Central & Eastern Europe Economic Forecast

Economic Snapshot for Central & Eastern Europe

February 8, 2017

Growth slows to three-year low in 2016

Preliminary data for the countries of Central and Eastern Europe (CEE) show that the region’s economy lost steam last year. GDP expanded 2.9%, down from 2015’s 3.6% and the worst result seen since 2013. A notable contraction in fixed investment, which recorded the largest drop since 2009, and a weak external environment were behind the downturn. Mirroring the region, growth slumped to a three-year low in Poland, the region’s largest economy, as booming household consumption failed to compensate for a plunge in investment. 

Looking at the result for the fourth quarter, economic activity improved slightly in the CEE economy from Q3. GDP growth inched up to 2.7% from the same period of the previous year, after coming in at 2.6% in Q3. In terms of individual countries, preliminary data show that Lithuania’s economy expanded at the quickest pace since Q3 2014. Latvia’s economy also picked up steam, after having seen dwindling growth for one year. While data for the remaining economies is not yet available, growth in the Czech Republic is expected to have improved after Q3’s disappointing result, while dynamics in Hungary are likely to have weakened.

At the start of 2017, growth appears poised for a moderate pick-up and the FocusEconomics panel sees GDP expanding a slightly faster 2.9% in H1 2017. Leading indicators point to stronger momentum in major player Poland and the EU-led investment cycle means that investment should rebound across the region this year. However, the region’s growth trajectory will likely remain moderate without key economic reforms, which may be taken off this year’s agenda due to a lack of political willpower. Many economies have seen little reform momentum in recent months, while in Romania, the government took steps to backslide on anti-corruption legislation on 31 January. While the measure was repealed after massive protests erupted, crowds continued to gather as of 6 February as political tensions remain high in the country.  

Activity to firm in 2017

Despite last year’s slow growth, CEE remains one of the brighter emerging market regions. A large domestic economy, healthy external balances and the discipline of EU membership has kept the region from experiencing the volatile growth that plagues many others. Economic activity is seen picking up moderately in the region this year, helped by a rebound in investment. The FocusEconomics panel sees GDP growth of 3.0% in 2017, which is unchanged from last month’s forecast. For 2018, growth is forecast to remain stable at 3.0%.

A number of revisions were made to the growth outlooks in the region this month, causing the overall forecast to remain stable. 5 of the 11 economies surveyed had their projections raised, including Bulgaria, Croatia and Hungary. However, 4 countries were downgraded, including the region’s largest economy Poland. Meanwhile, the Czech Republic and Slovakia were the only economies whose growth projections were unchanged from last month.

Romania will likely be the region’s fastest-growing economy this year, with an expected expansion of 3.7%. Poland and Slovakia are also seen achieving fast growth rates of 3.0% each. On the other side of the spectrum, Estonia and Slovenia are expected to be the CEE region’s laggards, with expected expansions of 2.3% and 2.5%, respectively. 

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CZECH REPUBLIC | Solid fundamentals should support growth in 2017

The Czech economy is expected to have grown 2.5% in 2016, a significant slowdown from the previous year’s print due to the reduction in EU investment funds. Nevertheless, macro fundamentals remain solid. Official data and leading indicators suggest that after Q3’s weak reading—which was negatively affected by sector-specific holidays in the export-oriented industries—growth picked up pace in the final quarter of last year, and the upward momentum is likely fueling a positive start to 2017. An extremely tight labor market and the low unemployment rate are pushing up wages. This, together with upbeat consumer confidence, which hit a multi-year high in January, is supporting private consumption. Moreover, industry rebounded vigorously in November and manufacturing activity has also gained strength since then on the back of faster output growth and more new orders, according to both business confidence and PMI surveys.

This year, the Czech economy should maintain a broadly steady pace of growth. Private consumption will remain robust and fixed investment is expected to rebound after the cyclical reduction of EU funds in 2016. The main upside risk is posed by stronger-than-expected private consumption, while an economic downturn and political turbulence in the European Union are the main downside risks to the outlook. Panelists see GDP growing 2.6% in both 2017 and 2018.

HUNGARY | Tight labor market supports economic activity

The latest batch of indicators confirm expectations that the economic slowdown in the third quarter was most likely temporary. In November, industrial production expanded for the first time in three months and exports rebounded strongly. The labor market made strong gains throughout the whole year and unemployment closed the fourth quarter at a multi-year low. Leading indicators also paint a bright picture of the economy. The economic sentiment index has improved significantly since November and hit a one-year high in January. January’s increase was underpinned by growing optimism among Hungarian businesses and consumers, with consumer confidence hitting its highest point in almost 11 years.

The outlook is promising as loose monetary conditions, a planned 15-25% minimum wage hike, increased EU funds inflows and a solid labor market will boost economic growth this year and next. Our panelists forecast that the economy will expand 3.0% in 2017, which is up 0.1 percentage points from last month’s forecast. For 2018, it is expected to grow 2.9%. 

POLAND | IMF approves precautionary credit line

Poland’s economy lost momentum throughout 2016 as reduced EU development funds and controversial domestic politics curtailed investment. GDP expanded at the slowest pace since 2013, despite buoyant household spending thanks to government stimulus measures and an improving labor market. Leading indicators for 2017 suggest that growth may be on the upswing, after bottoming out in Q4. The manufacturing PMI picked up and business confidence improved in January. Meanwhile, the IMF cleared an over EUR 8 billion credit line for the country on 13 January. The flexible credit line is precautionary and will provide the government with some breathing room amid an extremely uncertain global environment. U.S. monetary policy normalization, Brexit negotiations and the EU’s heavy election calendar all make Poland susceptible to a number of external shocks in the medium term.

GDP growth should accelerate moderately this year but will remain subdued overall as investment recovers. The FocusEconomics panel sees growth of 3.0%, which is down 0.1 percentage points from last month’s projection. In 2018, the panel sees GDP expanding 3.2%.

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ROMANIA | Protests challenge government policy

Under pressure from the largest demonstrations since the end of the Cold War, on 5 February the government scrapped a controversial decree passed on 31 January that would have decriminalized certain corruption offences. The law was widely seen as weakening anti-corruption standards little over a year after the government was brought down by large scale protests following revelations of widespread corruption and mismanagement. This episode of political unrest is undermining the credibility of the newly elected government led by Prime Minister Sorin Grindeanu, which, notwithstanding Romania’s strong GDP growth, is facing crucial economic challenges such as the need to reduce the budget deficit. Meanwhile, economic indicators continue to point to solid growth in the last quarter of 2016 on the back of low unemployment and resilient industrial activity.

The government’s expansionary fiscal policy should continue to promote strong growth this year. However, risks to the outlook have increased with the latest political scandal, which could once more deprive the country of a fully functioning government and starve it of much-needed EU investment funds. Still, our panelists predict an expansion of 3.7% in 2017, which is up 0.1 percentage points from last month’s forecast, with growth of 3.3% penciled in for 2018. 

INFLATION | Price pressures jump in December

According to an estimate produced by FocusEconomics, inflation rose to the highest level since October 2013 in December. Inflation in the CEE region ticked up from November’s 0.3% to 0.9%. All of the economies other than Romania recorded positive price pressures, as the effect of low oil prices wanes.

Price pressures are expected to increase this year after a 0.3% fall in consumer prices in 2016. The FocusEconomics panel sees inflation of 1.7% this year, which is up 0.2 percentage points from last month’s projection. This month’s 2017 outlook reflected upward revisions to inflation forecasts for nine countries in the region, including the Czech Republic and Poland. In 2018, inflation is expected to rise slightly to 2.1%. 

See the Full FocusEconomics Central and Eastern Europe Report

Written by: Angela Bouzanis, Senior Economist

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