SEE: SEE economy remains weak in Q3
November 30, 2016
Provisional GDP estimates show that the economies of South-Eastern Europe (SEE) remained weak in the third quarter, following the regional slowdown recorded in the second quarter. Taking a closer look at individual countries where Q3 GDP data is available, a sharp deceleration from the previous quarter was recorded in Romania which expanded 4.4% in the three months to September, but this still marked a robust expansion. The slowdown is a likely product of lower household consumption, as the effects of the wage hikes and VAT cuts introduced earlier this year start to wane. A slowdown was also recorded in Bulgaria while growth in Cyprus stalled in Q3. The silver lining of the region in the third quarter was Greece, where growth swung from a 0.4% contraction in the second quarter to a 1.2% expansion in the third quarter. The improvement was likely due to both domestic and external factors.
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In the political arena, tensions between the Turkish government and the European Union intensified earlier this month after the European Commission voted to halt Turkey’s accession talks. This provoked a strong reaction from President Recep Tayyip Ergodan, who threatened to end the landmark deal over the flow of migrants to Europe. Political turmoil in Turkey comes against a background of economic deceleration. The local currency has been particularly vulnerable to political developments both at home and abroad. Similar to the other emerging market currencies, the lira has suffered following the U.S election result, which diminished the appetite for high-risk assets. Elsewhere in the region, Romania will hold general elections on 11 December and polls point to a coalition government as the most likely outcome. The trade-off between stimulating the economy and maintaining a prudent fiscal stance will be key for the next administration.
Growth expected to remain broadly stable next year
Next year, growth dynamics in SEE will be dominated by the escalating political uncertainty and security concerns in Turkey, the ongoing debt saga in Greece, the continuing refugee crisis in the region and the uncertainty regarding Brexit. This month, FocusEconomics panelists expect the regional economy to expand 2.8% next year, which is unchanged from last month’s estimate. The forecast reflects upward revisions for six economies including Greece and Romania, which offset downward revisions for three economies including Turkey. 2017 growth estimates were left unchanged for Albania, Bosnia Herzegovina and Cyprus. Next year’s growth will represent a slight acceleration from the 2.6% increase expected for this year.
BULGARIA | Economy disappoints in third quarter
Preliminary data showed that Bulgaria’s economy decelerated slightly in Q3, from 3.6% in Q2 to 3.5%. The slight deceleration came as a result of a contraction in fixed investment—the steepest since Q3 2011—which offset an expansion in total consumption and an improvement in the external sector. The fall in fixed investment mainly reflected the slowdown in the absorption of EU funds, following the completion of the 2007-2013 funding program. Despite lower investment, Q3’s GDP figure suggests that the economy has been largely stable so far this year and it remains one of the fastest-growing economies in the European Union. On the political front, pro-Russian Rumen Radev beat ruling-party candidate Tseka Tsacheva at the 14 November presidential elections. After his party’s crushing defeat, Prime Minister Boyko Borisov submitted his minority government’s resignation. Radev’s victory and the collapse of Borisov’s government are expected to trigger new elections in the spring of 2017 and will likely result in months of political instability.
Private consumption and investment are expected to support economic growth in 2017, partly due to the EU’s 2014-2020 funding program. In 2016, FocusEconomics Consensus Forecast participants expect GDP to expand 3.1%. In 2017, they see growth of 2.9%, which up 0.1 percentage points from last month’s estimate.
CROATIA | Solid private consumption and fixed investment will support the economy in 2017
Data for Q3 gave a mixed picture of Croatia’s economic performance. All three months saw notable growth in tourist arrivals, which consolidated Croatia as one of Europe’s top tourist destinations, boosted retail sales and pushed down unemployment—although the latter rose again at the end of the summer season in October. On the downside, industrial production in the third quarter slowed and consumer confidence was somewhat volatile. In the political arena, the parties which support the coalition government reached an agreement to increase the VAT rate in the hospitality industry, which has been approved by the parliamentary committee for budget and finances. The measure is meant to reduce the fiscal deficit but it could also have adverse effects on the tourism sector—especially considering the numerous alternative tourist destinations in the Mediterranean basin.
Next year Croatia’s economy should maintain a growth pace similar to this year’s rate, supported by solid private consumption and fixed investment. The announced reduction in corporate and income taxes in 2017 poses the main upside risks to growth, while the main downside risks stem from an economic slowdown in the EU. FocusEconomics panelists expect GDP to grow 2.4% in 2016. The panel expects economic activity to expand 2.3% in 2017, which is up 0.1 percentage points from last month’s forecast
ROMANIA | Country heads to elections in December, polls suggest Social Democrat victory
The Romanian economy had a soft landing in the third quarter following an almost eight-year high pace of growth in Q2. According to a first estimate released by the Statistics Institute on 15 November, GDP grew 4.4% in Q3 over the same quarter last year, down from 6.0% in Q2. The slowdown, which surprised analysts by its extent, is a likely product of slower household consumption growth, as the effects of the wage hikes and VAT cuts introduced earlier this year start to wane. Continued low absorption of EU funds has also been a likely drag on growth this quarter. The slowdown comes as the country is readying itself for the parliamentary election on 11 December, which the polls suggest the Social Democrats will win.
The boom in domestic demand that has fueled growth this year is likely to moderate next year. The effects of fiscal measures taken earlier this year have already started to fade and the pace of fiscal easing is expected to slow under the next government. In addition, higher inflation will dampen household consumption. As a result, panelists expect the economy to grow 4.8% this year and 3.6% in 2017, which is up 0.1 percentage points from last month’s forecast.
TURKEY | Security concerns and political chaos threaten growth next year
Recent monthly indicators suggest that the Turkish economy disappointed in Q3 after the slowdown recorded in Q2. In September, industrial production contracted and the manufacturing PMI remained in contractionary territory, signaling deteriorating business conditions in the sector. The state of emergency introduced in the wake of the failed coup attempt and the resulting deterioration in tourism hurt the economy in Q3. Heightened political uncertainty has the potential to further harm economic activity in the final quarter of the year. Tensions between Turkey and the EU intensified earlier this month after the European Parliament voted to freeze Turkey’s accession talks. This prompted President Recep Tayyip Erdogan to threaten to end a landmark deal over the flow of migrants to Europe.
Political turmoil and security concerns will limit growth next year. On the upside, decisive government support will benefit the economy. On balance, FocusEconomics panelists expect that the economy will expand 2.9% in 2016. In 2017, the panel expects growth to inch up to 3.0%, which is down 0.1 percentage points from last month’s estimate.
INFLATION | SEE inflation stable in October
In October, inflation in the South-Eastern Europe region stood at 3.8%, matching the previous month’s reading. The figure reflected higher inflation in eight countries, which offset lower readings for three countries including Turkey. The annual variation in consumer prices in October remained negative in 6 of the 12 countries surveyed.
This month, our panelists maintained their 2017 inflation forecast at the previous month’s 4.8%. This reflects that upgraded estimates for three countries compensated for downgrades for seven countries. Next year’s inflation figure represents an increase compared to the 4.1% expected for this year.
Written by: Dirina Mançellari, Senior Economist