CEE economy dodges global headwinds in 2015
January 12, 2016
The economies of Central and Eastern Europe (CEE) showed solid growth in 2015, which resulted from strong domestic demand, particularly private consumption. Multiple factors contributed to strengthening private consumption including, falling unemployment, higher real wages, improved credit growth for consumers as well as lower commodities prices, which supported households’ disposable income. More complete data showed that after a mild slowdown in the second quarter of 2015, the region’s economy gained some momentum in the third. CEE’s GDP expanded 3.4% year-on-year in Q3 2015, which was above the 3.2% increase in Q2. Data across the region showed that almost all economies in CEE picked up pace in Q3. The exceptions were Estonia—where GDP cooled notably in Q3—as well as Hungary and Slovenia. Economic growth in the Czech Republic inched down in Q3 relative to Q2, but was still robust.
The CEE economies weathered well the external headwinds that came from volatility in the global financial markets in 2015. A number of factors drove volatility in the financial markets including concerns about the potential for a new Greek crisis (Grexit) in May 2015, the Chinese slowdown in the second half of 2015 and the fall in global commodities prices throughout the year. In fact, the reemergence of concerns about a Grexit and the consequent correction in 10-year bonds in the Eurozone (particularly German bunds) had little impact on financial markets in Central and Eastern Europe. This is due to high confidence among investors and the European Central Bank’s asset purchase program, known as quantitative easing (QE), the spillover effects of which had a positive effect in equity and bond markets across CEE. Meanwhile, concerns about the Chinese slowdown also had little impact on the region as trade links between CEE economies and China are relatively small. In addition, the impact that China’s rebalancing has on global commodities prices actually had a positive effect on the CEE economies’ terms of trade. That said, these economies are not immune to an increase in global risk aversion, which could result in sustained capital outflows with an important impact on countries that maintain a high share of foreign investment in their local markets, such as Hungary and Poland.
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CEE’s economy expected to continue expanding at solid pace in 2016
Following an expected 3.3% expansion in 2015, the economy of Central and Eastern Europe (CEE) is projected to continue expanding at a solid rhythm in 2016. The region will continue to benefit from the recovery in the Eurozone as well as from still-low commodities prices. However, risks to the outlook persist in the form of stronger-than-expected impact of the normalization of U.S. monetary policy. Also, risks to trade and capital flows stemming from a possible further slowdown in emerging economies as well as the ongoing refugee crisis are the main additions to the risks CEE faces in 2016.
The economic outlook for the region improved this month; forecasters surveyed by FocusEconomics expect that the economy of Central and Eastern Europe will grow a still healthy 3.1% in 2016. This month’s projection was up 0.1 percentage points from last month’s forecast. For 2017, the Consensus view of our panel of analysts is that the region’s economy will also expand 3.1%.
The improving growth outlook for 2016 reflected that growth projections for Bulgaria, Croatia and Romania were raised over the previous month, while forecasts for the remaining economies surveyed were left unchanged. Latvia was the only country for which forecasts were cut.
CZECH REPUBLIC | Extraordinarily strong economic performance in 2015 supported by domestic demand
The Czech economy’s performance was extraordinarily strong in 2015. Full year GDP growth likely peaked at a post-recession high of 4.3%, which is one of the fastest rates of expansion in the European Union. Private consumption and fixed investment growth likely accelerated significantly, benefiting from expansionary monetary policy, subdued oil prices, low inflation and strong absorption of EU funds. A significant fiscal stimulus also added to growth. Other indicators corroborate that the economy ended the year on high note: in November, industrial production grew solidly and both the manufacturing PMI and economic sentiment continued to rise in December.
Following the sizeable acceleration expected for 2015, GDP growth will likely moderate to a more sustainable pace this year as fiscal stimulus and inflows of EU funds are projected to slow. FocusEconomics Consensus Forecast panelists see GDP growing a weaker, albeit still solid, 2.7% this year, which is unchanged from last month’s estimate. For 2017, they also forecast an expansion of 2.7%.
HUNGARY | Economic activity slows in Q3, but further deceleration in Q4 likely to be averted
Hungary’s economy lost more steam in the third quarter, expanding at the softest pace since Q2 2013. Subdued performance in the external sector dragged on growth, while a robust labor market supported strong private consumption. Notably, fixed investment swung to contraction as EU developmental funding began to dry up. Averting a notable economic slowdown this year remains a key challenge for policy makers going forward. More recent data, however, is encouraging: business and consumer sentiment improved in December. In addition, the minimum wage hike that took effect on 1 January should give a boost to household consumption going forward.
Positive developments in the labor market will likely support growth this year, however, it is unclear if the government can prevent a significant moderation in investment growth. FocusEconomics Consensus Forecast panelists see GDP expanding 2.4% in 2016, which is unchanged from last month’s forecast. For 2017, the panel sees GDP expanding 2.5%.
POLAND | Economic growth remains solid in 2015 and is expected to remain robust this year
Poland has recorded robust GDP growth so far in 2015 thanks to solid domestic demand. Industrial production has reflected this, posting a sharp 7.8% increase in November. Meanwhile, Poland’s new conservative government has drawn criticism from international bodies, as legislation that was recently put forward has worked to consolidate power in the hands of the governing Law and Justice (PiS) party. The government has pushed controversial reforms that modify the way the constitutional court, public media, the Central Bank, and the anti-corruption agency function so that the government has more control over such institutions. Eight of the 10 members of the Central Bank’s policy council are set to be replaced this month by parliament, raising concerns over the Bank’s independence.
The momentum in Poland’s steadily-growing economy should continue into 2016. However, persistently-falling consumer prices need to be addressed before consumer expectations regarding inflation begin to decline, which could jeopardize domestic demand. 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 | Fiscal stimulus and absorption of EU funds boost economy in 2015; outlook is bright
Fiscal stimulus and increased absorption of EU funds likely boosted private consumption and fixed investment in 2015 and Romania is on track to have expanded a solid 3.6% last year. Further fiscal easing measures are likely to sustain another year of fast growth and buoyant private consumption in 2016 at the expense of public accounts. On 1 January, several tax cuts came into effect, the most relevant being a reduction in the value-added tax from 24% to 20%. Moreover, in December 2015, the new government adopted an expansionary budget for 2016 which incorporates public sector wage hikes and increased investment, as well as the already-approved tax cuts. While the budget envisages to keep the fiscal deficit just below the EU’s threshold of 3.0% of GDP, several critics pointed out that there is a risk of exceeding this target. Meanwhile, on 30 December, the government agreed to raise the minimum wage by 19% starting in May.
Romania’s growth prospects are fairly robust. Our panelists see GDP expanding 3.7% in 2016, which is up 0.1 percentage points from last month’s estimate. Next year, they expect GDP growth to be broadly stable at 3.5%.
INFLATION | November’s annual drop in consumer prices provides evidence of protracted deflation in CEE
Most countries in the region continued to grapple with downward consumer price pressures in 2015 and a 40% decline in oil prices intensified the pressures. An estimate elaborated by FocusEconomics indicates that consumer prices declined 0.4% over the same month of the previous year in November. This marked yet another month of decline and provided further evidence that the region remained mired in deflation in 2015. In the absence of inflation, local currencies can gain value and improve the development of capital markets. However, the lack of inflation may increase the real debt burden, which is a particular problem in countries with high household debt.
In 2016, economists surveyed this month by FocusEconomics expect that, following the average 0.4% fall in consumer prices in 2015, inflation will increase to 1.0% in 2016, which, nonetheless, represents a downward revision from the 1.1% 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, the Czech Republic, Estonia, Lithuania and Romania. Going forward, inflation is expected to continue rising and forecasters predict that it will average 2.1% in 2017.
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