Wide Angle Shot: IMF views euro area an underperformer — CEE traces more the US

According to fresh projections, the IMF is very upbeat about the global economic outlook, less so for the euro area. Here, as well as for very many country forecast points in CEE, our projections coincide with those of the IMF, less so for Russia, Belarus and selected countries in Southeastern Europe.

The International Monetary Fund (IMF) yesterday published its new economic forecasts for 2021 and 2022 as part of the World Economic Outlook (WEO) (for an outline see here). Given the current dynamic economic developments in Asia (especially China), the USA and the prospect of a continued very pro-cyclical policy mix, especially in the large Advanced Economies, it is not surprising that the IMF has significantly raised its forecast for the world economy, Advanced Economies and the USA in particular. The recovery in 2021 and then also in 2022 could thus be much more dynamic than in the aftermath of the Global Financial Crisis, especially in the Advanced Economies.

Real GDP (% yoy)
IMF, RBI/Raiffeisen Research

Euro area does not make up for 2020 slump in 2021 - but the USA does

Unfortunately, the euro area is becoming a global underperformer in spite of the expected significant recovery in 2021. In October 2020, the IMF still expected the euro area to grow by 5.2% in 2021, partly because of the sharp drop in GDP in 2020; now it is only 4.4%. In comparison, the 2021 growth estimates for the USA were raised impressively from 3.1% (October 2020) to 6.4%, and those for China from 8.2% to 8.4% (which corresponds to the highest growth since 2011). In view of economic growth of around 6% in 2021 (following a GDP slump by 3.5% in 2020), it should be possible to clearly exceed the pre-crisis GDP level in the USA already this year, which hardly seems realistic in the euro area after a slump of -6.6% in 2020. For the world economy as a whole, the IMF expects growth of 6.0% this year, slightly more than the latest forecast (5.5%).

Real GDP (% yoy): Various IMF forecast points
IMF, RBI/Raiffeisen Research

A comparison: Raiffeisen Research vs. current IMF forecasts

With regard to the euro area, the IMF has left its forecast in April almost unchanged compared to the start of the year (January). With GDP estimates of 4.4% (2021) and 3.8% (2022), the IMF is very close to our GDP estimates, which have been valid for some time. In our view, the hardly changed GDP estimate for the trade-open and industry-heavy euro area is primarily a reflection of the weak start to the year in terms of domestic economic development and the related weak start to vaccination (excluding the UK). In view of the subdued GDP momentum in the euro area in Q1 and partially in Q2, economic output growth of significantly more than 5% is hardly possible, even when assuming significant recovery effects in H2 2021. For Austria, we expect GDP growth of 5% in 2022 after a rather weak 3.5% in 2021, but also see the IMF close to our forecast path (IMF: 3.5% and 4% in 2021 and 2022, respectively) and more optimistic for 2021 than some local forecasters.

As outlined earlier for the euro area and Austria, much of the economic momentum in 2021 in Europe will depend on the further handling of the restrictions on public plus economic life and thus also on vaccination progress. Depending on the recovery profile assumed here, the annual growth rates for 2021 and 2022 will then be determined. Moreover, it is not yet clear to what extent common European policy measures in Western Europe and especially in Central and South-Eastern Europe (NGEU) will have an effect as early as 2021 or more strongly in 2022. Depending on the (model) assumptions made with regard to the influencing factors outlined, certain fluctuation margins are to be expected in current GDP projections. In this respect, certain deviations between the current IMF forecasts and our Raiffeisen Research forecasts are also discernible (for details, see the table on the following page).

Raiffeisen Research vs IMF forecasts

IMF, RBI/Raiffeisen Research; Real GDP (% yoy)

Overall outlook positive for CEE - forecast divergences mainly in Bulgaria, Croatia, Serbia, Russia and Belarus

Interestingly, our deviations from the IMF projections are generally rather cosmetic when viewed together over 2021 and 2022. In ten out of fifteen countries considered here, the cumulative difference between our estimates and the IMF's is less than 1.5 percentage points, which is not to be interpreted too drastically with GDP growth rates averaging 4 percentage points and this differential is also close to one standard deviation in this set of projections. In 4 CEE countries, the IMF economic outlook over 2021 and 2022 is partly more optimistic, precisely in Bulgaria, Croatia, Serbia and Russia (Bulgaria +1.5 percentage points, Croatia +1.6 pp, Serbia 2.0 pp and Russia +3.9 pp). In the case of Belarus, our economic forecasts are slightly more optimistic (plus 3 percentage points in 2021 and 2022 compared to IMF). For Belarus, the IMF even expects a mild recession in 2021, a scenario that could be avoided given Russia's continued, albeit hesitant, financial assistance and export reorientation towards Russia. Our cautious growth estimate for Russia after 2021 is justifiable in view of accumulated structural weaknesses, but more pronounced recovery effects are also not to be minimized in view of currently very supportive global commodity price trends. For the EU countries in SEE, much of the economic momentum in 2021 and especially in 2022 will depend on how efficiently EU funds can be deployed. In this respect, the somewhat more optimistic IMF forecasts for Bulgaria and Croatia seem quite plausible, even if structural weaknesses should not be underestimated here.

All in all, the current IMF projections for CE/SEE are on average 0.4 percentage points higher than our current estimates for 2021 and 2022 (4.1% vs. 4.5%). In the Eastern Europe region, we identify significant forecast differences in Russia and Belarus, as mentioned above, while we are on a par with the Ukraine projections. Overall, however, we are very close in many assumptions regarding the general economic dynamics in Europe and, in view of the weak start to the year, regard GDP growth rates in the range of 6% or even 9% for countries such as the Czech Republic, Hungary or Romania in 2021 to be rather unachievable (the most optimistic forecasts currently in the forecasting consensus). However, such scenarios cannot be completely ruled out, given the current impressive economic recovery dynamics in vaccine forerunners such as the USA or Israel.

Overall, GDP growth in CE/SEE should exceed the economic expansion inside the euro area in 2021 and especially in 2022. This encouraging outlook, combined with a much smaller GDP decline in CEE than in the euro area in 2020, should mean that pre-crisis GDP levels can be reached more quickly in CE/SEE, mostly probably as early as 2021. In this respect, many CEE countries should be on a par with the US and significantly outperform the euro area in terms of this measurement approach.

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Gunter Deuber is heading the Economics and Financial Analysis division (Raiffeisen Research) at Raiffeisen Bank International (RBI) since 1 January 2021. Since 2011, Gunter Deuber has held leading positions in RBI's Economic and CEE Research and has continuously expanded the cooperation with his research colleagues in RBI’s subsidiary banks in CEE. Since the early 2000s, he has been analysing economies, banking sectors and market topics with a focus on CEE and EU/euro area topics for RBI in Vienna, but also in the international (investment) banking context in Frankfurt. He regularly presents the views of Raiffeisen Research and his research team at meetings with investors and clients. He is a well sought-after speaker at landmark events in the finance and banking industry and a guest lecturer at several universities/teaching institutions. In 2019, he was nominated for the US State Department's IVLP (International Visitor Leadership Program). Gunter has published several edited volumes on Euro/EU crisis issues and published various articles in professional journals and industry magazines. Outside the office, Gunter enjoys travelling with his family and long-distance running.

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Matthias REITH

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Matthias Reith is an economist at the Economics and Financial Analysis division (Raiffeisen Research) of Raiffeisen Bank International (RBI) in Vienna and looks back on more than 10 years of analytical experience at RBI. Then as now, he is the responsible analyst for the Austrian economy, and in 2020 he played a key role in setting up the Austrian regional real estate research. Furthermore, Matthias also has an eye on other euro area countries as well as on the monetary union as a whole, focusing on the business cycle and in particular on fiscal policy. Matthias has several years of experience in lecturing and presenting.