Growth in the South-Eastern Europe (SEE) region slowed in the second quarter and recent monthly data for key economies suggest another deceleration in the third quarter. The disappointing performance of the economy in Q2 was mainly due to frail growth in Turkey and to Greece’s GDP contraction, while growth in Bulgaria and Romania was robust. Meanwhile, the economic recovery in the Western Balkans region continued and the labor market improved in Q3, with employment levels increasing in most countries—although at an uneven pace. Despite the weak external context, so far this year, the region has benefited from higher lending to the private sector due to lower lending rates and from accelerations in private consumption.
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In the past weeks, political developments have taken center stage. In Turkey, the ruling AKP party announced that it will submit a bill to Parliament asking for constitutional changes and introducing a presidential system, which could hand more power to President Recep Tayyip Erdogan. The news caused the lira to plummet to a new record low on 17 October. In other developments, Greece’s international creditors agreed on the disbursement of EUR 2.8 billion after the successful completion of the first review of the country’s third bailout. This fresh funding is vital as it will go towards servicing the country’s debt. Elsewhere in the region, in Montenegro, Milo Djukanovic stepped down as prime minister following his party’s victory in the 16 October parliamentary elections and is set to be replaced by Dusko Markovic, former deputy prime minister. The political situation became clearer in Croatia after Parliament approved the new coalition government, which will focus on spurring growth through pro-market reforms and tax cuts while reducing public spending and debt.
In the coming quarters, 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 uncertainty regarding Brexit. Our panel of analysts expect the SEE region to have decelerated further in Q3, expanding 2.1%.
Growth prospects unchanged for third consecutive month in November
This month, the outlook for South-Eastern Europe’s economy was left at the previous month’s estimate for the third consecutive time. FocusEconomics panelists expect the SEE economy to expand 2.7% this year. Upward revisions for seven countries, including Greece and Romania, offset downward revisions for three countries, including Turkey. GDP outlook figures for Albania and Montenegro were the only ones left unchanged this month. For next year, our panel of economists foresees the economy expanding 2.8%, which is also unchanged from the previous month’s estimate.
BULGARIA | Political stability will support the economy this year
Bulgaria’s economic momentum seems to have carried over into Q3. In August, industrial production grew a healthy 2.6%, which reflected an acceleration in manufacturing and mining. Likewise, the unemployment rate fell to 7.8% in September—the lowest reading since November 2009—and on 14 October, Moody’s confirmed Bulgaria’s stable credit rating as a result of the country’s “strong fiscal position, resilient economy and broad agenda for reform.” In other news, on 26 October, the Finance Ministry submitted the 2017 budget to Parliament for approval. The draft envisages a budget shortfall of 1.4% GDP and it includes increases to the minimum wage and pension installments. According to the Finance Ministry, the government’s debt-to-GDP ratio is expected to be around 25% for the 2017-2019 period as a result of the country’s ongoing fiscal consolidation plan.
The fact that Bulgaria has achieved sufficient political stability to successfully implement a structural reform program will support growth. That said, subdued growth and uncertainty in the Euro area could weigh on the country’s outlook. FocusEconomics Consensus Forecast participants expect GDP to expand 2.9% in 2016, which is up 0.1 percentage points from last month’s forecast. In 2017, panelists see the economy growing 2.8%.
CROATIA | New government set to spur growth through pro-market reforms
The latest monthly indicators show that economic activity likely lost some steam in Q3, after the healthy expansion recorded in the second quarter. Growth in industrial production decelerated in the first two months of the quarter—though it regained some strength in August—and in September unemployment figures matched the previous month’s data, ending seven consecutive months of decline. In the political arena, on 19 October the Croatian Parliament approved the government led by Prime Minister Andrej Plenković, leader of the conservative Croatian Democratic Union party (HDZ). The government is formed by the HDZ and its junior coalition partner, the Bridge of Independent Lists (MOST), a pro-market reformist party. It received the support of 91 out of 151 parliamentary votes—from HDZ, MOST and other minor parties, including national minorities. The government’s focus will likely be on spurring growth through pro-market reforms and tax cuts, as well as on reducing public spending and debt.
Despite Q3’s mild softening, Croatia’s annual economic growth appears to have gathered pace, as private consumption benefits from falling consumer prices and fixed investment from improved business conditions. FocusEconomics panelists expect GDP to grow 2.3% in 2016, which is up 0.2 percentage points from last month’s forecast. The panel expects economic activity to expand 2.2% in 2017.
ROMANIA | Q2’s positive momentum likely continued in Q3
In the second quarter, the Romanian economy grew by an almost eight-year high of 6.0% on the back of strong consumption, according to data confirmed by the National Statistics Institute in October. Growth in the third quarter looks to have been robust but is unlikely to reach Q2’s lofty figure: in August, retail sales extended their streak of double-digit growth, while industrial production rebounded strongly, growing at its fastest annual pace in a year. In October, Parliament passed a bill to re-denominate Swiss franc loans into Romanian leu. At a cost of EUR 532 million, the bill seeks to provide financial relief to Romanian borrowers who suddenly faced steep repayment increases following the abrupt appreciation of the Swiss franc in January 2015. However, the government is launching a constitutional court challenge to block the bill in its current form after a provision capping the relief available to individual borrowers was removed at the last minute.
The domestic demand-led boom witnessed over the first two quarters of the year is likely to abate going forward, as macroeconomic economic imbalances start to grow and external headwinds continue to linger. Panelists expect the economy to grow 4.8% this year, which is up 0.1 percentage points from last month’s forecast. In 2017, the panel foresees economic growth moderating to 3.5%.
TURKEY | Mounting political turmoil threatens the economy this year
Monthly indicators point to a deceleration of the Turkish economy in Q3, as suggested by the contractions recorded in industrial production and retail sales in July. However, it is unclear whether Q3’s slowdown can be attributed primarily to July’s failed coup or to the underlying weakness in the economy. Although the government has taken positive steps to stabilize the economy since the coup, political turmoil has the potential to threaten business sentiment going forward. The lira hit a new record low on 17 October following the news that the ruling AKP party will submit a bill to Parliament asking for constitutional changes and introducing a presidential system, which could hand more power to President Recep Tayyip Erdogan. In other news, in early October, Turkey and Russia signed a bilateral agreement to build the TurkStream pipeline—a project that will allow Russia to pass gas to Turkey and Europe and to cut gas supplies via Ukraine. The project is fundamentally important since Turkey is one of the biggest buyers of Russian gas.
Political turmoil and security concerns will limit growth this year. On the upside, decisive government support and a more accommodative monetary policy will benefit the economy. On balance, FocusEconomics panelists expect that the economy will expand 3.0% in 2016, which is down 0.1 percentage points from last month's forecast. In 2017, the panel expects growth to inch up to 3.1%.
INFLATION | SEE inflation eases again in September
In September, inflation in the South-Eastern Europe region decreased for the second consecutive month, this time to 3.8%, down from the previous month’s 4.3%. September’s decrease was due to lower inflation rates in most SEE countries, including in Turkey.
This month, our panelists downgraded their 2016 inflation forecast from last month’s 4.3% to 4.2%. This reflects downgraded estimates for six countries, while projections were unchanged for four economies. Only the inflation forecasts for Bulgaria and Greece were upgraded this month. Our panel forecasts that inflation will accelerate to 4.8% in 2017, which is also down 0.1 percentage points from last month’s estimate.
Written by: Dirina Mançellari, Senior Economist