CEE economy withstands global headwinds thanks to strong domestic demand
February 10, 2016
The economies of Central and Eastern Europe (CEE), propelled by robust domestic demand, picked up pace in the fall of 2015. Strong private consumption—supported by tightening labor markets and the low-commodity-price environment—has allowed the region to withstand external headwinds. More complete data show that regional GDP gained steam in Q3 2015 and expanded 3.4% year-on-year, which was above Q2’s 3.2% growth. The pickup came on the back of accelerations in almost all of the economies in the region, with the exception of Estonia, Hungary and Slovenia. For the full year 2015, the CEE economy is expected to have grown at the fastest pace since 2008, thanks to strong domestic demand. Poland, the region’s largest economy, accelerated from 2014’s 3.4% expansion to a 3.6% increase in 2015 according to a preliminary estimate. In addition, Latvia’s economy also picked up speed last year, while Lithuania’s economy decelerated as it was likely restrained by a subdued external sector.
While official GDP data is not yet available for the rest of the countries in the region, recent indicators signal that in the final quarter of 2015 growth moderated slightly, though it did remain strong. The CEE economies are expected to have shown healthy growth as they were supported by accommodative monetary policies and high real wages. Against this backdrop, FocusEconomics Consensus Forecast panelists project a 3.3% expansion for Q4 2015.
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CEE’s economic prospects remain positive at the outset of 2016
The economy of Central and Eastern Europe is expected to have grown at seven-year-high 3.3% last year. Following that multi-year high, the region is projected to continue growing at a solid pace of 3.1% in 2016. The Consensus Forecast among our panel of analysts is in line with last month’s projection. The region’s economy should benefit from the ongoing recovery in the Eurozone, particularly in Germany—the region’s largest trade partner—as well as from sold domestic dynamics. However, risks to the outlook persist. A stronger-than-expected impact of the normalization in U.S. monetary policy, capital outflows related to a further slowdown in emerging market economies as well as heightened political tensions related to the ongoing refugee crisis all represent downside risks to the forecast.
This month’s outlook reflects stable growth prospects for 5 of the 11 economies surveyed. In contrast, forecasts for Bulgaria, Croatia and Romania were raised over the previous month, while Czech Republic, Estonia and Hungary’s growth projections were cut.
CZECH REPUBLIC | Economy starts 2016 on solid footing after GDP likely surged in 2015
The Czech economy’s performance last year was outstanding. The country figured among the fastest-growing economies in the EU as GDP growth likely picked up to a post-recession peak of 4.3%. Growth was fueled by buoyant investment on the back of increased EU funding, strong private consumption boosted by tumbling oil prices and low inflation, as well as rising exports that benefited from a weak koruna. Positive one-offs also contributed to 2015’s sharp acceleration, including surging inventories and the impact of modified taxation on tobacco in Q1. Several of these factors are expected to fade this year and the economy will likely return to a slower, but still solid, pace of growth. Private consumption is expected to remain as a primary growth engine, while investment will decelerate due to lower EU fund absorption. High-frequency indicators confirm the health of the economy at the outset of 2016: businesses and consumers grew more confident in January, driving economic sentiment to a multi-year high, and the PMI painted a positive picture of the manufacturing sector.
The economy is projected to slow this year, mainly due to weaker fixed investment and the fading of several one-off effects that boosted growth last year. However, robust private consumption will support growth this year. Analysts expect the economy to expand at a slower, though solid, pace of 2.6%, which is 0.1 percentage points lower than last month’s estimate. For 2017, they forecast a slight pickup to 2.8% growth.
HUNGARY | Economic growth loses momentum as EU development funds dry up
Hungary’s economy lost steam throughout the first three quarters of last year and expanded at the weakest pace since Q2 2013 in Q3. The downturn was largely driven by a weaker performance in the external sector and a notable deterioration in fixed investment, which swung to contraction as EU development funding began to dry up. More recent economic data is mixed: industrial production moderated in December, yet economic sentiment improved notably in January.
Improvements in the labor market and tax cuts should allow private consumption to remain healthy this year, however, the depletion of EU development funds will drag down investment. Our panelists see GDP expanding 2.3% in 2016, which is down 0.1 percentage points from last month’s forecast. For 2017, the panel sees GDP expanding 2.6%.
POLAND | GDP hits four-year high in 2015, concerns over government’s actions drive credit downgrade
Poland’s economy is estimated to have posted robust growth in the last quarter of 2015. Overall, the economy is expected to have grown at the fastest pace in four years last year, driven mainly by strong domestic demand that was supported by a quickly-improving labor market. However, latest data paint a mixed picture of the economy at the start of 2016. Indeed, while business confidence rebounded into optimistic territory in January, the manufacturing PMI fell to a four-month low. Meanwhile, Standard and Poor’s unexpectedly cut Poland’s credit rating from A- to BBB+ with a negative outlook on 15 January, mentioning significant erosion of institutional checks and balances since the new administration, led by conservative Law and Justice (PiS), took office in November 2015. The decision followed the announcement that the European Commission would carry out a formal investigation under the rule of law framework as legislative changes to the constitutional court, the Central Bank and public broadcasting all resulted in PiS consolidating its control over these key public institutions.
Persistently-falling consumer prices and controversial reforms undertaken by the government have increased downside risks. In particular, a deterioration of confidence in the financial market resulting in increased borrowing costs could put significant pressure on the government’s budget. Our panelists expect the economy to expand 3.5% in 2016, which is unchanged from last month’s forecast. For 2017, the panel sees economic growth at 3.5% as well.
ROMANIA | Economy to benefit from fiscal stimulus ahead of upcoming elections
Romania’s efforts to reverse a tough austerity program spurred economic growth in 2015 and will support a strong expansion this year. Wage increases, several tax cuts, improving sentiment and low inflation boosted private consumption last year. In addition, fixed investment turned into a growth engine, mainly thanks to strong absorption of EU funds. An expansionary budget ahead of the elections scheduled for the end of the year will drive household spending up further in 2016. On the downside, faster growth will likely come at the expense of public finances and the current account. In January, Fitch Ratings affirmed Romania’s BBB credit rating, highlighting that a positive growth outlook, the better fiscal situation and improved governance supported the rating, while strong fiscal relaxation in the years ahead is a risk.
The short-term outlook is fairly bright on expectations that strong fiscal stimulus will propel household spending and growth this year. Nevertheless, pro-cyclical fiscal policy and deteriorating public finances represent downside risks in the medium term. Our panelists revised Romania’s growth forecast up for a second month in a row, this time by 0.1 percentage points, and now see GDP expanding 3.8% in 2016. Next year, they expect GDP of 3.5%.
INFLATION | Negative consumer price environment persist throughout 2015
A substantial decline in oil prices has intensified downward pressures on prices, and almost all of the countries in the region grappled with falling prices in 2015. An estimate elaborated by FocusEconomics indicates that consumer prices declined 0.3% in December over the same month of the previous year. This marked the seventh consecutive month of falling prices. The absence of inflation is likely to support local currencies, however, it may increase the real debt burden, which is a particular problem in countries with high household debt.
Inflationary pressures are expected to return this year following the 0.5% fall in prices in 2015. Economists surveyed this month by FocusEconomics expect inflation of 0.7% in 2016, which represents a downward revision from the 1.0% expected last month. The cut in this month’s projection reflected that the inflation forecasts for almost all of the economies in the region were reduced, except for Bulgaria and Slovenia, for which the projections was held stable. Going forward, inflation is expected to rise and forecasters predict that it will average 2.1% in 2017.
Written by: Angela Bouzanis, Senior Economist
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