Central & Eastern Europe Economic Outlook November 2017

 Growth shows no signs of slowing in Q3

Central & Eastern Europe: Growth shows no signs of slowing in Q3

November 2, 2017

The Central and Eastern European (CEE) economy is expected to have recorded another quarter of buoyant growth in Q3. FocusEconomics analysts expect GDP to have increased 4.2% annually in Q3, matching Q2’s increase, which had marked the third consecutive acceleration in growth. Growth has picked up notably since Q3 2016 thanks to reviving investment driven by higher EU development fund absorption and a spending spree by households in the region.


Although official GDP data is still outstanding, an acceleration in the region’s largest economy, Poland, is projected to have driven the regional uptick in growth in the third quarter. Monthly economic data suggests that growth remains in full swing: Retail sales grew briskly in September, amid rapidly rising wages and a declining unemployment rate, and robust external demand supported export growth and industrial production. Outside of the regional giant, Hungary’s economy is also projected to have gained steam on the back of tailwinds from expansionary fiscal policy, monetary stimulus and rebounding investment. In contrast, momentum is expected to have slowed slightly in the other major players—Czech Republic and Romania—but remained strong overall.   


On the political front, the 20 and 21 October election in the Czech Republic resulted in the most fractured Chamber of Deputies in the country’s recent history, continuing a recent trend of fractured European parliaments. Nine parties will enter parliament, with the Action of Dissatisfied Citizens (ANO) party attaining the most seats as expected: 78 out of 200. Forming a coalition government is appearing to be a challenge for ANO leader Andrej Babis. So far, negotiations have yielded few options for partners. A number of parties are unwilling to work with him as he is facing fraud charges. While negotiations are still ongoing, the country is likely to inherit a shaky coalition or a minority government, which could increase political uncertainty.     


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Momentum to wane in 2018


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Rebounding investment, tight labor markets and solid demand from the Eurozone, the region’s chief trading partner, are seen driving growth to a 11-year high of 4.1% this year. Next year, the FocusEconomics panel sees growth slowing slightly as monetary policy turns less accommodative and export growth slows. GDP is nevertheless projected to expand a healthy 3.4% in 2018, which is unchanged from last month’s forecast. In 2019, growth is seen decelerating further to 3.1%.


This month’s stable 2018 outlook is due to unchanged forecasts for Bulgaria and Slovakia. In contrast, eight of the economies in the region, including regional heavyweight Poland, saw their prospects upgraded. Meanwhile, Estonia was the only economy to have its GDP forecast downgraded.


Romania is projected to be the region’s fastest-growing economy next year, with an expected expansion of 4.0%. Latvia and Poland are also seen achieving fast growth rates of 3.6%. On the other end of the spectrum, Croatia is projected to be the CEE region’s laggard, with an expansion of 2.8%. 


Head on over to our Central & Eastern Europe page for more recent economic news on the region.


POLAND | Robust activity leads the government to cancel IMF credit line


Data for Q3 suggests the economy continued to grow at a brisk pace. Retail sales expanded strongly throughout the quarter in annual terms, showing that household spending, supported by rapidly rising wages and a declining unemployment rate, continues to be the main driver of growth. Moreover, buoyant external demand drove exports up notably in July and August, underpinning industrial production. Imports also grew robustly due to soaring consumer spending, resulting in broadly balanced trade. Because of the favorable economic situation, in mid-October the Finance Minister decided to quit the IMF’s USD 9.2 billion flexible credit line, to which the country has never resorted. In late October Prime Minister Beata Szydlo announced a cabinet reshuffle in the next two weeks, a move interpreted as an attempt to refresh the government’s political momentum at the half-way point of its four-year term.


The economy is set to record another year of robust growth in 2018. Household spending should continue to expand healthily, driven by tight labor market conditions and robust wage increases. Moreover, fixed investment is expected to take off, on the back of rising EU fund inflows and a still dovish monetary policy stance. However, the ongoing clash between the government and the European Commission over judicial reforms poses downside risks to the outlook. FocusEconomics panelists expect GDP to grow 3.6% in 2018, up 0.1 percentage points from last month, and 3.2% in 2019.


CZECH REPUBLIC | Populist ANO party prevails in October vote


The Action of Dissatisfied Citizens (ANO) party, led by populist billionaire businessman Andrej Babis, won the elections in October, as expected. Babis campaigned on an anti-establishment and Eurosceptic platform, and his party called for fiscal discipline and an increase to the minimum wage, state pensions and salaries for public sector workers. Although coalition talks appear cumbersome, the new government will inherit a robust domestic economy. While exports contracted due to a strong currency, growth in industrial production picked up steam for the third consecutive month in August. Retail trade also increased healthily in annual terms, likely aided by the multi-year low unemployment rates in recent months. Moreover, the strong economic fundamentals were mirrored by an improvement in economic sentiment in October. However, on the political front the picture is less rosy in the short-term, as it is far from clear what the makeup of the new government will be. 


The results of the election are not expected to significantly alter the current prudent fiscal approach. Moreover, the economy will likely continue to perform strongly next year and in 2019 on the back of strong private consumption and fixed investment. Household spending is expected to benefit from a tightening labor market and robust real wage increases. Risks are tilted to the downside, however, as the relationship with the EU could be distorted, affecting investment inflows. FocusEconomics Consensus Forecast panelists see GDP growing 3.1% in 2018, up 0.1 percentage points from last month’s projection, and 2.7% in 2019.


ROMANIA | Upcoming 2018 budget to be in the spotlight as concerns around fiscal sustainability mount 


Preliminary figures suggest another robust economic expansion in Q3, driven by robust private consumption amid a tightening labor market. Double-digit retail sales growth in July and August points to strong household consumption. Downside risks are growing, however, as robust growth teeters on the verge of unsustainability. Loose fiscal policies including VAT cuts are putting more money into consumers’ pockets, but are also increasing pressure on prices: Inflation is rising faster than expected. Furthermore, the 2018 budget is expected to include more public wage hikes. On 16 October, Minister of Finance Ionut Misa announced the government’s plans to cut income tax rates. Romania had the highest government deficit among EU members in Q2. Additional expansionary policies could put the deficit at greater risk of crossing the European Commission’s 3.0% of GDP threshold.


Despite the growing fiscal imbalance, which could result in a correction that would trigger a slowdown, economic growth is expected to continue at a brisk pace in 2018. Growth will, however, depend in part on the government’s response to the widening budget deficit. FocusEconomics panelists expect growth of 4.0% for 2018, which is up 0.2 percentage points from last month’s forecast. They see the economy expanding 3.4% in 2019.  


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HUNGARY | Positive economic news continues to flow in


The economy is in good shape thanks to expansionary fiscal policy, substantial monetary stimulus and inflows of EU investment funds. These tailwinds pushed the economy into a higher gear in the first two quarters of this year, and annual GDP growth is currently on track to almost double the growth rate observed in 2016. Recent data suggests that the momentum is holding up well and is likely to accelerate as temporary factors that dented growth in the first two quarters, such as a poor harvest, constrained production capacities in the secondary sector and a sharp drop in inventories, have eased and will continue to do so. In August, industrial production rebounded following the end of the summer holidays, and growth in exports came in at a double-digit rate on strong foreign demand.


Economic growth is set to moderate in 2018 from this year’s multi-year high but should nevertheless remain strong. Expansionary monetary and fiscal policy in the run-up to the general elections next spring will support the economy, but slower inflows of EU funds will weigh on growth. FocusEconomics panelists project the economy will expand 3.4% in 2018, which is up 0.1 percentage points from last month’s forecast. For 2019, they pencil in growth of 2.8%.


MONETARY SECTOR | Inflation rises to highest rate since February 2013


According to an estimate produced by FocusEconomics, inflation in the CEE region rose in September to 2.2%, following the 1.9% print in August. September’s result marked the highest reading in over four years. The majority of the region’s economies saw higher price pressures in September, largely due to more elevated commodities prices and robust economic momentum.


Rising inflation and improved economic activity is causing the majority of central banks in the region to hold their monetary policies unchanged. In October, policymakers in Hungary, Poland and Romania all left their policy rates unchanged. 


FocusEconomics panelists see inflation rising gradually in 2018, after averaging a projected 1.9% in 2017. In 2018, inflation is seen averaging 2.3%, which is unchanged from last month’s forecast. In 2019, inflation is see averaging slightly higher, at 2.5%. 


Angela Bouzanis


Senior Economist 

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