South Eastern Europe Economic Forecast

Economic Snapshot for South-Eastern Europe

January 11, 2017

SEE economy plummets in Q3 due to Turkey’s GDP contraction 

Comprehensive data showed that growth in the South-Eastern Europe (SEE) region plummeted in the third quarter of 2016. GDP expanded only 0.1% over the same quarter of the previous year, which was a much slower expansion compared to the 3.8% increase seen in the second quarter and marked the lowest reading in nearly four years. The strong deceleration was due to a slowdown in 6 of the 12 countries surveyed, including a contraction in Turkey—the biggest economy in SEE. The silver lining of the region in the third quarter was Greece, where the economy swung from a 0.4% contraction in Q2 to a 1.6% increase in Q3.

Taking a closer look at individual countries, Turkey’s economy contracted for the first time in seven years in Q3. GDP dropped 1.8% against the same quarter of the previous year, broadly reflecting the consequences of heightened political unrest and the weakening of the currency on the economy. The lira has been under escalating pressure these past months and the numerous terrorist attacks have harmed tourism—a key source of growth. Decelerations were also recorded in Bulgaria and Romania due to their weak external sectors and decelerations in fixed investment, the latter of which has been negatively affected by a slower absorption of EU funds. In contrast, the economies of Serbia and Greece accelerated in the third quarter. On a regional level, private consumption dynamics remained robust as households benefited from rising real wages and an improving labor market.

In the political arena, Romania held general elections on 11 December and the Social Democratic Party formed a coalition government again. The trade-off between stimulating the economy and maintaining a prudent fiscal stance will be key for the new administration. Elsewhere in the region, the ruling coalition led by the VMRO-DPMNE won last month’s general elections in Macedonia by a slight margin. The outcome is unlikely to put an end to the country’s long-lasting political crisis. The fragmented parliament will likely lead to a fragile coalition government, thus postponing the implementation of much-needed structural reforms.  

2017 growth prospects deteriorate  

In 2017, growth dynamics in SEE will be dominated by the escalating political uncertainty and security concerns in Turkey, the ongoing debt saga in Greece, the continuing refugee crisis in the region and the limited space for monetary policy easing. The uncertainty surrounding Brexit and the result of the elections in key European countries pose a risk to the region’s growth outlook this year.  

This month, FocusEconomics panelists expect the regional economy to expand 2.7% in 2017, which is down 0.1 percentage points from last month’s estimate. The forecast reflects a downward revision to Turkey’s GDP forecast, which more than offset upward revisions to five countries including Greece and Romania. 2017 growth estimates were left unchanged for the other six countries. For next year, the panel expects the economy to expand 2.9%.

Kosovo will be the fastest growing economy in 2017, followed by Romania and Albania. In contrast, the worst performers are expected to be Greece and Cyprus, in that order. 

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BULGARIA | Data suggest a further dip in growth in Q4 2016

Revised data confirmed that Bulgaria’s economic growth decelerated slightly in the third quarter of 2016. A slowdown in industrial production in October hints at a further dip in growth towards the end of the year, although the country is still likely to have been one of the European Union’s better-performing economies in 2016. The deceleration in Q3 came largely as a result of a fall in fixed investment due to a slower absorption of EU funds following the completion of the 2007-2013 funding program. On the political front, the country will probably head to the polls in the spring for the third time in four years following Prime Minister Boyko Borisov’s resignation and the subsequent failure of the ruling GERB party and the Reformist Bloc to agree on a new cabinet. The decision over whether to dissolve parliament will fall to newly elected president Rumen Radev, who takes office on 22 January.

Private consumption and investment are expected to support economic growth in 2017, partly due to the EU’s 2014-2020 funding program. However, added political uncertainty may weigh on growth going forward. FocusEconomics Consensus Forecast panelists expect GDP to expand 3.0% in 2017, which is up 0.1 percentage points from last month’s forecast. Panelists expect GDP to grow 2.9% in 2018.

CROATIA | Resilient domestic demand will support the economy this year 

Croatia's economy picked up some pace in Q3 due to strong private consumption and a remarkable improvement in the external sector, which benefited from a very good tourist season. The positive momentum is likely to have carried over into the final quarter of 2016 as growth in industrial production accelerated markedly in November and both consumer and business confidence indexes performed well. In mid-December, the parliament approved the 2017 budget with a target deficit set at 1.6% of GDP, a marginal improvement on the 1.7% shortfall the government expects for this year. However, in the same month, the government approved a substantial rise of 6.0% in state employees’ salaries, which does not bode well for keeping the fiscal deficit in check. Lastly, on 1 January, the tax reform came into effect with its numerous new measures such as a lower tax burden on labor and business activity. A sharp increase in VAT on restaurants, however, threatens the competitiveness of the tourism industry.

This year, the economy should broadly replicate its solid performance in 2016 on the back of falling unemployment and resilient domestic demand. The difficulty of reining in public finances and a lower-than-expected implementation of the reformist agenda, however, pose the main downside risks to growth. FocusEconomics panelists expect GDP to grow 2.5% in 2017, which is up 0.2 percentage points from last month’s forecast. The panel expects economic activity to expand 2.4% in 2018.

ROMANIA | New government likely to struggle to keep fiscal accounts in check 

Romania’s economy lost some momentum in Q3 2016 according to a revised estimate from the Statistics Institute released on 6 December. The slowdown was felt across the board, with private consumption, investment and government spending growth all dropping compared to Q2’s very strong set of figures. On the political front, Romania’s Social Democrats (PSD) took office again in January as the main party in a left-leaning coalition, following a 12-month hiatus. The new government’s platform is fiscally expansive, consisting of tax reductions and increases in the minimum wage, pensions and welfare spending, meaning it may struggle to stick to its pledge to keep the fiscal deficit below the EU’s 3% limit. The 2017 budget, due to be approved in the coming weeks, will be the first test of the government’s fiscal credentials.

The new government’s planned spending rises and tax reductions should boost domestic demand and help prop up growth in the short term. Panelists predict an expansion of 3.6% in 2017, which is unchanged from last month’s forecast, with growth of 3.3% penciled in for 2018.

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TURKEY | Economy records first contraction in six years in Q3 2016 

The consequences of July’s coup attempt, numerous terrorist attacks, a weak currency and heightened political uncertainty took a toll on the Turkish economy in the third quarter of 2016. Revised data show that GDP contracted for the first time in seven years, disappointing the markets and contrasting the previous quarter’s expansion. Private consumption dropped on an annual basis and the external sector’s net contribution to growth deteriorated in Q3. Even the impressive double-digit expansion in government consumption was not enough to prevent the economy from contracting. The discouraging data put pressure on the lira, which has continued to depreciate since then, hitting a new low on 9 January. The deteriorating economic environment poses a challenge to the troubled government since President Recep Tayyin Erdogan’s plans to change the constitution through a referendum broadly depend on the performance of the economy.

Political turmoil and security concerns will limit growth this year. On the upside, however, decisive government support will benefit the economy. On balance, FocusEconomics panelists expect that the economy will expand 2.7% in 2017, which is down 0.3 percentage points from last month’s estimate. In 2018, the panel expects growth to accelerate to 3.1%.

INFLATION | SEE inflation edges down in November, inflationary pressures increase in December 

Inflation in the South-Eastern Europe region edged down from 4.2% in October to 4.0% in November, a six-month low. The figure reflected lower inflation in Turkey and in four other countries, which offset higher inflation in six countries including Bulgaria and Serbia. The annual variation in consumer prices in November was negative in 6 of the 12 countries surveyed. Preliminary data show that inflation in December accelerated on the back of higher inflation in Turkey.

This month, our panelists upgraded their 2017 inflation forecast from the previous month’s 4.8% to 5.2%. This reflects that upgraded estimates for four countries more than compensated for downgrades for five countries. For 2018, the panel expects inflation to remain broadly stable at 5.1%. 

See the Full FocusEconomics South-Eastern Europe Report

Written by: Dirina Mançellari, Senior Economist

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