South-Eastern Europe: Economy ends 2016 on positive note
April 5, 2017
Complete data for the economy of South-Eastern Europe (SEE) shows that activity picked up in the fourth quarter, more strongly than initially estimated. GDP expanded 3.0% annually in Q4, a notable improvement from Q3’s meagre 0.5% expansion and significantly above last month’s estimated 2.0% increase. The upward revision was due to stronger-than-expected growth in Turkey, which pushed up the regional figure. Government stimulus measures enacted after the failed July coup attempt finally bore fruit and drove household spending to the best result since Q2 2015 despite a worsening labor market and political uncertainties.
Meanwhile, revised data for Greece showed the economy on a much weaker footing than initially estimated, dragging on the region’s activity in Q4. Nosediving fixed investment and a sharp slowdown in private consumption dampened momentum and underscored that despite multiple bailout programs, the debt-ridden economy has failed to make progress towards a sustained recovery. On the political front, negotiations for the country’s next tranche of fresh funds are dragging on as the government butts heads with its creditors on required reforms.
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Beyond Greece, political noise is high throughout the region. On 16 April, Turkey will vote in a referendum that seeks to broaden presidential powers in the country. Politics has taken center stage in the past weeks and a ‘yes’ vote could be positive for the country in the sense that it would bring the economy back to the forefront of discourse. However, opinion polls show a large amount of undecided voters and a ‘no’ vote could ramp up uncertainty in the country. In Bulgaria, pro-European GERB won the parliamentary elections on 26 March, but failed to win an outright majority. While a GERB-led government should be positive for the economy, the party will have to forge an awkward coalition with smaller parties, which could make it prone to disagreements due to different ideologies.
Diverging dynamics hold outlook stable
The FocusEconomics panel kept their view of the regional economy unchanged this month and sees growth of 2.5% in 2017, below the 2.8% increase tallied in 2016. An improvement in the global economy and stabilizing political and security situation in Turkey should fuel the slight uptick, however, growth will be meagre in a historical context. In 2018, the economy is seen gaining speed and growth should come in at 2.8%.
Differing dynamics in the region’s largest economies held the growth outlook unchanged this month as upward revisions to Turkey’s and Serbia’s GDP growth projections were balanced out by a large downgrade to Greece’s outlook. Bulgaria, Croatia, Cyprus and Serbia all also saw brighter outlooks, while Albania’s forecast was downgraded. The remaining 4 other economies’ forecasts were left unchanged this month.
Kosovo and Romania are expected to be the fastest growing economies in 2017 with expansions of 3.8% and 3.9%, respectively. On the other side of the spectrum, major-players Greece and Turkey are expected to be the worst performers, growing 1.4% and 2.4% respectively.
BULGARIA | Center-right GERB wins parliamentary election
According to revised data released on 7 March, GDP growth in Q4 was in line with Q3’s healthy result thanks to an acceleration in total consumption, which more than offset a contraction in fixed investment. While overall growth in 2016 was slightly below last year’s, the Bulgarian economy continues to be one of the most dynamic in the region and should remain so after GERB, a party known for its fiscal prudence, came first in 26 March snap parliamentary elections. Although the center-right party’s victory spells good news for the economy, without an outright majority it faces a tough road ahead to form a stable coalition.
Fixed investment is expected to gain steam due to higher inflows of EU funds, but increased imports will likely keep a lid on growth this year as domestic demand strengthens. A slower-than-expected absorption of EU funds poses the main downside risk to the country’s outlook. FocusEconomics Consensus Forecast panelists expect GDP to expand 3.2% in 2017, which is up 0.1 percentage points from last month’s forecast, and 3.0% in 2018.
CROATIA | Positive developments fuel ratings upgrade
The Croatian economy is in good shape, with the fourth quarter’s positive momentum carrying over into Q1. Retail sales continued to grow in January, while in February the unemployment rate declined after four consecutive monthly increases, as companies in the tourist sector stepped up recruitment in response to greater tourist inflows. The rating agency Moody’s took note of the positive developments and revised the country’s outlook from negative to stable in early March, citing the stronger than expected growth in 2016 and the subsequent reversal of the upward trajectory in public debt as reasons. On a negative note, Croatian food group Agrokor, the largest private company and employer of the country, continues to undergo a difficult financial situation, burdened by heavy corporate debt. A standstill agreement is likely to be signed between the company and creditors in the near future, and the government has announced measures to help systemically important companies in financial trouble.
The economy is set to record another year of sustained growth in 2017. The reduced tax burden, a strong tourist sector and falling unemployment will support private consumption. In addition, lower corporate tax together with increasing EU funds and ample liquidity will spur fixed investment. Analysts expect GDP to grow 2.9% in 2017, which is up 0.1 percentage points from last month’s forecast, and 2.6% in 2018.
ROMANIA | Fiscal concerns persist despite rapid growth
Romania’s position as the EU’s fastest growing economy in 2016 was confirmed in March by comprehensive data. GDP growth was propelled by scorching private consumption growth resulting from extensive tax cuts and wage increases. Nevertheless, the data also revealed how unbalanced the expansion was. Fixed investment growth was almost flat, partly as a result of poor EU fund absorption but also because investment decisions might have been postponed in anticipation of tax breaks taking effect in January 2017. In addition, the external sector made a negative contribution to growth as the consumption boom caused import growth to accelerate. Somewhat worryingly, Q4 GDP data showed that private consumption slowed for a second consecutive period, an indication that the government’s income-boosting measures are starting to fade. As a result, the government’s fiscal plans are becoming more and more unrealistic and the IMF in its Article IV conclusions has urged the government to consider cutting expenditure and improving revenue collection, while also implementing structural reforms. For 2017, the government is betting on 5.2% GDP growth and a deficit of 2.99% of GDP, both of which are far more optimistic than our Consensus Forecasts.
Economic growth is expected to moderate this year. Private consumption is set to continue as the main driver of growth but will be weighed down by higher inflation. 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 3.3% penciled in for 2018.
TURKEY | Economy surpasses expectations in Q4
The economy bounced back in the final quarter of last year, after recording the worst result since the financial crisis in Q3. Despite a weakened labor market, a number of government enacted counter-cyclical measures supported surging consumption and drove the economy’s upturn. Early data for Q1 suggests that the recovery is continuing: industrial production accelerated in January and the ICI manufacturing PMI rose into expansionary territory in March. On the political front, the country will vote in a referendum on whether to strengthen the powers of the presidency on 16 April, which has pushed economic matters to the backburner. A ‘yes’ vote should allow policymakers to shift focus back to economic matters, while a ‘no’ vote has the potential to extend a period of political uncertainty, depending on President Recep Tayyip Erdogan’s reaction.
The positive Q4 result fueled a slight upgrade to Turkey’s outlook this month, as the economy is on a better footing than previously thought. FocusEconomics panelists expect the economy to expand 2.4% in 2017, which is up 0.1 percentage points from last month’s estimate. In 2018, the panel expects growth to accelerate to 2.9%.
INFLATION | Price pressures soar in February
Inflation in the South-Eastern Europe region jumped from 5.8% in January to 6.4% in February, which marked the highest rate since September 2012. The figure reflected higher annual variation in consumer prices in nearly all countries, including Turkey—the largest economy in the region—as the effect of low oil prices wanes.
This month, our panelists held their 2017 inflation forecast at last month’s 5.7%. This reflects that upgraded estimates for seven countries, including Turkey, were balanced by four downgraded forecasts. For 2018, the panel expects inflation to ease to 5.3%.
Written by: Angela Bouzanis, Senior Economist