Central & Eastern Europe: Growth rises at the start of 2017
May 10, 2017
Preliminary data for the first quarter of 2017 showed that the economies of Central and Eastern Europe (CEE) gained steam at the start of 2017. GDP expanded 3.3% over the same period of the previous year in Q1, above the 2.8% increase recorded in Q4 2016 and the best result in nearly one year. Lithuania’s economy grew at the fastest pace since Q2 2014, likely on the back of strong domestic demand thanks to wage increases and strong credit growth. In addition, GDP growth in Latvia accelerated.
Although official GDP data is not yet available for the remaining economies, monthly indicators suggest that activity firmed in most of the region’s major players including Hungary and Poland. In addition, growth is expected to have remained robust in Romania, although below Q4’s pace. Overall, fiscal stimulus and easy monetary conditions are supporting spending in the region and improving external demand is also boosting activity. FocusEconomics panelists see GDP increasing 3.1% in Q2.
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In the political arena, the past month has been a whirlwind for Croatia and the Czech Republic. In Croatia, Finance Minister Zdravko Maric narrowly survived a no-confidence vote on 4 May, avoiding holding a second snap election in one year. The government has been at the brink of collapse since MOST quit the governing coalition on 28 April. While a snap vote has been avoided for now, the government’s slim support is a poor sign for political stability going forward.
The Czech Republic has also been embroiled in a political crisis due to a clash between Prime Minister Bohuslav Sobotka from the Social Democratic Party and Finance Minister Andrej Babis from ANO 2011. After announcing that his government would resign, Sobotka abruptly changed course on 5 May and announced that he would seek to only remove Babis. While the political noise has been high, the disturbance is not expected to have any large effects and elections are already scheduled for October.
Prospects brighten this month
The CEE’s economic outlook was upgraded this month and FocusEconomics panelists revised their GDP forecast for 2017 up a notch. Our panelists now see regional GDP expanding 3.2% in 2017, as a solid domestic economy and improving demand from abroad act as tailwinds. In addition, positive data from the beginning of the year supported the upgrade. Next year, the panel sees the economy remaining on a healthy footing and growing 3.1%.
7 of the 11 economies surveyed in this report saw brighter prospects this month, including Poland and all of the Baltic countries. No country saw its outlook downgraded, while four economies, including the Czech Republic and Romania saw no change to their outlooks.
Romania is projected to be the region’s fastest-growing economy this year, with an expected expansion of 3.9%. Bulgaria, Hungary, Poland and Slovakia are also seen achieving fast growth rates of over 3.0%. On the other side of the spectrum, the Czech Republic and Estonia are expected to be the CEE region’s laggards, with expansions of 2.6%.
CZECH REPUBLIC | Fundamentals improve in 2016
The Czech economy likely accelerated in Q1 according to available data, with the manufacturing sector surfing on a wave of strong domestic and external demand and private consumption benefiting from rising wages and a multi-year-low unemployment rate. Momentum looks to have carried over into the second quarter, with encouraging PMI and economic sentiment readings for April. The positive economic panorama is set to continue despite the recent political turmoil. After announcing that he and his entire cabinet would be resigning as a means to oust Finance Minister Andrej Babis, Prime Minister Bohuslav Sobotka of the centre-left Social Democratic Party swiftly backtracked on the decision on 5 May after an intervention by head of state Milos Zeman. Elections were already scheduled for October and early polls suggest that Babis’ centrist ANO 2011 party will win despite some controversy over his wealth and alleged involvement in corruption scandals.
The economy will likely pick up this year, underpinned by solid household spending, stronger external demand and a partial recovery of EU investment funds. Nevertheless, a shortage of labor supply might restrain the economic momentum, while the political uncertainty surrounding the outcome of next elections could discourage investment. Panelists see GDP growing 2.6% in 2017, unchanged from last month’s projection, and also in 2018.
HUNGARY | Economy ends 2016 on soft note
Recent data confirm that the Hungarian economy hit a soft patch in the final quarter of 2016, with growth decelerating. The headline figure disappointed market analysts’ expectations and dragged annual GDP to a four-year low. The deceleration, however, seems to be a mere blip in an otherwise solid sequence of economic activity and healthy economic fundamentals. In 2016, all three major credit rating agencies restored Hungary to investment grade, the labor market strengthened considerably and a sustained decline in public and external debt reduced the country’s exposure to economic shocks. The latest data from this year suggests strong growth momentum in the domestic economy and solid growth in exports, which expanded at the fastest pace in over five years in January.
Hungary’s economic outlook is promising as loose monetary conditions, a planned 15–25% minimum wage hike, tax cuts, increased EU funds inflows and a solid labor market will boost economic growth this year. Our panelists forecast that the economy will expand 3.2% in 2017, which is up 0.1 percentage points from last month’s forecast. For 2018, it is expected to grow 3.1%.
POLAND | Activity ramps up at the start of 2017
Poland’s economy is gathering steam. A revival in investment and construction activity is supporting activity and recent economic indicators are pointing up. Business confidence came in at the highest level in seven years in April and the manufacturing PMI pointed to improving business conditions. Moreover, accommodative fiscal and monetary policies are adding impetus to consumption and retail sales expanded nearly 10% in March. The upturn in data comes after GDP slowed in H2 2016 as plunging investment curtailed economic activity. Looking forward, while improved conditions in the labor market will continue to fuel household spending, growth is expected to wane in H2 as the effects of the Family 500+ child care benefit scheme fade.
Recovering investment and healthy Euro area demand should fuel higher growth this year. The FocusEconomics panel sees GDP expanding 3.4%, which is unchanged from last month’s projection. In 2018, the panel also sees GDP expanding 3.4%.
ROMANIA | Wage growth supports strong momentum
An upward revision to GDP growth showed that the economy ended last year in a stronger position than initially estimated, on the back of surging household spending. Robust wage growth along with accommodative fiscal and monetary measures is supporting booming momentum and the Romanian economy is performing well above the majority of its regional peers. Incoming data for the first quarter suggest that dynamics remained healthy at the start of 2017, although growth likely moderated: industrial production and retail sales posted healthy expansions in February and March, respectively, and the unemployment rate edged down in March. Meanwhile, the government backtracked on a bill to pardon corrupt officials on 4 May following largescale protests. Social unrest has risen in recent months due to backsliding on anti-corruption measures, although it is unlikely to have a significant economic impact in the near-term.
The economy should record another year of robust growth this year, however, risks of overheating are increasing. Our panelists predict an expansion of 3.9% in 2017, which is up 0.1 percentage points from last month’s forecast, with growth of 3.4% penciled in for 2018.
INFLATION | Price pressures ease slightly in March
According to an estimate produced by FocusEconomics, inflation inched down in March after hitting the highest level since July 2013 in February. Inflation in the CEE region fell to 1.8% from February’s 1.9%. Despite the fall, inflation still rests at one of the highest levels seen in years as the effect of low oil prices wane. Rising price pressures and relatively healthy data across the region have caused central banks to enter holding cycles and none have changed interest rates in the past month. Moreover, rising inflation led the Central Bank of the Czech Republic to remove its currency floor on 6 April and allow the koruna to float freely.
Higher commodity prices along with booming consumption will fuel inflation this year. The FocusEconomics panel sees inflation of 1.9% in 2017, which is unchanged from last month’s projection. In 2018, inflation is expected to rise slightly to 2.2%.
Written by: Angela Bouzanis, Senior Economist