IMF Regional Outlook: Europe continues to enjoy strong growth but recent indicators suggest that momentum is leveling-off
All European economies grew in 2017, and the outlook remains favorable in the short run, says the IMF’s latest regional report. But for growth to last beyond the current upswing, European countries will need to loosen structural constraints on growth, which range from barriers to investment to dwindling competitiveness.
“Europe continues to enjoy strong growth but recent indicators suggest that momentum is leveling-off somewhat. Medium-term economic prospects are less bright, so policymakers should seize the moment to lower their deficits and debt and push forward with reforms to make their economies more productive,” said Poul Thomsen, Director of the IMF’s European Department.
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The report includes a summary on the economic development in the Czech Republic:
- The Czech Republic surged to 4.3 percent in 2017, due to strong private demand and increased absorption of the new round of EU Structural and Investment Funds.
- In the Czech Republic, inflation surpassed the 2 percent target of the central bank starting in early 2017 before declining before at the beginning of this year.
- Wage growth continues to be strong in the newer EU member states (Czech Republic, Baltics, Central Europe, SEE economies)— significantly outpacing inflation as unemployment rates dip below precrisis lows.
- The Czech koruna appreciated about 10 percent, following the lifting of the Koruna-euro floor in early 2017, and on the back of a more recent increase in the policy interest rate and strong growth performance.
- Sovereign bond yields edged up in many euro area economies, in response to better-than-expected growth outcomes and an expectation of earlier monetary policy normalization, and in the Czech Republic and Romania, which began normalizing their monetary policy.
- Central banks in the rest of advanced Europe are signaling a tightening bias. In the Czech Republic, the Czech National Bank has raised rates three times since August 2017, after almost five years of a supportive stance, and is expected to continue gradually normalizing monetary conditions.
- The central bank’s steady approach toward normalization has been appropriate, and future policy decisions should continue to be data driven.
- In the Czech Republic, the central bank should be given binding powers over loan-to-value, debt-to-income, and debt-servicing-to-income ratios, risks related to housing prices should be carefully monitored.
- In the newer EU members, productivity gains are generally translated into similar real wage rises over the long term. In the Czech Republic, Estonia, Latvia, the Slovak Republic, and to a lesser extent Slovenia, the coefficient on labor productivity is close to unity.