Growth remains robust in Q3 despite deceleration

Growth remains robust in Q3 despite deceleration

February 10, 2016

The economy of South-Eastern Europe (SEE) decelerated slightly in the third quarter according to a more complete set of data. GDP expanded 3.0% over the same quarter of the previous year, which was down from the 3.1% increase tallied in Q2 and marked the second-highest reading in over a year. Q3’s deceleration was mainly the result of an annual contraction in Greece—the first in nearly two years. The country has been suffering the effects of the tough economic reforms required to be compliant with the bailout agreement. Complicating things further, the refugee crisis is adding pressure on the flagging economy. Conversely, Turkey, the other regional heavyweight, surprisingly accelerated in Q3 and GDP grew at the fastest rate in over a year despite the political turmoil following June’s elections. The country benefited from a strong restocking process and an improvement in the contribution from the external sector. The majority of the other economies also tallied accelerations in Q3.

Greece’s political outlook became blurry again earlier this month when the Greek government resumed talks with the International Monetary Fund and European creditors. This has raised fears that more austerity measures will be needed to meet budget targets and unlock bailout funds. Meanwhile, the impact of the economic sanctions that Russia imposed on Turkey after the shooting down of the Russian fighter jet, have yet to materialize. However, Turkish officials claim that the sanctions could cost the country up to USD 9.0 billion per year. The sanctions include an import ban on Turkish agricultural products and charter holidays to Turkey as well as restrictions on the economic activity of Turkish companies in Russia, especially in the construction sector.

Economic dynamics in the region will broadly depend on the pace of recovery of the Eurozone and further policy action by the European Central Bank. Rising geopolitical threats in Turkey and the possibility of renewed political unrest in Greece have the potential to dampen economic sentiment. Adding to that, the threat also exists that further complications in the refugee crisis could destabilise the region. Our panel of analysts projects that growth in the SEE region decelerated in the final quarter of 2015, with GDP expanding 2.5% on an annual basis.

For more recent economic news on the region, check out the South-Eastern Europe regional page

See the Full FocusEconomics South-Eastern Europe Report

2016 outlook improves on upward revisions to Turkey and Greece 

The outlook for South-Eastern Europe’s economic growth improved for the second consecutive time this month. The analysts we polled expect the region to expand 2.6% this year, which is up 0.1 percentage points from last month’s estimate. The panel participants upgraded their projections for six of the 12 countries surveyed, including BulgariaGreeceRomania and regional powerhouse Turkey. In Greece, austerity measures are likely to weigh on consumption this year and push the economy into a pronounced decline, however, better-than-expected economic data continues to lift the country’s forecast. Analysts kept their forecasts unchanged for the other six countries, including AlbaniaBosnia and HerzegovinaMacedonia and Serbia. For 2017, our panel of economists foresees the economy expanding 3.1%.

Montenegro is expected to be the best performer in 2016, followed by Romania. At the other end of the spectrum, Greece and Croatia, in that order, are expected to be the worst performers. Among the other major economies, Turkey will likely grow the fastest, with a projected expansion of 3.1%. 

BULGARIA | Growth prospects remain positive amid a strong labor market and absorption of EU funds

Bulgaria’s economy expanded at the fastest pace in four and a half years in Q3. Overall, the economy is expected to have grown at a solid rate in 2015, thanks to lower oil prices, which had a positive impact on the external sector’s contribution to growth. Public investment and absorption of EU funds also boosted the economy. Although Bulgaria’s sound economic growth has largely restored investors’ trust, its banking sector is principally constituted of subsidiaries of Greek banks and is thus widely assessed as being highly exposed to economic turbulence in Greece.

Despite downside risks linked to Bulgaria’s close economic ties with Greece, improving labor market conditions and the government’s effort to consolidate public finances are expected to support the economy going forward. FocusEconomics Consensus Forecast panelists expect GDP to expand 2.5% in 2016, which is up 0.2 percentage points from last month’s forecast. In 2017, the panel expects the economy to grow 2.7%. 

CROATIA | Political uncertainty subsides after Parliament approves new cabinet 

Croatia’s economy is strengthening after six years of recession. Indeed, GDP grew at its fastest pace since Q2 2008 in Q3. Meanwhile, the country finally exited the four-month political deadlock that followed the general elections which resulted in a hung parliament. Following non-party corporate executive Tihomir Oreskovic’s nomination as new Prime Minister, the Croatian Parliament approved his new center-right cabinet on 22 January. The government is composed of members of the conservative Croatian Democratic Union (HDZ) and the center Bridge of Independent Lists (MOST) party. While Fitch Ratings confirmed the country’s BB credit grade with a negative outlook, the credit ratings agency highlighted doubts about the unity of the coalition and its ability to tackle a challenging situation. However, the new administration has reaffirmed its willingness to “take tough decisions” and implement structural reforms in order to consolidate worrying finances.

While political uncertainty remains as the new government takes office, its declared commitment to cautious fiscal policies in combination with a broad-based recovery in the Euro area have generated hope that economic conditions may improve going forward. FocusEconomics panelists expect GDP to grow 1.4% in 2016, which is up 0.1 percentage points from last month’s forecast. The panel expects economic activity to expand 1.7% in 2017. 

ROMANIA | Economy set to record another year of strong growth in 2016

Romania’s efforts to reverse a tough austerity program spurred economic growth in 2015 and will support a strong expansion this year. Wage increases, several tax cuts, improving sentiment and low inflation boosted private consumption last year. In addition, fixed investment turned into a growth engine, mainly thanks to strong absorption of EU funds. An expansionary budget ahead of the elections scheduled for the end of the year will drive household spending up further in 2016. On the downside, faster growth will likely come at the expense of public finances and the current account. In January, Fitch Ratings affirmed Romania’s BBB credit rating, highlighting that a positive growth outlook, the better fiscal situation, and improved governance supported the rating, while strong fiscal relaxation in the years ahead is a risk.

The short-term outlook is fairly bright on expectations that strong fiscal stimulus will propel household spending and growth this year. Nevertheless, pro-cyclical fiscal policy and deteriorating public finances represent downside risks in the medium term. Our panelists revised Romania’s growth forecast up for a second month in a row, this time by 0.1 percentage points, and now see GDP expanding 3.8% in 2016. Next year, they expect GDP of 3.5%. 

TURKEY | Economy loses steam due to high inflation and rising geopolitical risks

The series of economic sanctions that Russia imposed against Turkey following the shooting down of a Russian fighter jet on 24 November came into force on 1 January. They affect a wide range of areas spanning from agricultural products, charter holidays to Turkey and include banning Turkish companies from signing new construction projects in Russia. While the sanctions’ immediate effect on the economy has yet to be seen, Turkish officials reckon that they could cost the country as much as USD 9.0 billion a year. Moreover, on 29 January, Turkey denounced Russia for violating its airspace, adding to an already-entangled political situation. In the economic field, while the economy showed surprising resilience in 2015, there are signs suggesting that growth has likely lost some steam at the outset of the year due to soaring inflation and rising geopolitical risks.

Turkey’s economic outlook will benefit this year from bold government support as well as low oil prices. That said, rising geopolitical threats both in the region and in southeastern Turkey and political risks stemming from President Erdogan’s intentions to adopt a presidential system have the potential to dampen economic sentiment. Analysts increased their GDP forecast for 2016 by 0.1 percentage points to 3.2%. For 2017, the panel expects the economy to expand 3.5%. 

See the Full FocusEconomics South-Eastern Europe Report

INFLATION | SEE inflation increases in December on less severe deflationary forces and higher inflation in Turkey 

Latest data showed that inflation in South-Eastern Europe increased from 4.2% in November to 4.8% in December, thus ending the year at the highest level in over a year. December’s increase mainly reflects higher inflation in Turkey and highlights the fact that deflationary pressures in the region are slowly fading. Nevertheless, eight of the twelve countries in the region posted negative annual variations in consumer prices. A preliminary estimate for January points to a continuation of the upward trend. The rise in Turkey’s inflation continues to be the main reason behind the overall increase in prices as the country is suffering from high food prices and a weak lira.

Our panel of analysts has increased the 2016 inflation projection for South-Eastern Europe by 0.2 percentage points to 4.7%. This mainly reflects upward revisions to Turkey, which offset downward projections in six other countries, including Croatia, Greece and Serbia. The FocusEconomics Consensus Forecast panel foresees inflation of 4.8% in 2017.

Written by: Dirina Mançellari, Senior Economist


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