South Eastern Europe Economic Forecast

Economic Snapshot for South-Eastern Europe

July 20, 2017

SEE economy off to a strong start in 2017 

A more comprehensive set of data shows that the economy of South-Eastern Europe (SEE) grew at a much faster pace than originally estimated in the first quarter of the year. The region’s economy expanded 4.1% in annual terms in Q1, a notable improvement from the previous quarter’s 3.0% increase and a much stronger figure than last month’s estimated 2.8% rise. The upward revision largely owed to front-loaded growth in the Turkish economy, which was brought about by the government’s counter-cyclical measures and a robust performance in the external sector. Nonetheless, the country’s fiscal and liquidity metrics have quickly deteriorated as a result of the government’s spending spree, which has analysts questioning the sustainability of the current debt-fueled growth model.

On top of Turkey’s surprisingly-strong start to the year, revised Q1 data for Greece showed an economy on a firmer footing than had been expected. The revision was fueled by a pickup in household spending and a remarkable upswing in fixed investment growth. In addition, the country’s creditors finally greenlighted the next tranche of financing in June following months of wrangling between the IMF and Eurozone lenders. While this greatly reduced the risk of a default in July, the country is far from being out of the woods in its never-ending debt saga.

Meanwhile, political developments throughout the region continued to dominate headlines in recent weeks. In major-player Romania, Prime Minister Sorin Grindeanu was dismissed by his own party in a no-confidence vote on 21 June for delays in implementing the reform agenda adopted after last year’s general election. However, the new cabinet, endorsed by Romania’s Parliament on 29 June, has already come under fire after it unveiled a governing program that has at its core a conspicuous revision to the fiscal and budgetary policy. Similarly bleak were the latest developments in Kosovo, where the snap elections held on 11 June yielded a hung parliament. In Albania, Edi Rama and his ruling Socialist Party obtained a sweeping victory in the parliamentary elections held on 25 June. The resulting strong mandate will allow Rama to expedite the anti-corruption reforms necessary for the country’s eventual accession to the EU. 

Projections upgraded for third straight month

This month, the outlook for South-Eastern Europe’s economy was upgraded from last month’s 2.8% to 3.3%, well above the 2.8% expansion recorded in the region last year. This marked the third consecutive upward revision and was largely driven by Turkey’s unexpectedly-strong first-quarter GDP reading and panelists’ better assessment of the Romanian economy. FocusEconomics panelists also revised their projections for next year, when they now expect the economy to grow 3.1%.

The short-term effects of the Turkish government’s fiscal stimuli and the external sector’s outstanding performance through May prompted a hefty upward revision to the country’s economic forecasts. Elsewhere in South-Eastern Europe, Bulgaria, Cyprus and Romania saw upgrades to their 2017 economic forecasts. Conversely, the Croatian, Greek, Macedonian and Serbian economies were downgraded this month, while the forecasts for the remaining four economies in the region were left unchanged.  

Kosovo and Romania are expected to be the fastest-growing economies in 2017 with expansions of 3.8% and 4.6%, respectively. On the other end of the spectrum, major-player Greece is expected to be the worst performer, growing 0.9%. Turkey’s economy, the largest in the region, will expand 3.6% in 2017.

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BULGARIA | Economy on a strong footing in Q1

More detailed national accounts data revealed that the economy grew at a slightly higher rate in Q1 than first reported in May’s flash estimate.  According to the Statistical Institute, GDP grew 3.5% in Q1, a notch above Q4’s already robust outturn. GDP growth was driven by a strong increase in total consumption, with both private and public consumption contributing to the acceleration. The solid performance of the domestic economy is further reflected in strong growth in imports. Credit rating agencies have taken notice of Bulgaria’s stable economic performance: both Fitch Ratings and S&P Global Ratings upgraded their outlook on Bulgaria’s sovereign credit rating to positive, a vote of confidence for the government’s fiscal and economic policies.
 
Higher inflows of EU funds and strong private consumption growth will largely keep the economy on its stellar growth path. A slower-than-expected absorption of EU funds poses the main downside risk to Bulgaria’s economy. FocusEconomics Consensus Forecast panelists expect GDP to expand 3.3% in 2017, which is up 0.1 percentage points from last month’s forecast, and 3.2% in 2018. 

 

CROATIA | Economy to shrug off short-term weakness and accelerate in Q2

The economy seems to have started to feel the consequences of food and retail group Agrokor’s restructuring process in Q2. Consumers have grown more pessimistic on the back of poorer expectations about the country’s economic and financial situation, which was reflected in a slowdown in retail sales growth in April. In the same month, industrial production fell again, likely suffering from disruptions to flows of supplies to the agro-food giant. However, the economy remains on track for further growth despite some short-term weakness. The unemployment rate continued to fall in May and reached its lowest level in well over a decade while the labor market is benefiting from another strong tourist season and continued emigration of workers. In the political arena, the government crisis which began in April finally ended in early June after Parliament voted in favor of a reshuffled conservative-led cabinet. The conservative HDZ party will be joined in government by the liberal Croatian People’s Party, which will be in charge of two ministries. 

Growth in 2017 is likely to be similar to last year. Another strong tourist season, lower income taxes and falling unemployment should spur household spending, while an increased absorption of EU funds and reduced corporate taxes will underpin fixed investment. However, Agrokor’s restructuring could hit the profitability of the banking system and restrain access to credit, shaving some decimals off growth. Analysts expect GDP to grow 2.8% in 2017, down 0.1 percentage points from last month, and 2.6% in 2018. 

ROMANIA | Heightened political noise as Prime Minister is sacked by his own party

The Romanian political scene was once again rocked by uncertainty in June. Prime Minister Grindeau was voted out of office by his own party after he refused to step down on the instructions of PSD party leader Liviu Dragnea. He was replaced by Mihai Tudose, who is expected to follow the party line more closely. However, this new political embarrassment, which came just a few short months after the ruling coalition faced mass street protests almost immediately after it took power, could lead to economic instability in the near future. Some analysts fear the ruling coalition could turn more populist, pushing through even steeper tax cuts and higher wage increases. With the economy already growing at a fast pace, such pro-cyclical policies could lead to an abrupt adjustment down the line.

The economy should record another year of robust growth this year, though risks of overheating are increasing. Our panelists predict an expansion of 4.6% in 2017, which is up 0.4 percentage points from last month’s forecast, with growth of 3.6% penciled in for 2018.

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TURKEY | Economy benefits from government-induced credit boom and robust exports growth

The economy far exceeded market expectations at the outset of the year, growing 5.0% in annual terms in Q1. The unexpected expansion, spearheaded by the government’s spending spree as well as robust private consumption and exports growth, proved that the economy is able to withstand a backdrop of domestic uncertainty and regional tensions. Meanwhile, leading data continues to point to decent growth: the unemployment rate fell for a second consecutive month, hitting a six-month low in March as the government’s employment campaign continued to bear fruit, while the capacity utilization rate of Turkish manufacturing rose to a nearly nine-year high in May on account of upbeat momentum in the sector and buoyant factory output. However, Ankara’s growth-inducing policies have significantly weakened the country’s fiscal performance, while the resulting credit boom has led to a sizeable debt buildup in the corporate sector, increasing its exposure to external shocks and risking trouble down the road.  

The government’s fiscal stimulus will continue to shore up growth in the short term, but the costs it entails suggest that ample government spending and counter-cyclical measures will begin to ebb towards the end of the year or in early 2018. Nonetheless, there are plenty of signs that growth is becoming increasingly broad-based across sectors, which should sustain overall economic activity in the absence of unfettered public consumption. FocusEconomics panelists expect GDP to expand 3.6% in 2017, which is up 0.9 percentage points from last month’s estimate, and 3.2% in 2018. 

INFLATION | Inflationary pressures begin to ease in May 
Inflation in the South-Eastern Europe region edged down from April’s near-seven-year high of 7.5% to 7.3% in May, ending a streak of five consecutive months of accelerating inflation. The figure reflected softening pressures in a majority of countries, including heavyweight Turkey, where the pass-through effects of the weakening of the lira continue to ebb. Albania, Bosnia-Herzegovina and Macedonia were the only countries where inflation picked up.  
 
This month, our panelists revised their 2017 inflation outlook from the 5.8% projected last month to 6.0% which, if confirmed, would mark the highest reading since 2011. The forecasts for four countries, including Turkey, were revised upwards, while the only downgrades occurred in the Macedonian and Romanian inflation outlooks. The rest of the countries’ forecasts were kept the same. For 2018, the panel still expects inflation to ease to 5.5%. 

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Written by: David Ampudia, Senior Economist

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