OESTERREICHISCHE NATIONALBANK EUROSYSTEM FOCUS ON EUROPEAN ECONOMIC INTEGRATION 2/08 FOCUS ON EUROPEAN ECONOMIC INTEGRATIONFOCUS ON EUROPEAN Stability and Security. 2/08 Contents Editorial 5 Recent Economic Developments Developments in Selected Countries 8 Compiled by Antje Hildebrandt and Josef Schreiner Studies Real Estate, Construction and Growth in Central and Eastern Europe: Impact on Competitiveness? 52 Balázs Égert, Reiner Martin Housing Loan Developments in the Central and Eastern European EU Member States 73 Zoltan Walko The OeNB Euro Survey in Central, Eastern and Southeastern Europe – The 2008 Spring Wave Update 83 Sandra Dvorsky, Thomas Scheiber, Helmut Stix Financial Sector Development in Serbia: Closing Ranks with Peers 94 Stephan Barisitz, Sándor Gardó Highlights The 62nd East Jour Fixe of the Oesterreichische Nationalbank Soaring Prices in Emerging Europe: Temporary Phenomenon or Lasting Challenge? 122 Compiled by Markus Eller with input from Claudia Zauchinger Selected Abstracts 143 2 FOCUS ON EUROPEAN ECONOMIC INTEGRATION 2/08 Contents Statistical Annex Maria Dienst, Angelika Knollmayer and Andreas Nader Gross Domestic Product 146 Industrial Production 146 Average Gross Wages 146 Unemployment Rate 147 Industrial Producer Price Index 147 Consumer Price Index 147 Trade Balance 148 Current Account Balance 148 Net Foreign Direct Investment 148 Reserve Assets Excluding Gold 148 Gross External Debt 149 General Government Balance 149 Gross General Government Debt 149 Broad Money 150 Official Key Interest Rate 150 Exchange Rate 150 Notes Legend, Abbreviations and Definitions 152 List of Studies and Special Reports Published in Focus on European Economic Integration 155 Periodical Publications of the Oesterreichische Nationalbank 156 Addresses of the Oesterreichische Nationalbank 159 The views expressed are those of the authors and need not necessarily coincide with the views of the Oesterreichische Nationalbank. FOCUS ON EUROPEAN ECONOMIC INTEGRATION 2/08 3 K^h^idjg8::8lZWh^iZ ]iie/$$XZZX#dZcW#Vi Editorial Dear reader, The Times They Are a-Changin’ This famous song line definitely holds for the global economic situation, which has deteriorated significantly since the last issue of Focus on European Economic Integration (FEEI) was published. As we all know, economic turmoil – which has drastically changed economic forecasts and overturned traditional views – has not been confined to the U.S.A. Obviously, neither industrialized economies nor emerging markets all over the world have been able to decouple from U.S. developments. As a result, countries in Central, Eastern and Southeastern Europe (CESEE) as well as the Commonwealth of Independent States are facing a signifi- cant downturn. The good news is that, with a few exceptions, growth rates for 2009 are still positive. The often-cited growth differential in favor of Austria’s neighboring countries is thus still in place. Read more about this in the Recent Economic Developments section. Two of the studies published in this FEEI issue cover another topic that is espe- cially relevant given the ongoing turmoil: Balázs Égert (OECD, formerly OeNB) and Reiner Martin (currently at the OeNB, on leave from the ECB) deal with Real Estate, Construction and Growth in Central and Eastern Europe. Whereas they take a closer look at the impact of real estate and construction sector develop- ments on competitiveness, Zoltan Walko analyzes Housing Loan Developments in the Central and Eastern European EU Member States. In addition, you will find the 2008 Spring Wave Update of the OeNB Euro Survey in Central, Eastern and Southeastern Europe by Sandra Dvorsky, Thomas Scheiber and Helmut Stix. In our series on financial sector studies, Stephan Barisitz and Sándor Gardó, more or less for the first time in this publication, focus on Serbia. Finally, the summary of the OeNB’s East Jour Fixe of June on inflation was compiled by Markus Eller. The Times They Are a-Changing not only characterizes the current economic situation, it also holds for this publication itself – but in a positive sense. From 2009 onward, you will receive four instead of two FEEI issues. This does not necessarily imply rising volumes, but it will make sure that you are provided with more timely information and analyses. Issues 1 and 3 will contain studies only, whereas issues 2 and 4 will include Recent Economic Developments and the Euro Survey, apart from one or two studies. We will continue to release the Recent Economic Developments section on our website at ceec.oenb.at a few weeks before FEEI is published, mainly to make it available closer to the cutoff date for data. As a reminder and to keep you informed about papers published and about ongoing events, we will circulate the relaunched ceec.newsletter on a regular basis. If you are interested in receiving this newsletter, please send your e-mail address to [email protected] Oesterreichische Nationalbank Head of the Foreign Research Division FOCUS ON EUROPEAN ECONOMIC INTEGRATION 2/08 5 Recent Economic Developments Developments in Selected Countries 1, 2, 3 1 International Financial Turmoil Puts a Brake on the Dynamic Catching-up Process of CESEE Growth in CESEE The turmoil on international financial markets has intensified over the past weeks; expected to the situation remains volatile, but various policy measures taken by central banks moderate and governments around the world aim at stabilizing the situation.4 While considerably in the emerging markets were hit less hard than advanced economies for a prolonged coming months period after the outbreak of the crisis in mid-2007, financial spillovers to this country group have increased recently. Together with the moderation in world economic activity, this development has contributed to a substantial worsening of the international economic environment for the CESEE countries covered in this report. In addition, the situation is characterized by a high degree of uncertainty surrounding current economic and financial conditions. Up to the first half of 2008, however, the international financial turmoil had almost no direct impact on real economic developments in CESEE, as real growth came in at 6.5% year on year on average. Somewhat less favorable developments in external demand (resulting partly from lower world as well as euro area demand, especially in the second quarter of 2008) were offset to a considerable extent by a still robust performance of domestic variables. However, along with global output, growth is expected to moderate in most countries over the coming quarters (see box 2). Inflation still Inflation has only recently started to come down somewhat from the record elevated in most levels observed in the course of the year, mainly due to decreasing energy prices. countries but on the Domestic inflation pressures, however, remain strong in many countries, as tight- decline owing to ening labor markets lead to increasing wages and rising unit labor costs (ULC). falling energy prices and slowing growth The expected moderation in output growth, however, will have a certain dampen- ing effect on prices. Adverse impacts of the international turbulence on financial markets in the region were more pronounced than those on the real economy. Especially the SEE-2, Croatia, and Turkey (i.e. countries with stronger external and/or internal imbalances) were hit more strongly, while countries at more advanced stages of transition (notably the CEE-5) generally experienced less distortion in their financial markets (see box 1). 1 Compiled by Antje Hildebrandt and Josef Schreiner with input from Stephan Barisitz, Markus Eller, Johann Elsinger, Sándor Gardó, Thomas Reininger, Tomáš Slacˇík, Zoltan Walko, and Julia Wörz. 2 Cutoff date: end-October 2008. This report focuses primarily on data releases and developments from mid-April 2008 up to the cutoff date for data. 3 This report covers Bulgaria, the Czech Republic, Hungary, Poland, Romania, Slovakia and Slovenia, as well as Croatia, Turkey, and Russia. The Central, Eastern and Southeastern (CESEE) EU Member States – Bulgaria, the Czech Republic, Hungary, Poland, Romania, Slovakia and Slovenia – are referred to as the CESEE EU Member States throughout the report. Additionally, the CEE-5 group comprises the Czech Republic, Hungary, Poland, Slovakia, and Slovenia, while SEE-2 refers to Bulgaria and Romania. Croatia and Turkey are referred to as EU candidate countries. 4 Central banks and governments in the countries under observation have responded to the ongoing turmoil by taking numerous policy measures, including verbal interventions stressing banking system stability, raising deposit insurance levels (to at least EUR 50,000 in CESEE, to EUR 56,000 in Croatia), supporting interbank liquidity via foreign exchange swaps (Hungary, Poland), repo auctions (Czech Republic) and guarantees (Russia, Bulgaria), lowering minimum reserve requirements (Croatia, Russia, Bulgaria), foreign exchange market interventions (Russia) and/or measures to ease the situation on government bond markets (reducing offer volumes in the Czech Republic and Hungary, buybacks in Bulgaria) (see also Financial Stability Report 16). 8 FOCUS ON EUROPEAN ECONOMIC INTEGRATION 2/08 Developments in Selected Countries Hungary is somewhat of an outlier from this pattern, as financial variables have deteriorated sharply in recent weeks. Even though the country reports one of the highest levels of gross external debt in the region, macroeconomic fundamen- tals are gradually recovering from