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IMF Says European Economic Recovery to be
Fragile and Calls for Policy Action to Secure a Solid Rebound
Press Release No. 09/332
October 3, 2009
The current European economic recession is showing signs of bottoming out,
but the recovery is likely to be slow and fragile, the International Monetary
Fund (IMF) said today in its October 2009 Regional Economic Outlook (REO) for
Europe. Helped by rebounding confidence and a tentative pick up in global trade,
the contraction in Europe appears to have ended at mid-2009 and is expected to
give way to a moderate recovery in 2010 and more solid growth returning only
afterwards, the report said.
“The long recession shows signs of finally bottoming out. But the recovery
will likely be slow and fragile because the pickup in demand from Asia can
hardly substitute for the pre-crisis appetite for imports of U.S. consumers.
Europe cannot count on exports alone to drive the recovery. In addition, credit
remains scarce, unemployment is rising, and the crisis has reduced Europe’s
growth potential,” said Marek Belka, Director of the IMF’s European Department.
In advanced economies this should result in an average decline of -4.0 percent
in 2009 and growth of 0.5 percent in 2010. In emerging Europe activity is
expected to contract by -6.6 percent this year, but growth should return to most
countries in 2010, with GDP increasing by an average 1.7 percent.
The report calls on policymakers to focus their attention on securing the
recovery. In the near term, they should adopt a more resolute approach to
assessing the balance sheet risks faced by banks, and take action to
recapitalize or restructure viable institutions and resolve others. “The
economic recovery might be weaker than hoped for unless the financial sector
problems are dealt with promptly and effectively,” Belka said.
Macroeconomic policies also need to sustain the upswing while preparing for
an exit. The fragility of the recovery will require fiscal policy to continue
with planned stimuli and letting automatic stabilizers work, but sustainability
concerns demand a strong consolidation effort once the recovery has firmed up.
And monetary policy will need to remain supportive but, once financial
conditions normalize and the recovery is firm, attention needs to be given to
exiting the unprecedented market interventions forced by the crisis. Clear
communication of this exit strategy will be essential, the report says. “There
is little rest for the weary. The fragility of the upswing will require
policymakers’ steady hand to maintain support for activity while preparing to
exit from the policies put into place during the crisis. Getting its timing and
the pace right will require careful judgment,” Belka stated.
“But, overall, moving fast to repair the damage the crisis has caused to
potential growth is what ultimately matters most. Only lifting the long-run
growth potential of Europe will put the crisis behind us for good,” he added. To
achieve this, policymakers in advanced countries should pursue opportunities to
reform labor and product markets, while those in emerging economies should focus
on developing a new business model that rebalances the sources of growth and
financing.
Brief Summary of the Analytic Chapters in the
2009 October REO
Chapter 2 of the 2009 October REO, entitled “The Crisis
and Potential Output,” looks at the impact of the crisis on Europe’s
potential growth and concludes that financial sector difficulties, weak
investment, and long spells of unemployment are likely to hold back potential
growth over the next few years. The magnitude of their impact is, however,
uncertain. Over the long term, potential growth should return to its historic
trend in most of Europe’s advanced economies, except where unsustainable
financial sector profits might have exaggerated growth. In emerging Europe,
resuming convergence will depend on restoring sustainable capital inflows by
ensuring a business-friendly environment, strengthening policy frameworks to
reduce uncertainty, and implementing sound macroeconomic policies.
Chapter 3 of the REO, entitled “Implications of the Fall
in Potential Output for Macroeconomic Policies,” concludes that the decline
in potential output and the surrounding uncertainty complicates both fiscal and
monetary policy decisions in an already difficult environment and can lead to
policy mistakes. To keep inflation expectations anchored, monetary policymakers
will need to clearly communicate their views on potential output on which policy
rate decisions are based, while emphasizing their commitment to adjust as new
information arrives. Given the large fiscal costs of the crisis, fiscal policy
should err on the side of caution and consolidate as soon as the recovery takes
momentum.
Chapter 4 of the REO, entitled “Policies in Emerging
Economies to Cope with Heightened Risk during Recovery,” says that emerging
Europe is likely to face higher risk premiums and a more volatile environment in
the aftermath of the financial crisis, as investors pay increased attention to
domestic policies in individual countries. Adopting policies that lower
uncertainty about the state of the financial system and reduce fiscal discretion
would go a long way in addressing concerns and will yield a “double dividend” in
improving prospects for long-term growth.
Table 1. European Countries: Real GDP
Growth and CPI Inflation, 2006–10
(Percent)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real GDP Growth |
|
CPI Inflation |
|
2006 |
2007 |
2008 |
2009 |
2010 |
|
2006 |
2007 |
2008 |
2009 |
2010 |
|
Europe
1/ 2/ |
4.2 |
3.9 |
1.7 |
-4.7 |
0.8 |
|
3.6 |
3.6 |
5.7 |
3.0 |
2.7 |
Advanced
European economies 1/ |
3.2 |
2.8 |
0.8 |
-4.0 |
0.5 |
|
2.2 |
2.1 |
3.4 |
0.7 |
1.0 |
Emerging
European economies 1/ 2/ |
7.2 |
6.8 |
4.2 |
-6.6 |
1.7 |
|
7.8 |
7.8 |
12.0 |
9.0 |
7.2 |
European
Union 1/ |
3.4 |
3.1 |
1.0 |
-4.2 |
0.5 |
|
2.3 |
2.4 |
3.7 |
0.9 |
1.1 |
Euro
area |
2.9 |
2.7 |
0.7 |
-4.2 |
0.3 |
|
2.2 |
2.1 |
3.3 |
0.3 |
0.8 |
Austria |
3.5 |
3.5 |
2.0 |
-3.8 |
0.3 |
|
1.7 |
2.2 |
3.2 |
0.5 |
1.0 |
Belgium |
3.0 |
2.6 |
1.0 |
-3.2 |
0.0 |
|
2.3 |
1.8 |
4.5 |
0.2 |
1.0 |
Cyprus |
4.1 |
4.4 |
3.6 |
-0.5 |
0.8 |
|
2.2 |
2.2 |
4.4 |
0.4 |
1.2 |
Finland |
4.9 |
4.2 |
1.0 |
-6.4 |
0.9 |
|
1.3 |
1.6 |
3.9 |
1.0 |
1.1 |
France |
2.4 |
2.3 |
0.3 |
-2.4 |
0.9 |
|
1.9 |
1.6 |
3.2 |
0.3 |
1.1 |
Germany |
3.2 |
2.5 |
1.2 |
-5.3 |
0.3 |
|
1.8 |
2.3 |
2.8 |
0.1 |
0.2 |
Greece |
4.5 |
4.0 |
2.9 |
-0.8 |
-0.1 |
|
3.3 |
3.0 |
4.2 |
1.1 |
1.7 |
Ireland |
5.4 |
6.0 |
-3.0 |
-7.5 |
-2.5 |
|
2.7 |
2.9 |
3.1 |
-1.6 |
-0.3 |
Italy |
2.0 |
1.6 |
-1.0 |
-5.1 |
0.2 |
|
2.2 |
2.0 |
3.5 |
0.7 |
0.9 |
Luxembourg |
6.4 |
5.2 |
0.7 |
-4.8 |
-0.2 |
|
2.7 |
2.3 |
3.4 |
0.2 |
1.8 |
Malta |
3.8 |
3.7 |
2.1 |
-2.1 |
0.5 |
|
2.6 |
0.7 |
4.7 |
2.1 |
1.9 |
Netherlands |
3.4 |
3.6 |
2.0 |
-4.2 |
0.7 |
|
1.7 |
1.6 |
2.2 |
0.9 |
1.0 |
Portugal |
1.4 |
1.9 |
0.0 |
-3.0 |
0.4 |
|
3.0 |
2.4 |
2.7 |
-0.6 |
1.0 |
Slovak
Republic |
8.5 |
10.4 |
6.4 |
-4.7 |
3.7 |
|
4.5 |
2.7 |
4.6 |
1.5 |
2.3 |
Slovenia |
5.9 |
6.8 |
3.5 |
-4.7 |
0.6 |
|
2.5 |
3.6 |
5.7 |
0.5 |
1.5 |
Spain |
4.0 |
3.6 |
0.9 |
-3.8 |
-0.7 |
|
3.6 |
2.8 |
4.1 |
-0.3 |
0.9 |
Other EU
advanced economies |
|
|
|
|
|
|
|
|
|
|
|
Denmark |
3.3 |
1.6 |
-1.2 |
-2.4 |
0.9 |
|
1.9 |
1.7 |
3.4 |
1.7 |
2.0 |
Sweden |
4.2 |
2.6 |
-0.2 |
-4.8 |
1.2 |
|
1.5 |
1.7 |
3.3 |
2.2 |
2.4 |
United
Kingdom |
2.9 |
2.6 |
0.7 |
-4.4 |
0.9 |
|
2.3 |
2.3 |
3.6 |
1.9 |
1.5 |
New EU
countries 1/ |
6.6 |
6.0 |
4.0 |
-4.3 |
0.7 |
|
3.2 |
4.3 |
6.5 |
3.4 |
2.2 |
Bulgaria |
6.3 |
6.2 |
6.0 |
-6.5 |
-2.5 |
|
7.4 |
7.6 |
12.0 |
2.7 |
1.6 |
Czech
Republic |
6.8 |
6.1 |
2.7 |
-4.3 |
1.3 |
|
2.5 |
2.9 |
6.3 |
1.0 |
1.1 |
Estonia |
10.0 |
7.2 |
-3.6 |
-14.0 |
-2.6 |
|
4.4 |
6.6 |
10.4 |
0.0 |
-0.2 |
Hungary |
3.9 |
1.2 |
0.6 |
-6.7 |
-0.9 |
|
3.9 |
7.9 |
6.1 |
4.5 |
4.1 |
Latvia |
12.2 |
10.0 |
-4.6 |
-18.0 |
-4.0 |
|
6.6 |
10.1 |
15.3 |
3.1 |
-3.5 |
Lithuania |
7.8 |
8.9 |
3.0 |
-18.5 |
-4.0 |
|
3.8 |
5.8 |
11.1 |
3.5 |
-2.9 |
Poland |
6.2 |
6.8 |
4.9 |
1.0 |
2.2 |
|
1.0 |
2.5 |
4.2 |
3.4 |
2.6 |
Romania |
7.9 |
6.2 |
7.1 |
-8.5 |
0.5 |
|
6.6 |
4.8 |
7.8 |
5.5 |
3.6 |
Non-EU
advanced economies |
|
|
|
|
|
|
|
|
|
|
|
Iceland |
4.3 |
5.6 |
1.3 |
-8.5 |
-2.0 |
|
6.8 |
5.0 |
12.4 |
11.7 |
4.4 |
Israel |
5.3 |
5.2 |
4.0 |
-0.1 |
2.4 |
|
2.1 |
0.5 |
4.6 |
3.6 |
2.0 |
Norway |
2.3 |
3.1 |
2.1 |
-1.9 |
1.3 |
|
2.3 |
0.7 |
3.8 |
2.3 |
1.8 |
Switzerland |
3.6 |
3.6 |
1.8 |
-2.0 |
0.5 |
|
1.0 |
0.7 |
2.4 |
-0.4 |
0.5 |
Other
emerging economies |
|
|
|
|
|
|
|
|
|
|
|
Albania |
5.5 |
6.3 |
6.8 |
0.7 |
2.2 |
|
2.4 |
2.9 |
3.4 |
1.7 |
2.0 |
Belarus |
10.0 |
8.6 |
10.0 |
-1.2 |
1.8 |
|
7.0 |
8.4 |
14.8 |
13.0 |
8.3 |
Bosnia
and Herzegovina |
6.9 |
6.8 |
5.5 |
-3.0 |
0.5 |
|
6.1 |
1.5 |
7.4 |
0.9 |
1.6 |
Croatia |
4.7 |
5.5 |
2.4 |
-5.2 |
0.4 |
|
3.2 |
2.9 |
6.1 |
2.8 |
2.8 |
Macedonia, FYR |
4.0 |
5.9 |
4.9 |
-2.5 |
2.0 |
|
3.2 |
2.3 |
8.3 |
-0.5 |
2.0 |
Moldova |
4.8 |
3.0 |
7.2 |
-9.0 |
0.0 |
|
12.7 |
12.4 |
12.7 |
1.4 |
7.7 |
Montenegro |
8.6 |
10.7 |
7.5 |
-4.0 |
-2.0 |
|
2.1 |
3.5 |
9.0 |
3.4 |
2.1 |
Russia |
7.7 |
8.1 |
5.6 |
-7.5 |
1.5 |
|
9.7 |
9.0 |
14.1 |
12.3 |
9.9 |
Serbia |
5.2 |
6.9 |
5.4 |
-4.0 |
1.5 |
|
12.7 |
6.5 |
11.7 |
9.9 |
7.3 |
Turkey |
6.9 |
4.7 |
0.9 |
-6.5 |
3.7 |
|
9.6 |
8.8 |
10.4 |
6.2 |
6.8 |
Ukraine |
7.3 |
7.9 |
2.1 |
-14.0 |
2.7 |
|
9.1 |
12.8 |
25.2 |
16.3 |
10.3 |
|
Source: IMF, World Economic Outlook.
1/ Average weighted by PPP GDP.
2/ Montenegro is excluded from the
aggregate calculations. |
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