20160411-NATIXIS-Potential_growth_in_the_Central_and_Eastern_Europe__no_miracle_in_sight_17页_1mb

Summary of the Document: Potential Growth in Central and Eastern Europe

Core Content

This document analyzes the potential growth and current cyclical position of the economies in Central and Eastern Europe (CEE), including the Czech Republic, Hungary, Poland, Russia, and Turkey, using a combination of statistical methods and economic indicators.

Main Findings

1. Potential Growth Trends

• Potential growth in all CEE countries has been on a downward trend due to:

  • Unfavorable demographic trends (except for Turkey).
  • Slowing productivity gains since the 2008 financial crisis.

• Estimated potential growth rates (based on Hodrick-Prescott filter and simplified production function approach):

  • Turkey: 3.5%
  • Poland: 2.9%
  • Hungary and Czech Republic: ~1%
  • Russia: Below 1%

• Russia shows more optimistic potential growth (2.7%) when using a simplified production function, assuming consistent productivity and labor trends.

2. Cyclical Position

• Czech Republic, Hungary, and Poland are in the expansion phase of the business cycle with a positive output gap and growth above potential.

• Russia and Turkey are on the descending slope of the business cycle, with negative output gaps and growth below potential.

• Unemployment rates align with these cyclical positions, supporting the analysis.

3. Demographic Challenges

• Working-age population is shrinking in all CEE countries except Turkey, which has a strong upward trend in labor force growth (2.7% YoY since 2005).

• Natural population growth is close to zero or negative in most countries, with Turkey being the exception due to high fertility rates.

• Low birth rates and rising life expectancy are contributing to aging populations, increasing dependency ratios and budgetary pressures.

4. Productivity and Investment Dynamics

• Productivity gains have decelerated since 2008, particularly in the Czech Republic, Hungary, and Poland.

• Gross fixed capital formation (investment) has not recovered to pre-crisis levels in most CEE countries, especially in Poland, Hungary, and Russia.

• Net migration is insufficient to offset demographic decline, and in Poland, it even exacerbates the issue.

• Tighter financing conditions and reduced foreign capital inflows are contributing to slower productivity growth.

5. Business Cycle Synchronicity

• The Czech Republic, Hungary, and Poland exhibit highly synchronized business cycles.

• Russia and Turkey show more divergent dynamics.

• Kendall's tau correlation confirms the synchronicity of cycles among Central European countries.

6. Average Cycle Length

• The average business cycle length is estimated at 4-4.5 years.

7. Diversification Opportunities

• Central European countries have more synchronized cycles, suggesting limited diversification in economic activity.

• Turkey and Russia show more divergent economic dynamics, potentially offering hedging opportunities.

Key Information

• Demographic factors and productivity trends are the main drivers of long-term growth potential in the region.
• Russia and Turkey are currently below potential growth, while Czech Republic, Hungary, and Poland are above potential.
• Investment in capital and human resources is crucial for raising productivity in aging societies.
• Aging populations will increase the burden on economies and public finances, necessitating policy interventions.
• Cyclical indicators such as industrial production, retail sales, and capital utilization confirm the business cycle positioning of the economies.

Conclusion

The long-term growth potential of the CEE region is declining, driven by aging populations and slower productivity gains. While Central European economies (Czech Republic, Hungary, Poland) are currently in the expansion phase, Russia and Turkey are experiencing negative output gaps. The synchronicity of cycles among Central European economies highlights the interconnectedness of their economic dynamics, while divergent trends in Russia and Turkey suggest greater resilience to external shocks. However, low birth rates, high dependency ratios, and limited investment remain significant challenges for future growth.