsNLD6.24.63.1
    PortugalPRT2.11.61.1
    Slovak RepublicSVK1.20.90.6
    SloveniaSVN0.50.40.2
    SpainESP12.08.86.1
    Nordic economiesNOR100.06.04.1
    DenmarkDNK23.81.41.0
    IcelandISL1.50.10.1
    NorwayNOR31.51.91.3
    SwedenSWE43.22.61.8
    Other European advanced economiesIT4100.020.614.1
    Czech RepublicCZE9.11.91.3
    IsraelISR7.71.61.1
    San MarinoSMR0.00.00.0
    SwitzerlandCHE12.52.61.8
    United KingdomGBR70.614.510.0
    Emerging European economiesEEUR100.031.3
    Central EuropeCE100.015.44.8
    HungaryHUN20.53.21.0
    PolandPOL79.512.33.8 2.5
    Southeastern European EU member statesSEE EU100.08.02.5
    BulgariaBGR20.81.70.5
    CroatiaHRV13.81.10.3
    RomaniaROU65.45.31.6
    Southeastern European non-EU member statesSEE non-EU100.02.70.8
    AlbaniaALB14.50.40.1
    Bosnia and HerzegovinaBIH18.00.50.2
    KosovoUVK7.90.20.1
    Macedonia, FYRMKD12.50.30.1
    MontenegroMNE4.50.10.0
    SerbiaSRB42.61.20.4
    Commonwealth of Independent States excl. RussiaCIS excl RUS100.06.21.9
    BelarusBLR31.52.00.6
    MoldovaMDA3.50.20.1
    UkraineUKR65.04.01.3
    RussiaRUS100.043.813.7
    TurkeyTUR100.023.87.4
    Note: Country weights are based on 2017 GDP in purchasing-power-parity terms. The country groups are color coded, and the weights refer to respective groups.

    Executive Summary

    Europe continues to enjoy strong growth. Activity has firmed up in many economies, and the forecast is for more of the same. Real GDP increased by 2.8 percent in 2017, up from 1.8 percent in 2016. The expansion is largely driven by domestic demand. Credit growth has finally picked up, which is helping Europe’s banks rebuild profitability. While leading indicators have recently begun to ease, they remain at high levels. Accordingly, the forecast is for growth to stay strong, reaching 2.6 percent in 2018 and declining to 2.2 percent in 2019. Amid the good times, however, fiscal adjustment and structural reform efforts are flagging.

    Inflation and wage growth remain subdued in most advanced economies and are projected to gather pace only very gradually, given slack in labor markets. In central and eastern Europe, by contrast, where economies are cyclically much further ahead, wages are growing rapidly and inflation is expected to pick up appreciably in 2018, potentially affecting competitiveness. As Chapter 2 discusses, the subdued wage dynamics in many advanced economies reflect low inflation and inflation expectations, still-high unemployment and underemployment rates, as well as sluggish productivity growth. In addition, there are signs that wage Phillips curves are very flat in advanced economies and that spillovers from regional labor market conditions and slow wage growth in some economies are contributing to wage moderation, holding back demand in other economies. It could thus take some time before wage growth picks up noticeably and broadly in the advanced economies.

    The favorable outlook is subject to several risks that are mainly to the downside over the medium term. The most immediate risks stem from rich valuations in financial markets at the global level, notably an exceptionally low term premium and a growing tendency toward inward-looking economic policies. European markets have weathered the recent financial turbulence well, with capital flows to emerging market economies staying strong. But, as is discussed in Chapter 1, sustained large declines in stock prices are often harbingers of lower growth and inflation. With many policy rates close to the zero lower bound and central banks still engaged in unorthodox policies, the scope for further, effective policy easing in response to new shocks is not large. It is therefore all the more important to rebuild room for fiscal policy maneuver.

    An important question is how long this recovery can run even in the absence of external shocks. On the one hand, estimates for output gaps point to little slack in most economies. On the other hand, unemployment rates—especially when defined broadly—still appear high, particularly in key advanced economies. Whether the recovery has the legs to last depends on the response of investment. Chapter 1 shows that investment has generally been subdued, and mainly for replacement purposes. It has also been much weaker than after the global crisis of 1991.

    With economic prospects continuing to improve in the short term but medium-term prospects less bright, policymakers should seize the moment to rebuild room for fiscal maneuver and push forward with reforms to boost growth potential. In countries where inflation is still subdued, monetary policy should continue to be supportive to ensure a durable increase in inflation to targets. In countries where inflation is hitting targets, it should gradually normalize. In many economies, policymakers should strive to bring fiscal deficits within range of balance over the next few years. This way, automatic stabilizers and fiscal stimulus can be deployed again, should downside risks materialize. Also, stabilizing and bringing down public debt would help economies better cope with the pressures from growing expenditures on pensions and health care. The combination of fiscal adjustment and easy monetary policy should also help the many economies that have rebuilt much-needed competitiveness since the crisis continue to lower their still-high net external liability positions. Fiscal adjustment should be driven first and foremost by efforts to improve the efficiency of government. This is a major challenge, particularly in many of the emerging economies in Europe that also need to work further on improving institutions and governance. Countries with ample fiscal space can and should use it to promote higher potential growth.

    Finally, the recovery provides an opportunity to move faster to deepen the Economic and Monetary Union. First, more actions are needed to complete the Banking Union. Instituting a European Stability Mechanism to backstop the Single Resolution Fund would mark an important first step toward greater risk sharing. Second, there is a strong case for a central fiscal capacity, but access should be strictly conditional on compliance with the fiscal rules combined with mechanisms to prevent permanent transfers between countries. Third, with the United Kingdom leaving the single market, there is a more urgent need to advance the Capital Markets Union, which requires steps to promote harmonization of insolvency regimes and better protection of cross-border investor rights.

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