GDP growth in developing Europe and Central Asia1 rebounded to an estimated 5.2 percent in 2010, following a 6.5 percent contraction in 2009 (see first chart shown here and the Forecast summary table). Limited credit growth, the deleveraging of household-sector balance sheets and continued industrial sector restructuring following the easy-credit excesses of the boom period are expected to continue weighing on GDP. Because of that, output is projected to expand at a relatively subdued (by developing countries’ standards) growth rate of 4.7 percent in 2011 and averaging 4.5 percent during 2012 and 2013. These aggregate figures hide significant variation across countries within the region, with those most affected during the above-average credit growth period performing least well, while resource-rich economies are benefitting from high commodity prices.
The recession in Europe and Central Asia was much deeper than elsewhere in the developing world, because substantial trade and financial market linkages with high-income Europe. Overall, regional industrial production, which had been growing at a 6.2 percent pace in the four years before the crash, fell 10 percent in 2009–more than three times as much as in other developing regions. Partly as a result of this, output only regained pre-crisis levels at the end of 2010, versus mid-2009 for the rest of the developing world.
As of the first quarter of 2011, industrial production in the region was expanding at a 9.3 percent annualized pace. If sustained, such an expansion should begin to close the still large 20 percent gap between current activity levels and those that might have been observed if the boom and bust not occurred. Progress at the sub-regional level has been mixed, with Russian (which represents over 50 percent of the region’s total industrial product) growth of 8.3 percent during 2010 underperforming the regional aggregate, and well below the impressive performance of Turkey, up 13.2 percent in 2010. As a whole, seasonally adjusted industrial production in the region grew almost 8.0 percent, ranging from an over 19 percent increase in Lithuania for the 12 months ending March 2011 to a 5.3 percent contraction in Kazakhstan (for the 12 months ending April 2011).
Much of the initial impetus for recovery in Europe and Central Asia reflected the region’s strong export performance, that saw real merchandise exports expanding at a 25 percent annualized pace during the final three months of 2010. Lithuania and Romania, exporters of manufactured goods to the EU market, recorded some of the fastest growth rates (a more than 40 percent increase during the final 3 months of 2010), while economies in the Southern Caucasus and Central Asia sub-region, such as Armenia and Uzbekistan, reported the slowest export growth rates.
The acceleration in regional trade reflects the global recovery, but also the increased trade ties of several countries in the region towards faster growing economies inside and outside the region. Between 2005 and 2010, the share of the exports of countries going to the Commonwealth of Independent States (CIS)2 and Russia was broadly stable, while shares going to Turkey, the EU (notably, Germany) and China increased significantly (by more than 55 percent in the case of China).3
This overall pattern has particular sub-regional dimensions. The EU is a more important trading partner for the western CIS, the Southern Caucasus and countries like Albania, Bosnia and Herzegovina, FYR Macedonia, Kosovo, Montenegro and Serbia, while China is a relatively more relevant trade partner for countries in Central Asia (albeit the EU still remains, on aggregate, the largest trade partner of this sub-region).
The combination of growing exports volumes and rising commodity prices, especially oil, has contributed to a large fall in the region’s trade deficit, from $3.6 billion at end 2010 to $0.7 billion in early 2011. Higher oil prices were reflected in a sharp increase in the trade surplus of oil exporters, from $10 billion in August 2010 to $14 in December, and a deterioration among oil importers, from a $-13 to $-16 billion trade deficit over the same period.
Despite the depth of the recession and the massive disruption to the construction industry and still large industrial sectors of the regional economy, unemployment rose relatively little from 7 percent in 2007 to a peak of 9.3 percent in 2009 and has fallen relatively rapidly, coming in at 8.6 percent at the end of 2010, a nevertheless still elevated level that makes it a ongoing cause for concern. The regional aggregate is significantly influenced by developments in Russia, Turkey and Ukraine (figure ECA.5), which represent two thirds of the region’s total population. Unemployment in these countries rose by 2.6 percentage points between 2008 and 2009, before falling by 1.5 percentage points between 2009 and 2010.
In the remaining countries of the region unemployment averages 15.6 percent of the labour force (ranging from close to full formal employment in places like Belarus and Tajikistan4 to as much as 45 percent unemployment in Bosnia and Herzegovina). Developments in these countries have been equally varied, but there not only the average unemployment rate was considerably higher previous to the crisis, it actually rose somewhat during 2010.
As observed elsewhere (see main text and Financial annex), private capital inflows into Europe and Central Asia, which were strong in the second and third quarters of 2010 eased in the fourth quarter of that year and into 2011 (for the year as a whole they were still up 88 percent, Country forecasts table). The decline in portfolio flows was most evident in Turkey, and roughly coincided with the authorities’ decision to lower interest rates in an effort to deter capital inflows being attracted by high-interest rate differentials, while restricting credit growth by simultaneously raising reserve requirements.
Russia experienced significant outflows, despite high and rising energy prices. FDI flows increased the most in Ukraine, reflecting the recapitalization of banks, while they declined more in Kazakhstan and Romania. Significant improvements will likely be delayed until the regional recovery matures further and until there are substantial improvements in the region’s investment climate.5
Rising food prices following the extreme drought in the summer of 2010 contributed to a pickup in inflation in the region during 2010.6 Food prices rose at a 12 percent annualized pace in the three months ending September 2010, which contributed, with a lag, to an acceleration in overall inflation to a 7.6 percent annualized rate in the fourth quarter of the year. Year-over-year, all-goods inflation picked up from 6.3 percent in June 2010, to 7.6 percent in the fourth quarter of the year. Inflation now exceeds 10 percent in almost forty percent of the countries in the region, but it has been easing as the inflationary impact of the 2010 higher food prices fades. However, the recent rise in oil prices is likely to yield a second acceleration, which may be exacerbated by planned increases in regulated prices in Belarus and Ukraine (and, in the case of Belarus, by a devaluation of the currency).
Remittances are both an important source of foreign currency for several countries in the region and an important source of income for households, and therefore an important determinant of domestic demand. Remittances are around 10 percent of GDP for countries like Armenia and Bosnia and Herzegovina, and between 18 and 35 percent of GDP for Albania, the Kyrgyz Republic, Moldova and Tajikistan. After falling by almost a quarter between 2008 and 2009, they rose by a meager 1.3 percent in 2010. Looking forward, high commodity prices and stronger growth in migration destination countries are expected to contribute to a 7.5 percent increase in remittances in 2011 and a 9.4 percent increase in 2012 (see table on Workers' remittances, employee compensation, and migrant transfers).
1 For the purposes of this report, the developing Europe and Central Asia region is comprised of only low- and middle-income countries (22 in total). Thus the aggregate excludes high-income Western European countries (among which Croatia, the Czech Republic and Hungary), but includes low- and middle-income EU member states (Bulgaria, Lithuania and Romania).
2 The CIS is a loose organization that includes most of the countries from the former Soviet Union, notably Armenia, Azerbaijan, Belarus, Georgia, Kazakhstan, Kyrgyz Republic, Moldova, Russia, Tajikistan, Turkmenistan, Ukraine and Uzbekistan. Turkmenistan discontinued its membership of the CIS as of 26 August 2005, and is now an associate member, while Georgia has left the group in August 2009. Ukraine has never ratified the CIS Treaty.
3 The ongoing creation process of a Customs Union between three members of the so-called “Eurasian Economic Community” (EurAsEC), namely Belarus, Kazakhstan and Russia may conceivably increase the regional share of intra-CIS trade (albeit possibly at the cost of welfare-reducing trade diversion.
4 Low measured unemployment likely reflects hidden unemployment due to limited economic restructuring in Belarus, and imperfect official statistics in Tajikistan.
5 The World Bank’s “Doing Business” indicator, a useful proxy for investment climate, shows that, while the region broadly stagnated between 2010 and 2011 (the average value for the aggregate indicator remained at 78, or over twice the EU average), each of the three largest regional economies worsened their relative positions (and Russia by a significant 7 slots).
6 See also “Rising Food and Energy Prices in Europe and Central Asia” (World Bank 2011) for an analysis of the regional effects of increasing commodity prices.