Transition Report 2012 28

26 CHAPTER 2 TRANSITION REGION IN THE SHADOWS OF THE EUROZONE CRISIS As the eurozone sovereign debt crisis 27 deteriorated, recovery has stalled in many countries of the transition region. Exports and capital inflows declined and the region’s banks have lost significant external funding from their eurozone parent banks. The region’s exposure to the euro area has thus recently turned from a benefit into a disadvantage, especially for central and south-eastern Europe. The outlook for the region continues to be crucially driven by developments in the eurozone crisis. In the baseline, the region will see a substantial slow-down this year and next relative to 2011. Transition region projected to slow down THE Year-on-year GDP growth of the transition region, per cent 6 FACTS 5 At A GLANCE 4 3 2 1 0 2010 2011 2012 2013 ■ Actual growth ■ Forecasted growth Source: National authorities via CEIC data service and EBRD forecasts. EXPOSURE TO THE EUROZONE Estimated quarterly output loss a year after a 1% lower quarterly eurozone output UKRAINE ROMANIA POLAND 3.7 % 2.0 % 0% CHAPTER 2 Transition Report 2012 28 TRANsitiON REGION IN GROWTH THE SHADOWS OF THE The intensification of the eurozone crisis occurred late enough in 2011 not to derail the transition region’s full-year economic EUROZONE CRisis performance, which was rather better than that in 2010. With the benefit of high prices, commodity exporters in Central Asia The past year has seen a significant deterioration in the grew robustly in 2011, particularly Mongolia, which expanded by external economic environment for the transition region. The over 17 per cent on the back of its mining boom, related foreign Transition Report 2011 suggested an ongoing recovery from direct investment (FDI) inflows and highly pro-cyclical fiscal policy. the global financial crisis, but pointed out the risks stemming Elsewhere, Turkey also maintained strong growth, fuelled by a from the region’s exposure to the eurozone. Since then, as the credit boom financed largely by capital inflows, while Estonia, eurozone’s sovereign debt crisis has deteriorated, recovery bouncing back from its deep and protracted 2007-09 recession, has stalled in many transition countries which are particularly was the best performer in the CEB region. Within the EEC region, integrated with the single currency area. Growth has slowed Georgia and Moldova returned unexpectedly strong results for the as exports and capital inflows have declined. Crucially, year, in part due to higher exports to neighbouring countries and banks, especially those in the western part of the transition recovery of agricultural output. region, have lost significant external funding as eurozone In contrast, Egypt and Tunisia in the southern and eastern financial institutions have deleveraged and reduced cross- Mediterranean (SEMED) region suffered recessions in 2011 as a border financing of their subsidiaries in transition countries. result of declines in investment, tourism and FDI flows, reflecting This has depressed credit growth, in turn impacting on political and economic uncertainties following their revolutions in output expansion. the spring. While most SEE countries grew faster than in 2010, This chapter summarises the main macroeconomic and their recovery was dampened by the onset of the eurozone crisis. financial developments in the transition region over the In the CEB region, Croatia and Slovenia recorded zero and slightly past year. Since during that time the region’s exposure to negative growth, respectively, as domestic factors (such as a the eurozone has veered from a benefit to a disadvantage, troubled Slovenian financial sector) compounded the effects of it assesses the extent to which each transition country’s the weak external environment. Meanwhile, a significant slow- growth depends on the fortunes of the single currency area down of the formerly booming Azerbaijani economy reflected a as well as on other external factors, such as oil prices and the year of shrinking oil production. rate of growth in Russia. The results confirm the expectation Most countries that grew healthily in 2011 did so on account of that, in general, the countries of central Europe and the private consumption (see Chart 2.1). Exceptions included Armenia Baltic states (CEB) and south-eastern Europe (SEE) are more and the Slovak Republic, which expanded due to substantially intertwined with the eurozone, while those of Central Asia (CA) higher exports, and Kazakhstan, where a combination of stronger and eastern Europe and the Caucasus (EEC) have closer links exports, greater government consumption and higher investment with Russia. However, the analysis also reaches some more surprising conclusions. For instance, within the transition region, Ukraine is particularly exposed to developments in its Chart 2.1 Private consumption was a key growth driver external environment, while Poland appears to be unusually in many countries resilient to them. Contribution to 2011 GDP growth, per cent The outlook for the transition region remains dependent on the course of the eurozone crisis and its global repercussions, 20 including its impact on commodity prices and global risk 15 aversion. The transition countries will experience a substantial 10 economic slow-down in 2012 and 2013 relative to 2011 5 as a result of the crisis. The CEB and SEE regions will see 0 particularly slow growth and some of their countries have -5 entered or will re-enter mild recession. As countries further -10 east become more exposed to the impact of the crisis, their -15 economies are also likely to flag. Possible further deterioration Egypt Latvia Turkey Serbia Russia Tunisia Poland Croatia Estonia Albania Belarus Ukraine Armenia Bulgaria Hungary Moldova Slovenia Morocco Romania of the euro area turmoil poses the largest risks to already- Lithuania Kyrgyz Rep. Slovak Rep. Kazakhstan Montenegro slower projected 2012 and 2013 growth in the region. CEB Bosnia & Herz. SEE EEC CA SEMED ● GDP growth year-on-year ■ Consumption, private ■ Consumption, public ■ Gross ﬁxed investment ■ Net exports ■ Other Source: International Monetary Fund International Financial Statistics (IMF IFS) Note: This chart depicts the contribution of components of national accounts to annual real gross domestic product (GDP) growth in 2011. “Other” component includes changes in inventories and statistical discrepancy. CHAPTER 2 Transition region in the shadows of the eurozone crisis 29 compensated for a drop in private consumption. Investment third quarter of 2011 to 0.6 and 3 per cent respectively, in the was also an important driver in the Baltic countries. After the second quarter of 2012. Baltic states increased their competitiveness through internal Economies further east have also started slowing down. devaluations during the global crisis, exports have become a Since early 2012, the crisis has negatively impacted on oil and much more prominent component of their outputs, replacing other commodity prices and on investor confidence. This has in real estate investment (see Chart 2.2). Now the export industry turn undermined growth in Central Asia and, more importantly is beginning to stimulate a different kind of investment, mainly in for the transition region as a whole, in Russia, where quarterly the manufacturing sector. Exports have also increased in relative gross domestic product (GDP) and industrial production have importance in many SEE economies since 2007, while Mongolia, slowed significantly during the first half of 2012. In addition to in contrast, has seen a dramatic fall in the export share of its lower commodity prices, country-specific developments (such as output as investments in mining (that should result in higher problems at a gold mine in the Kyrgyz Republic) have contributed exports in the future) have become predominant. to weaker growth in Central Asia. Continuing political uncertainty More recently, in the first half of 2012, growth in countries has weakened growth performance in the SEMED region. across the transition region slowed down markedly as a result of the widening “spillovers” from the eurozone crisis. A large majority of transition economies recorded weaker year-on-year growth in LABOUR MARKETS the second quarter of 2012 relative to the third quarter of 2011 In many transition countries labour markets never fully recovered (see Chart 2.3). from the 2008-09 crisis. Now they are likely to face further Unsurprisingly, growth has slowed in most of the CEB strains in the face of eurozone developments. Employment countries, which are among the most vulnerable to developments has generally failed to keep pace with GDP growth since 2010, in the single currency area. Having recorded successive quarter- although countries in the region vary significantly in the extent to on-quarter contractions in the first two quarters of this year, both which growth results in job creation (see Box 2.1). Croatia and Hungary are now in a recession. Output in Slovenia Over the past year unemployment rates have fallen in the contracted markedly in the second quarter of 2012, adding to Baltic states, but nevertheless they remain well above pre-crisis its own “double dip” recession of early 2011. The Baltic states, levels in all CEB countries (see Chart 2.4) except Poland (which Poland and the Slovak Republic performed better, although avoided a recession during the global financial crisis). The SEE figures for the second quarter of 2012 suggest that Polish growth region has also seen a few apparent falls in unemployment, is slowing down as domestic demand weakens. In the SEE region although from very high levels. Unemployment rates have Bulgaria and Romania also experienced a slow-down while the been more stable in other regions, but have risen since late economies of FYR Macedonia and Serbia contracted relative to 2011 in Moldova and Ukraine, coinciding with a slow-down in the first half of 2011. In the EEC region the two economies more growth. In the SEMED region the political and economic turmoil closely intertwined with the eurozone – Moldova’s and Ukraine’s – in the first half of 2011 contributed to rising unemployment saw their year-on-year growth slow from around 6 per cent in the in Egypt and Tunisia.

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