Labour Shortages Driving Economic Growth?


Vasily Astrov, Serkan Çiçek, Rumen Dobrinsky, Vladimir Gligorov, Doris Hanzl-Weiss, Peter Havlik, Mario Holzner, Gabor Hunya, Michael Landesmann, Sebastian Leitner, Isilda Mara, Olga Pindyuk, Leon Podkaminer, Oliver Reiter, Sandor Richter, Robert Stehrer and Hermine Vidovic

wiiw Forecast Report No. Autumn 2016, November 2016
157 pages including 32 Tables, 46 Figures and 3 Boxes

free download

You can also download separate country reports of this report

1ALBANIA: China, the new old strategic partner?Isilda Mara Free Download
2BELARUS: No end to the recession in sightRumen Dobrinsky Free Download
3BOSNIA AND HERZEGOVINA: Economic and political prospects divergeVladimir Gligorov Free Download
4BULGARIA: Upturn in private consumption supports moderate growthRumen Dobrinsky Free Download
5CROATIA: Economy back on a more stable growth pathHermine Vidovic Free Download
6CZECH REPUBLIC: Economic growth driven by external surplusLeon Podkaminer Free Download
7ESTONIA: Investment and exports to gain momentumSebastian Leitner Free Download
8HUNGARY: Investments implode – consumption and net exports come to the rescueSandor Richter Free Download
9KAZAKHSTAN: Nearly avoiding recessionOlga Pindyuk Free Download
10KOSOVO: Investment failure dragging down growthMario Holzner Free Download
11LATVIA: EU funds to rekindle investment aheadSebastian Leitner Free Download
12LITHUANIA: Wage increases push consumptionSebastian Leitner Free Download
13MACEDONIA: Instability slows down investmentsVladimir Gligorov Free Download
14MONTENEGRO: Public investment intentionsVladimir Gligorov Free Download
15POLAND: So far so good?Leon Podkaminer Free Download
16ROMANIA: Sobering to follow upbeatGabor Hunya Free Download
17RUSSIAN FEDERATION: Stagnation becomes the ‘new normal’Peter Havlik Free Download
18SERBIA: Fiscal adjustment with recoveryVladimir Gligorov Free Download
19SLOVAKIA: Solid growthDoris Hanzl-Weiss Free Download
20SLOVENIA: Waiting for new EU investment cycleHermine Vidovic Free Download
21TURKEY: Inevitable economic slowdown in sightSerkan Çiçek Free Download
22UKRAINE: Still addicted to IMF injectionsVasily Astrov Free Download


In most of the countries from Central, East and Southeast Europe (CESEE), the current virtuous circle of rising consumption and incomes is expected to continue at least in the near term, accompanied by solid GDP growth to the tune of some 3% p.a. Ongoing labour-market improvements and rising wages will continue to be the main growth driver throughout the region; they will be complemented by a recovery in fixed investments as new EU funds become available. The economies of Russia, other CIS countries (except Belarus) and the Ukraine are expected to bottom out, as the negative shocks of the past two years have already been largely absorbed. Turkey is heading for a ‘soft landing’. These are the main findings of the newly released medium-term macroeconomic forecast by the Vienna Institute for International Economic Studies (wiiw).

Despite the sluggish external environment, economic growth remains fairly strong in the majority of CESEE countries; the economic dynamics in almost half of those countries have intensified over the current year compared to 2015. Growth in the EU Member States from Central and Eastern Europe (EU-CEE) has declined only modestly over the current year, mostly on account of temporary investment weaknesses. It remains 1.5 pp higher on average than in the euro area. In Turkey, economic dynamics were also very solid up until mid-2016, albeit accompanied by signs of ‘overheating’, while the CIS countries are experiencing a ‘bottoming out’.

The main driver of growth throughout the CESEE region continues to be private consumption, underpinned by sharply rising wages and incomes as well as decreasing unemployment. The tightening of labour markets and the rising labour shortages are partly a consequence of sizeable outward migration over the past years, which has had a cumulative negative effect on labour supply. A number of countries have also introduced higher minimum wages, sometimes as part of a more general fiscal relaxation package. Inflationary pressures in most CESEE countries – with the exception of the CIS countries and Turkey – are almost non-existent, as solid wage growth has been largely offset by marked gains in labour productivity and a profit squeeze.

The expansion of fixed investments, which were an important pillar of GDP growth in 2015, has largely run out of steam this year. In the EU-CEE region, the main reason for this lies in a temporary drop in EU transfers that, in previous years, used to be an important source of investments. EU funds disbursed under the previous 2007-2013 Multiannual Financial Framework (MFF) were absorbed in 2015 at the latest, whereas attracting new funds under the recently adopted 2014-2020 MFF will take time. At the same time, disregarding the ‘EU transfers effect’, the underlying dynamics of investments remain strong.

The export dynamics in many CESEE countries have been better than those of imports, resulting in a positive contribution of net exports to GDP growth. In most EU-CEE countries and Serbia, this is largely a reflection of their ever-strengthening export base and further gains in competitiveness. However, in the CIS countries it is entirely due to the weakness of domestic demand which is still depressed following strong currency depreciations over the past two years.

Credit expansion in the CESEE region remains rather modest: no country, with the possible exception of Slovakia, is currently experiencing a credit boom. Other factors tend to be more important determinants of the demand for loans than interest rates, which in many CESEE countries are rather low. Going forward, this reduces the risk of ‘boom-and-bust’ developments that have characterised the trajectories of a number of CESEE countries in the run-up to and during the global financial crisis.

Domestic demand in many CESEE economies is supported by fiscal policy relaxation, particularly in Romania and Ukraine. One reason for this may have been a decline in government borrowing costs. Furthermore, the general disenchantment with the practical results of ‘expansionary austerity’ pursued in the past has played a role as well. At the same time, in most Western Balkan countries and in the CIS, the fiscal stance tends to be either neutral or restrictive – and in the case of the CIS countries it is essentially pro-cyclical.

The impact of the forthcoming Brexit on CESEE economies should be contained by those countries’ relatively low trade exposure to the UK economy. In the EU-CEE region, some 1.6% of GDP is accounted for by final demand from the UK, and that share is even lower in other CESEE countries. At the same time, from 2019 onwards the EU-CEE region potentially faces the prospects of much lower (by up to 20%) EU transfers once the UK – the second largest net contributor country to the EU budget after Germany – leaves the bloc. The migration flows from the EU-CEE region to the UK could fall by nearly half compared to the past two years even without any changes to the migration regime, as the UK will become less of a magnet for migrants.


Reference to wiiw databases: wiiw Annual Database, wiiw Monthly Database

Keywords: CESEE, economic forecast, Europe, Central and East Europe, Southeast Europe, Western Balkans, new EU Member States, CIS, Russia, Ukraine, Kazakhstan, Turkey, growth divergence, external risks, macroeconomic imbalances, consumption-led growth, unemployment, inflation, competitiveness, public debt, private debt, current account

JEL classification: C33, C50, E20, E29, F34, G01, G18, O52, O57, P24, P27, P33, P52

Countries covered: Albania, Belarus, Bosnia and Herzegovina, Bulgaria, Central and East Europe, CIS, Croatia, Czechia, Estonia, European Union, Hungary, Kazakhstan, Kosovo, Latvia, Lithuania, North Macedonia, Montenegro, New EU Member States, Poland, Romania, Russia, Serbia, Slovakia, Slovenia, Southeast Europe, Turkey, Ukraine

Research Areas: Macroeconomic Analysis and Policy, Labour, Migration and Income Distribution, International Trade, Competitiveness and FDI

ISBN-13: 978-3-85209-052-8