Central & Eastern Europe Economic Forecast

Economic Snapshot for Central & Eastern Europe

November 30, 2016

Growth slows sharply to three-year low in Q3

The economies of Central and Eastern Europe (CEE) lost steam in the third quarter, according to preliminary data available across the region. GDP expanded 2.6% over the same period last year, the worst result seen since Q3 2013 (Q2: +3.3% year-on-year). Despite fiscal easing measures in several economies, low price pressures and easy monetary policy, growth was likely hit by shrinking investment and subdued external demand.

Nearly all the countries in the region recorded slower growth rates and Poland—the region’s largest economy—expanded at the slowest pace in three years. Notably decelerations were registered in Czech Republic, Latvia and Hungary. Meanwhile, Romania’s economy, which has been the best performer in CEE so far this year, remained robust although growth came in at a slower clip of 4.4% after surging 6.0% in Q2. Estonia was the sole country to see faster growth in Q3, although the economy remains on a weak footing and GDP expanded by only 1.1%.

Currencies and assets across the region came under pressure at the start of the fourth quarter, after Donald Trump’s surprise election shook the markets. Declines were seen across the region as risk aversion hit emerging market assets. The election of Trump convolutes the region’s outlook. Trump advocated for a protectionist stance and any reduction in U.S. trade is likely to hurt the global economy, however, it remains to be seen what policies he will actually pursue in office and what was just election rhetoric.

Within the region, Romania will vote on 11 December to replace its caretaker government. Polls point to a fragmented parliament and a coalition government is the likely outcome. Keeping the hot Romanian economy on a solid footing will be a key goal for the new administration. Growth has been rapid this year due to a consumption-boom propelled by fiscal easing and loose monetary policy, but there is some concern that the economy could overheat. Reforms to ensure macroeconomic stability are needed and continued fiscal easing could lead to growing imbalances throughout the economy.         

CEE growth seen remaining stable in 2017

The Central and Eastern Europe economy is seen growing steadily at 3.0% this year and next, which is unchanged from last month’s forecast. Next year, a rebound in investment due to greater absorption of EU development funds should fuel steady growth as support from fiscal and monetary easing reduces.

This month’s outlook reflects unchanged growth forecasts for 5 of the 11 economies surveyed, including the Czech Republic and Hungary. The GDP projections were revised up for Bulgaria, Croatia and Romania, while Latvia, Lithuania and regional heavy-weight Poland were downgraded.

Romania will likely be the region’s fastest-growing economy next year, with an expected expansion of 3.6%. Poland and Slovakia are also seen achieving fast growth rates of 3.0% and above. On the other side of the spectrum, Croatia and Slovenia are expected to be the CEE region’s laggards, with expected expansions of 2.3%. 

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CZECH REPUBLIC | Momentum wanes in Q3

The Czech economy lost steam in Q3. Weak GDP figures for the third quarter show that the annual pace of growth decelerated substantially compared to the previous quarter’s result, dragged down mainly by lower investment activity. Healthy external demand and expanding private consumption nonetheless remained supportive of growth. Despite the slowdown, the labor market performed well overall. After a slight upturn in July, the unemployment rate returned to the downward trend that had begun in January, extending it until October. Further signs that the economy could have entered the last quarter on a more solid footing come from the manufacturing Purchasing Managers’ Index, which hit a five-month high in October on the back of higher new orders and output. In both October and November, economic sentiment improved and recorded robust results.

Next year the economy will broadly maintain this year’s pace of expansion, as a rebound in fixed investment will be offset by a weaker external sector. The potentially negative effects of a hard Brexit on demand from the Euro area and a subdued global environment pose the main downside risks to growth. Panelists see GDP growth of 2.5% in 2016. For next year, they see growth ticking up to 2.6%, which is unchanged from last month’s forecast.

HUNGARY | Reduced vulnerabilities fuel credit rating upgrade

The Hungarian economy lost steam and decelerated in Q3. A slowdown in the construction sector and a contraction in industry, owing in part to a temporary fall in production in the car industry, dragged on growth in the third quarter. Despite slower growth, the country’s economic fundamentals remain resilient. Forward-looking indicators recovered notably in November and latest data from the labor market is positive. A declining debt burden, lower vulnerability to external shocks and improved conditions in the domestic economy compelled credit rating agency Moody’s to upgrade Hungary’s rating to Baa3 with a stable outlook in early November. Hungarian bonds are now rated investment grade by all three major credit rating agencies, which highlights the country’s solid fundamentals and stable growth prospects.      

The economy will decelerate in 2016 dragged down by a contraction in fixed investment. In 2017, the economy is expected to accelerate on the back of a rebound in fixed investment, solid private consumption and loose monetary conditions. Our panelists forecast that Hungary’s economy will expand 2.1% this year. For 2017, they see GDP growth picking up to 2.7%, which is unchanged from last month’s forecast.

POLAND | Government lowers retirement age

The Polish economy lost momentum in the third quarter as GDP expanded at the weakest pace in three years. A breakdown by components is not yet available but feeble investment likely hit growth due to lower EU development funds, despite the government’s fiscal easing measures. Leading data for Q4 point to faltering momentum: the manufacturing PMI fell to an over one-year low in October and business confidence sank to the lowest level since January. Despite lagging growth, the parliament overturned a four-year-old increase in the retirement age on 16 November. The lower retirement age will strain the government’s purse by approximately USD 2.4 billion a year starting in 2018 and could hurt labor supply.   

GDP growth is seen picking up slightly next year, after coming in at a three-year low of 2.9% in 2016. Fiscal easing measures and a rebound in investment should fuel growth of 3.2% next year, which is down 0.1 percentage points from last month’s projection.  

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ROMANIA | GDP growth slows in Q3

The Romanian economy had a soft landing in the third quarter following an almost eight-year high pace of growth in Q2. According to a first estimate released by the Statistics Institute on 15 November, GDP grew 4.4% in Q3 over the same quarter last year, down from 6.0% in Q2. The slowdown, which surprised analysts by its extent, is a likely product of slower household consumption growth, as the effects of the wage hikes and VAT cuts introduced earlier this year start to wane. Continued low absorption of EU funds has also been a likely drag on growth this quarter. The slowdown comes as the country is readying itself for the parliamentary election on 11 December, which the polls suggest the Social Democrats will win.

The boom in domestic demand that has fueled growth this year is likely to moderate next year. The effects of fiscal measures taken earlier this year have already started to fade and the pace of fiscal easing is expected to slow under the next government. In addition, higher inflation will dampen household consumption. As a result, panelists expect the economy to grow 4.8% this year and 3.6% in 2017, which is up 0.1 percentage points from last month’s forecast. 

INFLATION | Inflation returns in October

According to an estimate produced by FocusEconomics, inflation was seen in the region for the first time since September 2014 in October. Consumer prices rose 0.1% from the same month of last year, which contrasted September’s 0.2% drop. Just over half of the economies recorded positive price pressures, as inflation gradually returns in the region and the effect of low oil prices wanes.

Price pressures are expected to increase next year after an expected drop in consumer prices this year. The FocusEconomics panel sees consumer prices dropping 0.4% on average in 2016 and inflation of 1.5% in 2017, which is unchanged from last month’s projection. This month’s 2017 outlook reflected stable inflation forecasts for seven countries in the region, including Croatia and Poland. The inflation outlooks for three countries were raised, while Romania’s inflation outlook was revised down. 

See the Full FocusEconomics Central and Eastern Europe Report

Written by: Angela Bouzanis, Senior Economist

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