South Eastern Europe: Regional GDP estimated to have expanded at the fastest pace in nearly a decade in Q3
November 29, 2017
A combination of healthy global demand, massive fiscal policy stimulus and an increased absorption of EU funds fueled economic growth across the South-Eastern Europe (SEE) region in the third quarter. A preliminary estimate shows the region’s economy expanded 6.0% in Q3 from the same period of last year, which, if confirmed, would mark the fastest pace of growth since Q1 2008. Q3’s figure is well above the 4.2% increase recorded in the previous quarter and the 5.4% rise initially expected. However, clouds are rapidly gathering on the horizon as economic tailwinds dissipate and macroeconomic imbalances become more evident. Regional growth is expected to decelerate to 3.7% in Q4.
Taking a closer look at individual economies for which Q3 GDP data is available, breakneck economic activity was recorded in Romania, with GDP growth accelerating from a 6.1% increase in Q2 to 8.8%—a nine-year high. The increase was driven by the government’s ultra-loose fiscal policy stance and greater inflows of EU funds; it has placed the economy well on course to log its best performance since 2008 this year. Similarly, the Bulgarian economy picked up some of its remaining slack in Q3 as growth accelerated to 3.9%, up from a 3.6% rise in Q2. The expansion, the strongest since Q1 2011, reflected higher absorption of EU funds as well as a vibrant domestic economy driven by falling unemployment and higher real wages. The Serbian economy also performed better in Q3 following a tepid H1 performance, with growth hitting a three-quarter high of 2.1%.
Third-quarter GDP data is still outstanding for the remaining countries in the region, but FocusEconomics panelists expect growth to have picked up across most of the region’s economies. Leading data in Turkey suggests that the economy churned out robust growth in Q3 following a brilliant performance in the first half of the year. Industrial production and manufacturing PMI data both point to a well-performing domestic economy, while the tourism sector’s recovery limited the effects of a weaker currency and higher oil prices on the current account. Similarly, the Croatian economy is expected to have accelerated from the previous quarter in Q3 on a healthy external sector and upbeat sentiment and employment figures. The Greek economy is projected to have gained some traction in Q3 despite a strong base effect, aided by a gradually improving labor market.
Despite the rosy third-quarter figures, headlines were dominated in recent weeks by sizeable sell-offs of the Turkish lira and Romanian leu in the foreign exchange market. The Romanian leu fell to record lows against the euro in late November on investor concerns regarding government plans to introduce controversial changes to the fiscal and judicial systems. The Turkish lira also closed at an all-time low in late November as the diplomatic spat between Turkish and U.S. officials intensified and President Erdogan renewed his commitment to fighting higher interest rates. The latter has led market analysts to question the Central Bank’s independence; the Bank has so far only reacted to the heavy sell-off with timid increases to the effective funding rate through secondary channels.
Regional growth is seen quickly decelerating in the fourth quarter. In Turkey, unchecked inflation, exhausted fiscal stimulus measures, higher oil prices and a strong base effect are all expected to weigh on the economy’s performance. Uncertainty remains high regarding the Central Bank’s path ahead, and the required tightening in monetary conditions could further restrain economic momentum as well as put Bank officials at odds with President Erdogan and his cabinet. In Romania, growth is expected to cool slightly on weaker EU funds and an overheating domestic economy. Elsewhere in the region, GDP growth is expected to hold up somewhat better.
Analysts see growth slowing in 2018 on diverging dynamics
The South-Eastern European economy is projected to grow 3.3% next year following an estimated 4.5% increase this year. Slower GDP growth will chiefly result from fading tailwinds in Romania and Turkey. Romania will likely attempt to tame its fiscal imbalances in 2018 in a bid to avoid breaching the European Commission’s fiscal deficit target of 3.0% of GDP, while Turkey’s government is expected to preserve some financial stability next year ahead of the 2019 presidential and parliamentary elections. Growth in the Bulgarian and Croatian economies is expected to remain resilient, while momentum in the Balkans and Greece is seen strengthening next year.
The Consensus Forecast for next year is unchanged from last month’s and reflects improved outlooks for several economies that were offset by downgrades for others. The economies of Bulgaria, Greece and Kosovo are seen growing at a faster clip than previously estimated, while those of Croatia and Macedonia are expected to grow at a slower pace than forecast last month. For 2019, our panel also estimates the region’s economy will grow 3.3%.
The economies of Romania and Kosovo are both expected to grow at the fastest rate in the region next year, with expansions of 4.0%. Turkey, the region’s largest economy, is seen growing 3.5% next year. On the other end of the spectrum, and despite this month’s upgrade, Greece is still expected to be the region’s laggard, with growth of just 2.0%.
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TURKEY | Economic outlook turns dire as currency plunges to an all-time low
The tailwinds that boosted GDP growth in the first three quarters of the year are starting to fade, and the country’s structural imbalances are becoming more acute. Furthermore, the economy is showing signs of overheating: Inflation reached a nine-year high in October, and the cumulative current account deficit widened to a two-year high in September. The widening current account deficit has become increasingly difficult to finance, which has in turn resulted in a steady drawdown of foreign reserves since the start of the year. In addition to weakening economic fundamentals, the ongoing diplomatic spat between Turkey and the U.S., as well as President Erdogan’s renewed dispute with Central Bank officials, caused the lira to weaken to record lows and Turkey’s 10-year bond yields to tumble in late November.
The government’s attempt to limit policy stimulus next year ahead of the 2019 election cycle and an unfavorable base effect will lead GDP growth to moderate in 2018. The FocusEconomics panel expects growth to come in at 3.5%, which is unchanged from last month’s estimate. The risk of a sustained depreciation of the lira and unanchored inflation expectations are, however, weighing heavily on the outlook. Our panel expects growth of 3.7% in 2019.
ROMANIA | Q3 GDP growth beats expectations, but political noise continues to cloud outlook
Preliminary data revealed that growth remained in full swing in the third quarter, with GDP expanding at the fastest pace since Q3 2008. Although details are not yet available, a spending spree by households thanks to a tightening labor market and government stimulus policies likely drove activity. In addition, a rebound in investment on the back of greater absorption of EU funds is expected to have added steam to growth. While loose fiscal policies have put the economy on track to grow at the fastest pace since 2008 this year, a lack of structural reforms, ballooning government spending, rising inflation and a widening trade deficit have sparked fears that the economy could overheat. These concerns, along with controversial politics, have taken a toll on the leu, which fell to record lows in November. On 23 November, the government survived a no confidence vote, as widely expected.
Growth is expected to wane somewhat next year as higher inflation and tighter monetary policy take a bite out of household spending. FocusEconomics panelists expect growth of 4.0% for 2018, which is unchanged from last month’s forecast. They see the economy expanding 3.4% in 2019.
BULGARIA | Economic momentum continues into Q4 after growth hits an over six-year high in Q3
The Bulgarian economy shifted into a higher gear in Q3, with GDP growth accelerating from 3.7% annually in Q2 to 3.9%. The reading, which marked the fastest expansion since Q1 2011, was mostly underpinned by the domestic economy. The economy has benefited from the resumption of EU investment funds inflows, along with declining unemployment throughout the year and higher wages. Stronger economic activity and improved tax collection have enabled the government to increase public expenditure and wages without severely impacting its fiscal account, which should keep the economy on a solid footing. Survey-based data from the final quarter suggests that the momentum has persisted. In October, business confidence recorded its highest reading since October 2008, and consumer confidence dipped slightly from the over ten-year high in September.
A solid labor market, a high level of public expenditure and growth in fixed investment should support economic growth in 2018 and 2019. FocusEconomics Consensus Forecast panelists expect GDP to expand 3.3% in 2018, which is up 0.1 percentage points from last month’s forecast. For 2019, the panel sees growth moderating slightly to 3.0%.
CROATIA | Robust economic performance reflected in improved government finances
The expansion of both industrial production and retail sales throughout Q3 suggests growth remained robust in the quarter. A record-breaking tourist season also made a decisive contribution to the economy in the quarter, and helped keep the unemployment rate at multi-year lows throughout Q3. The strong economic situation was reflected in the government’s fiscal data: In mid-November the Croatian parliament narrowed the expected government budget deficit for 2017 from 1.3% to 0.6% of GDP. This was due to slower-than-budgeted spending and revenues that outperformed plans on account of successfully implemented tax reforms. Early data for Q4 points to an extension of economic momentum into the last quarter of the year: Consumer and business confidence improved in October despite unemployment rising in the same month because of the end of the summer season.
In 2018, the economy is expected to post another year of healthy growth. Household spending will likely benefit from rising wages, employment growth and favorable financing conditions, while stronger EU funds inflows and upbeat business sentiment should lift fixed investment growth. Moreover, a strong tourism sector is expected to remain a key driver of growth, and the fiscal deficit should stay under control. On the downside, the main risks stem from the uncertainty surrounding the restructuring of food giant Agrokor. FocusEconomics panelists project GDP growth of 2.7% in 2018, down 0.1 percentage points from last month’s forecast, and 2.6% in 2019.
INFLATION | Inflationary pressures continue mounting in October
Inflation in the South-Eastern Europe region accelerated significantly for a third consecutive month in October as price pressures in Turkey again strengthened on strong domestic demand and several supply-side shocks. Markedly higher inflation in Romania also helped drive October’s headline figure. Inflation in the SEE economy picked up from 7.0% in September to 7.5% in October, the highest reading since November 2008. Price pressures mounted in most countries in the region, only easing in Greece, Kosovo, Montenegro and Serbia.
Although inflation is expected to gradually decrease next year on weaker price pressures in Turkey, recent revisions made by panelists to their inflation and exchange rate forecasts suggest that the deceleration will be weaker than previously estimated. Inflation in the region is seen at 5.7% next year, which is up 0.1 percentage points from last month’s estimate. Forecasts were upgraded for 5 of the 12 countries surveyed, including Bulgaria, Romania and Turkey. All the other countries in the region except for Albania saw no changes to their forecasts. In 2019, inflation is expected to moderate to 5.4%.
Written by: David Ampudia, Senior Economist