Growth accelerates in Q4; economy set to grow at fastest rate in four years in 2015
March 9, 2016
The economy of South-Eastern Europe (SEE) accelerated in the fourth quarter of last year according to a preliminary estimate. GDP expanded 3.1% over the same quarter of the previous year, which was up from the previous quarter’s 2.9% increase. In Q4, the Greek economy contracted less than expected and the figure marked the second consecutive decrease in nearly two years amid a high degree of uncertainty regarding the country’s negotiations with the international creditors. Elsewhere in the region, decelerations were recorded in Croatia and Serbia. Conversely, in Romania, GDP growth accelerated in Q4 as it was fueled by strong private consumption, which benefited from a reverse in austerity measures. Moreover, in Q4, Bulgaria’s economy expanded at the fastest pace in nearly five years. For the full year 2015, the economy of SEE likely grew 2.8%, which was up from the 2.1% increase seen in 2014 and marked the best result in four years.
The refugee crisis is the region was exacerbated by the closing of the “Western Balkan route”. This will inevitably result in an increase in the flow of migrants in Greece and Turkey, and thus complicate matters for both countries, which are simultaneously struggling to settle their own domestic issues. Looking forward, 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. A further complication in the refugee crisis could destabilize the region. Moreover, rising geopolitical threats in Turkey and the possibility of renewed political unrest in Greece have the potential to dampen economic sentiment. Our panel of analysts expects the SEE region to decelerate in the first quarter and expand 2.3%.
2016 outlook stable following two consecutive improvements
This month, the outlook for South-Eastern Europe’s economic growth was left unchanged after two consecutive improvements. The analysts we polled expect the region to expand 2.6% this year, which matches last month’s forecast. The panel participants kept their projections unchanged for six of the 12 countries surveyed, including Bulgaria, Montenegro and Serbia. The outlook deteriorated in Macedonia and Greece, where austerity measures weighed on the country’s economic prospects. Our panel projects the Greek economy to contract 0.7% this year, which is down 0.1 percentage points from last month’s estimate. Analysts upgraded their forecasts for Croatia, Romania and regional powerhouse Turkey. For 2017, our panel of economists foresees the economy expanding 3.1%.
Montenegro and Romania are expected to be the best performers this year. 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 in the region, Turkey will likely grow the fastest, with a projected expansion of 3.3%.
BULGARIA | Strong labor market and absorption of EU funds support the economy in 2015
Bulgaria’s economy accelerated and expanded at the fastest pace in almost five years in Q4. Overall, the economy posted its strongest growth since 2008 last year, thanks to lower oil prices, which had a positive impact on the external sector’s contribution to growth. Improving labor market conditions and strong absorption of EU funds also boosted the economy. However, both total consumption and fixed investment contracted slightly over the previous year in 2015. Meanwhile, blockades have been paralyzing the Greek border since the end of January. Greek farmers have started blocking checkpoints to protest tax and pension reforms, which led Bulgarian truckers to organize counter-blockades on Greek agricultural products. Bulgarian authorities have estimated that the carriers’ losses exceed EUR 10.0 million and that over 70,000 Greek and Bulgarian citizens cancelled their holiday plans due to the blockades, which could significantly impact Q1’s performance on both sides of the border.
Although Bulgaria’s sound economic growth has largely restored investors’ trust, its close ties with Greece exposes the country to spillover effects should economic turbulences return. 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 2.7%.
CROATIA | GDP expands for the fifth consecutive quarter in Q4
Croatia’s economy expanded after six years of recession. In the fourth quarter of 2015, GDP expanded 1.9% over the same quarter of the previous year, which represented a deceleration over the 2.8% growth recorded in Q3 but marked a fifth consecutive quarter of expansion. Meanwhile, on 25 February, the government announced guidelines for this year’s budget, which sets the fiscal deficit at 2.7% of GDP—which would bring the fiscal deficit within the EU’s 3.0% threshold for the first time since 2008. Nevertheless, this did not prevent the European Commission Vice President from warning Croatia on 26 February that it could be subjected to corrective measures as part of the Macroeconomic Imbalance Procedure for not implementing reforms in the areas of fiscal policy, labor market liberalization and the pension system. Against this backdrop, on 1 March, the Prime Minister stated that Croatia is going to introduce the euro in four years—which confirms the government’s intention to follow a pro-EU and reformist agenda.
The government’s commitment to a smooth fiscal consolidation coupled with liberalizing reforms has prompted some optimism about Croatia’s growth prospects. Nevertheless, the domestic banking system’s continued deleveraging could slow down the growth rate. FocusEconomics panelists expect GDP to grow 1.5% 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 strengthens in 2015 on expansionary fiscal policy
Romania’s economy gained steam last year as the government’s initiative to reverse austerity policies by raising wages and cutting several taxes triggered a consumption boom. A marked recovery in fixed investment, which largely resulted from strong inflows of EU funds, also spurred growth. Economic activity ticked up in Q4, pushing full-year growth to a seven-year high of 3.7%. On a negative note, the fiscal easing measures increased macroeconomic imbalances, as a sharp rise in imports caused the trade and current account deficits to widen. Similar dynamics are expected to remain in place this year: additional fiscal stimulus will likely spur domestic demand and growth at the expense of worsening public finances and growing external 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 third consecutive month, our panelists revised up Romania’s growth forecast for 2016 and they now see GDP expanding 3.9%. For next year, they expect slower but still solid 3.5% growth.
TURKEY | Growth prospects remain positive despite mounting geopolitical threats
Economic indicators suggested that Turkey’s economy ended 2015 on a strong footing, but more recent data show that rising geopolitical risks have started to erode economic sentiment: the manufacturing PMI and consumer confidence both deteriorated in February. On the upside, business sentiment continues to rise due to the government’s announcement that its main priority for this year is to deliver economic growth, even at the expense of increasing macroeconomic imbalances. While a full-scale military intervention in Syria seems highly unlikely, the possibility that Turkish forces will enter Kurdish-dominated areas of Syria is still in the cards. Moreover, the political situation could worsen in the coming months. The police raided and seized Turkey’s most widely circulated newspaper, which is one of the main voices criticizing President Recep Tayyip Erdogan.
Despite mounting geopolitical threats in both the region and the country’s southeastern corner, Turkey’s economy will benefit this year from strong government support, low oil prices and a weak lira. Moreover, the reintegration of Iran into the global economy has the potential to further trade. FocusEconomics Consensus Forecast panelists forecast that the economy will grow 3.3% in 2016, which is up 0.1 percentage points from last month's projection. In 2017, the panel sees GDP growth accelerating to 3.5%.
INFLATION | SEE inflation increases in January on higher inflation in Turkey
Inflation in South-Eastern Europe increased from 4.7% in December to 5.0% in January, an over-one-year high. The increase came on the back of higher inflation in Turkey, which broadly reflected higher food prices and a weak currency. Elsewhere in the region, five of the twelve countries surveyed posted negative annual variations in consumer prices.
This month, our panel of analysts revised up the 2016 inflation projection for South-Eastern Europe from last month’s 4.7% to 4.8%. This mainly reflects that upward revisions to Turkey and Romania offset downward projections in six other countries, including Croatia, Greece and Serbia. The FocusEconomics Consensus Forecast panel foresees inflation of 4.9% in 2017.
Written by: Dirina Mançellari, Senior Economist
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