CEE economy accelerates in the final quarter of 2015
March 9, 2016
The economies of Central and Eastern Europe (CEE) accelerated in the last quarter of 2015 thanks in large part to strong domestic demand. Preliminary data show that regional GDP growth picked up pace in Q4 and grew 3.6% year-on-year, which was above Q3’s 3.4% expansion. The uptick came on the back of accelerations in almost all of the economies in the region with the expectations of Croatia, Czech Republic, Estonia and Latvia. In addition, growth in Poland—the region’s largest economy—was particularly strong and GDP increased by 3.9% annually in Q4. While detailed data covering the breakdown of components is not available yet for all of the countries in the region, strong private consumption amid tightening labor markets and the low-commodity-price environment likely drove the region’s positive result.
Although the CEE economies managed to weather external headwinds well last year and started 2016 on solid footing, key challenges persist to the region’s outlook. Specifically, political turmoil both domestically and on a broader scale pose a key risk going forward. In Poland, controversial policies enacted by the government have increased uncertainty and brought the country on a collision course with European Union authorities. In addition, divergent views regarding how to handle the migrant crisis in the Eurozone have increased tensions between a number of governments in the region and EU authorities. On a broader scale, the United Kingdom set a date for its referendum on European Union membership for 23 June; a decision to leave the Union would have repercussions for the CEE economies. The UK is a significant contributor to the EU’s budget, and many CEE economies including Poland and Romania receive more funds than they contribute. FocusEconomics Consensus Forecast panelists project a 3.0% expansion for Q1 2016.
CEE’s growth outlook remains positive
The economy of Central and Eastern Europe grew at seven-year high of 3.4% last year on the back of robust domestic demand. The economy is projected to continue expanding at a solid rhythm in 2016 and grow 3.1%, which is in line with last month’s forecast. Solid domestic dynamics along with the ongoing recovery in the Eurozone should support the region’s economy this year. However, risks to the outlook persist. Capital outflows related to a further slowdown in emerging-market economies and a weaker-than-expected recovery in the Eurozone represent downside risks to the forecast. In addition, a number of political risks linger, which are clouding the outlook.
This month’s outlook reflects stable growth prospects for 4 of the 11 economies surveyed. In contrast, forecasts for Croatia, Hungary and Romania were raised over the previous month, while growth prospects for Czech Republic, Estonia, Slovakia and Slovenia were cut.
CZECH REPUBLIC | Economy picks up speed in 2015 amid strong private consumption and fixed investment growth
The Czech economy tallied an outstanding 4.3% expansion in 2015, which marked the fastest pace of growth in eight years. Surging private consumption, exceptional fixed investment on the back of sizable absorption of EU funds and robust exports, which received tailwinds from the weak currency, were behind the pickup, along with several positive one-offs. However, quarterly data point to a loss of momentum in Q4, with annual GDP growth slowing from Q3’s 4.7% to 4.0%. A deceleration in all components of domestic demand, particularly investment, partly offset a recovery in the external sector, causing overall growth to moderate. More recent indicators suggest that the Czech economy remained on a solid footing at the beginning of this year: the manufacturing PMI and economic sentiment remained firmly in positive territory in February, despite having weakened, suggesting sound dynamics in both manufacturing and domestic demand.
GDP will increase at a slower, albeit still solid, pace this year. Private consumption will sustain the economy, but fixed investment growth will decelerate and the effect of several positive one-off factors will fade. Slowing global growth, particularly from China, poses a slight downside risk. Our panelists forecast that GDP will grow 2.5% this year, which is down 0.1 percentage points from last month's projection. Next year, the panel sees GDP growth accelerating to 2.7%.
HUNGARY | Growth accelerates in Q4; political tension with EU authorities is rising
Hungary’s economy picked up in the fourth quarter, although it did lose steam for the full year 2015. A deterioration in fixed investment as EU development funding dried up and weak export growth limited the economy’s performance last year. Meanwhile, data for 2016 is lackluster so far: both business and consumer confidence fell in January. On the political front, the country continues to clash with the European Commission over the migrant crisis. In February, Prime Minister Viktor Orbán called a national referendum on whether to accept the EU decision of mandatory quotas for migrants, thus increasing tensions with EU authorities.
The economy is expected to slow further in 2016 as the depletion of EU development funds drags down investment. However, tax cuts and an improving labor market should support consumption. FocusEconomics Consensus Forecast panelists see GDP expanding 2.4% in 2016, which is up 0.1 percentage points from last month’s forecast. For 2017, the panel sees GDP expanding 2.6%.
POLAND | Economic growth strengthens in 2015; EU authorities investigate government’s controversial actions
Poland’s economy accelerated progressively throughout 2015 and grew at the strongest rate in four year in Q4 2015. Overall, the economy expanded a solid 3.6% in 2015, which marked the largest expansion since 2011. The result came on the back of strong domestic demand that was supported by a healthy labor market. However, latest data paint a mixed picture of the economy at the start of 2016. Indeed, while both manufacturing PMI and business confidence recorded improvements in February, industrial production and retail sales recorded significant decelerations in January. Meanwhile, the European Commission (EC) is expected to present the outcome in mid-March of its formal investigation under the rule of law framework following the legislative changes to key institutions the ruling Law and Justice (PiS) party made. If the EC decides that PiS’ new laws are breaching European Union standards, Poland could lose its voting rights within EU institutions.
While Poland’s economic fundamentals are solid, a series of controversial reforms undertaken by the government, which could cause investor confidence to deteriorate, have recently increased downside risks. 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 | Expansionary fiscal policy fuels growth, but external imbalances are increasing
Romania’s economy gained steam last year as the government’s initiative to reverse austerity policies by raising wages and cutting several taxes triggered a consumption boom. A marked recovery in fixed investment, which largely resulted from strong inflows of EU funds, also spurred growth. Economic activity ticked up in Q4, pushing full-year growth to a seven-year high of 3.7%. On a negative note, the fiscal easing measures increased macroeconomic imbalances, as a sharp rise in imports caused the trade and current account deficits to widen. Similar dynamics are expected to remain in place this year: additional fiscal stimulus will likely spur domestic demand and growth at the expense of worsening public finances and growing external imbalances.
Growth this year will be fueled by strong private consumption on the back of expansionary fiscal policy, which will more than compensate for a slight slowdown in fixed investment and deteriorating exports. However, widening fiscal and current account deficits represent medium-term risks. For a third consecutive month, our panelists revised up Romania’s growth forecast for 2016 and they now see GDP expanding 3.9%. For next year, they expect slower but still solid 3.5% growth.
INFLATION | Consumer prices tally another annual drop in January
Most countries in the region continue to grapple with falling consumer prices at the onset of 2016. An estimate elaborated by FocusEconomics indicates that consumer prices declined 0.4% in January over the same month of the previous year. This marked the eighth consecutive month of falling prices amid a substantial decline in the price of oil. While the absence of inflation is positive for consumers as well as for local currencies, it may increase the real debt burden.
Inflation is expected to return this year following the 0.5% fall in consumer prices tallied 2015. Economists surveyed this month by FocusEconomics expect inflation of 0.6% in 2016, which represents a downward revision from the 0.7% 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. The only exception was Romania, for which the projections was revised up. Going forward, inflation is expected to rise and forecasters predict that it will average 2.0% in 2017.
Written by: Angela Bouzanis, Senior Economist
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