SEE economy loses momentum in Q1 after accelerating notably in Q4 2015
April 13, 2016
According to a more complete set of data, in Q4 2015, the economy of South-Eastern Europe (SEE) accelerated notably over the previous quarter. GDP grew 3.9% on an annual basis, which marked the fastest expansion since Q1 2011. For the full year 2015, the economy of SEE expanded 3.0%, which was up from 2014’s 2.2% increase and marked the best result in four years. Looking at the individual countries in the region, in the fourth quarter, Turkey’s economy—the largest in SEE—accelerated and expanded a healthy 5.7% despite rising geopolitical tensions. Q4’s acceleration reflected resilient domestic demand and an improvement in the the external sector’s contribution to growth due to a combination of a weak currency and low oil prices. While Q4’s GDP figures are encouraging for Turkey, the economy likely decelerated in the first quarter as a result of the economic sanctions imposed by Russia at the beginning of the year. Elsewhere in the region, the economies of Bulgaria and Romania accelerated in the final quarter of last year, while Greece’s GDP contracted for the second consecutive quarter.
In light of the refugee crisis and following the closure of the “Western Balkan route” last month, the European Union managed to strike a deal with Turkey which is aimed at stemming the flow of refugees. According to the deal, Turkey agrees to take back the deported migrants from Greece and in return it will receive EUR 6.0 billion in financial aid from the Union. Moreover, Turkish nationals will be able to freely enter the EU by the end of June 2016. The deal will decrease the influx of migrants to Greece and alleviate some matters for the government, which is already struggling to settle its own domestic issues. The Greek government and the international creditors are due to resume talks soon and both parts hope to reach an agreement on a new list of austerity measures, which could unlock more aid to the country.
Economic dynamics in the SEE region will mainly depend on the pace of recovery of the Eurozone and further policy action by the European Central Bank. A further complication in the refugee crisis and renewed political unrest in Greece could destabilize the region. Moreover, Turkey’s deceleration will likely weigh on the region’s economic performance in the first quarter. Our panel of analysts expects the SEE region to decelerate in the first quarter and expand 2.4%.
Economy set to record robust growth again this year
This month, the outlook for South-Eastern Europe’s economy improved - analysts we polled expect the region to expand 2.7% in 2016, which is up 0.1 percentage points from last month’s forecast. Panel participants increased their projections for 3 of the 12 countries in the survey, including Greece and Romania. Conversely, the outlook was left unchanged for the other nine SEE countries including, Bulgaria, Serbia and Turkey. For 2017, our panel of economists foresees the economy expanding 3.1%.
The economies of Montenegro and Romania are expected to grow the fastest this year. On the other hand, Greece, Croatia and Cyprus, in that order, are expected to be the worst performers. Among the other major economies in the region, Turkey will likely grow the fastest, with a projected expansion of 3.3%.
BULGARIA | Economy expands in 2015 on robust domestic demand and strong exports
Bulgaria’s economy accelerated and expanded at the fastest pace in nearly five years in Q4. The result came on the back of a significant improvement in both total consumption and fixed investment. Labor market conditions were favorable in 2015 as unemployment fell to a six-year low, which boosted private consumption. Moreover, the Bulgarian government increased public spending thanks to EU funds. The government ramped up consumption as 2015 was the last year of the program. Looking at the external sector, Bulgaria’s exports rebounded substantially in 2015 and thus contributed positively to overall economic growth. Solid economic activity carried over into the beginning of 2016. In February, industrial production continued to show healthy growth and retail sales accelerated at the fastest pace in a year.
With the EU funding program having ended in 2015, Bulgaria’s economy is not likely to benefit from extra public spending this year. FocusEconomics Consensus Forecast participants expect GDP to expand 2.5% in 2016, which is unchanged from last month’s forecast. In 2017, panelists see the economy growing 2.8%.
CROATIA | Government presents 2016 budget aimed at narrowing fiscal deficit
Croatia’s economy grew 1.9% in Q4 2015, which compared to the same quarter of 2014 and more recent data point to a continuation of the positive momentum. In February, unemployment decreased slightly and industrial production recorded another robust growth rate. Parliament approved the government’s draft of the 2016 budget on 21 March. The budget includes minor cuts in expenditures and sets the budget deficit for 2016 to shrink mainly due to the optimistic 2.0% GDP growth forecast for this year. On 11 March, Moody’s downgraded Croatia’s credit rating from Ba1 to Ba2, maintaining a negative outlook. The rating agency expects the narrow majority government to face substantial difficulties in implementing its reform plan, which will translate into slower growth and increasing public debt.
Decreasing unemployment coupled with the fall in consumer prices will strengthen domestic demand, while the timid and insufficient measures that are inserted in the budget cast some doubts about the government’s ability to implement liberalizing, pro-growth reforms. FocusEconomics panelists expect GDP to grow 1.6% in 2016, which is up 0.1 percentage points from last month’s forecast. The panel expects economic activity to expand 1.8% in 2017.
ROMANIA | Economy accelerates in 2015 on consumption boom
More detailed data released by the Romanian Statistical Institute showed that the economy grew 3.8% annually in Q4 2015. The reading came above the previous quarter’s expansion and brought full-year growth to 3.8%, the highest reading since the start of the financial crisis in 2009. The expansion was supported primarily by solid private consumption and fixed investment. High-frequency data suggest that the economy remains on solid footing. Retail sales tallied double-digit growth for the seventh consecutive month in February. However, the fiscal easing policies, wage hikes and VAT cuts that have spurred a consumption boom are also weakening the government’s balance sheet. This was reflected in the Central Bank’s decision to leave the policy rate unchanged in March to secure sufficient room to apply monetary tools if needed amid growing macroeconomic 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 fourth consecutive month, our panelists revised up Romania’s growth forecast for 2016 and they now see GDP expanding 4.0%. For next year, they expect slower but still solid growth of 3.6%.
TURKEY | Migration deal with the EU brings the country closer to the Union
Turkey continued growing at a solid pace at the end of 2015 on the back of strong private and public consumption. Low oil prices and a weaker lira also drove an improvement in the external sector in Q4. GDP expanded an astonishing 5.7% annually in Q4, which marked the fastest acceleration since 2011. Q4’s strong growth momentum, however, is not likely to have carried into Q1 as global market volatility at the outset of the year, rising violence in Kurdish-dominated areas and a new wave of terrorist attacks have hampered economic growth. On the upside, the agreement between Turkey and the European Union regarding the refugee crisis is expected to accelerate both Turkey’s nearly-stalled accession process and the upgrade of the existing Customs Union. Moreover, the country will receive EUR 6.0 billion in financial aid and Turkish nationals will be able to freely enter into the EU by the end of June 2016.
Low oil prices, a recovery in the Eurozone and the Fed’s intention to temporary halt monetary policy normalization all are supporting Turkey’s economic outlook. However, mounting geopolitical risks and rising security threats promise to weigh on this year’s economic prospects. Analysts participating in this month’s Consensus Forecast project the economy to grow 3.3% this year, which is unchanged from last month's projection. Next year, the panel sees GDP growth accelerating to 3.5%.
INFLATION | SEE inflation eases in February on lower inflation in Turkey
Inflation in South-Eastern Europe eased to 4.3% in February from 4.9% in January—the highest reading in over a year. The decrease came mainly on the back of lower inflation in Turkey, which was primarily due to decreasing food prices and low oil prices. Elsewhere in the region, 6 of the 12 countries in SEE posted negative annual variations in consumer prices.
This month, our panel of analysts revised down the 2016 inflation projection for South-Eastern Europe from last month’s 4.8% to 4.7%. This reflects cuts to seven countries’ inflation forecasts including Bulgaria and Romania. Conversely, forecasts for the other five countries including Greece and Turkey were left unchanged. The FocusEconomics Consensus Forecast panel foresees inflation of 5.0% in 2017.
Written by: Dirina Mançellari, Senior Economist
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