South-Eastern Europe: The regional economy endures a rough Q3, although dynamics across most economies are positive
January 9, 2019
According to a comprehensive estimate by FocusEconomics, South-Eastern Europe’s (SEE) economy slowed notably in the third quarter, with growth weakening to 2.5% in annual terms from 4.3% in the second quarter and below last month’s preliminary estimate of 2.6% growth.
The weaker-than-expected reading was driven by a worse-than-anticipated outturn in regional behemoth Turkey, which accounts for roughly half of SEE’s nominal GDP. The Turkish economy slammed on the brakes in Q3, with financial turmoil hampering private consumption and fixed investment. In contrast, the external sector strengthened markedly as the weaker lira supported exports and weak demand saw imports plummet, although this was not enough to offset the poor performance of the domestic economy.
In Serbia, a second GDP reading confirmed the slowdown in the third quarter following a rip-roaring H1. That said, such a slowdown was to be expected and economic signs were still positive, with private consumption, fixed investment and exports all chalking up solid expansions. The picture in Croatia was similar; growth ebbed from the second quarter but was robust nonetheless, supported by wage gains and low unemployment.
The region’s minnows have also published Q3 national accounts figures over the last month, with fairly healthy growth across the board. Albania benefited from a surge in electricity production on favorable weather conditions, Macedonia’s performance was underpinned by robust consumption, growth in Montenegro was supported by strong fixed investment, and the expansion in Kosovo was powered by remittances, tourism, and higher wages. Meanwhile, momentum in Bosnia and Herzegovina eased somewhat on soft exports, but was still solid.
Looking at the final quarter, SEE’s growth should have slowed further, chiefly due to a further deterioration in conditions in Turkey, as suggested by high-frequency indicators such as retail sales, vehicle sales, the manufacturing PMI and economic sentiment. Dynamics in the region’s remaining economies should have remained fairly healthy, supported by solid labor markets, wage growth, and expansion in the EU—the key market for SEE’s exports.
On the political front, in late December Kosovo announced further tariffs on Serbian imports, after slapping 100% tariffs on Serbian and Bosnian imports in the prior month. Coupled with the recent announcement that Kosovo intends to create a standing army, the move will further strain diplomatic relations and trade between Kosovo and Serbia.
More positively, also in December Montenegro and Serbia opened further chapters as part of the EU accession process. While Montenegro has made more progress in negotiations, it is still likely to be many years before either country joins the Union.
SEE economy set to lose steam next year, driven by dismal dynamics in Turkey
The regional economy is seen expanding 1.5% next year, down 0.1 percentage points from last month’s projection and marking a substantial slowdown from 2018. More sluggish growth next year will be largely due to a weak performance in Turkey, as high inflation and tight financial conditions dampen consumer spending and investment, and the government likely adopts a more restrictive fiscal stance. Moreover, growth is also likely to slow somewhat in regional heavyweights Romania and Serbia following above-potential expansions this year. Turkey aside however, South-Eastern Europe’s economy will be supported by wage gains, EU investment, healthy tourist arrivals and robust external demand for goods. External risks stem largely from greater global trade protectionism; internally, political tensions—particularly between Kosovo and Serbia—and another bout of financial instability in Turkey are the key risks. In 2020, growth is seen recovering to 2.9%.
This month, panelists revised down their 2019 growth projection for Turkey, revised up their estimate for Cyprus, and left the region’s remaining 2019 forecasts unchanged.
Kosovo is expected to record the fastest expansion this year thanks to a solid labor market and remittance inflows. On the other end of the spectrum, Turkey is expected to stagnate due to the aftereffects of last year’s currency crisis and tight financial conditions.
TURKEY | Economy appeared to lose further steam in Q4 following paltry growth in Q3
The economy likely recorded a dismal fourth quarter, as the impact of the August 2018 currency crisis continued to reverberate. The manufacturing PMI was firmly in contractionary territory throughout the period on shrinking output and new orders, while business sentiment was decidedly pessimistic. Moreover, consumer spending was hit by higher interest rates, still-elevated inflation and depressed household sentiment, with retail sales declining sharply in October and vehicle sales plummeting throughout Q4. This comes after comprehensive data showed that GDP growth slowed sharply in Q3 on soft private consumption and fixed investment. More positively, the lira has recovered substantial ground since September, while external rebalancing continues apace, with a third consecutive monthly current account surplus in October. On the political front, President Erdogan announced a second 100-day plan in December. According to the president, it contains projects worth TRY 24 billion, which could provide a mild boost to demand going forward. Moreover, the government recently extended temporary tax cuts until the end of March, in a bid to fight inflation and support consumer spending.
The economy is set to perform poorly this year, depressed by restrictive financial conditions constraining private consumption and fixed investment. However, the external sector should provide some support. Currency volatility and the possibility of renewed geopolitical tensions pose significant downside risks. FocusEconomics panelists expect the economy to flatline in 2019, down 0.2 percentage points from last month’s forecast, and 3.1% in 2020.
ROMANIA | Inventories support growth in Q3, government announces surprise tax changes
Growth ticked up in the third quarter, although the slight acceleration was due to a surge in inventories which more than offset further cooling in consumer spending, still-falling fixed investment and a negative contribution from the external sector. In an attempt to curb the ballooning fiscal deficit, the cabinet approved a series of measures on 21 December, including a tax on banks’ assets designed to cap money market lending rates; taxes on energy and telecommunications companies; and an overhaul of the retirement system that allows Romanians, under certain conditions, to pull out of the mandatory private pension funds and switch to state management. The measures produced jittery reactions on the stock market, while analysts doubt they will bring the deficit below 3% of GDP. On the political front, the government survived a no confidence vote on 20 December, while on 1 January it took over the EU’s rotating presidency amid criticisms that the government is eroding the rule of law in the country.
Growth is set to slow further this year, as the expansionary effects of fiscal stimulus wane and consumer spending continues to cool due to weakening consumer confidence and smaller wage and job gains. Moreover, although growth in fixed investment is expected to strengthen, potential capital outflows and revisions of companies’ capital investment plans due to the deteriorated and unstable legal framework cloud the outlook. Further risks stem from the country’s sizeable twin deficits and frequent clashes with the EU over the rule of law. FocusEconomics panelists expect growth of 3.4% for 2019 unchanged from last month’s forecast, and
BULGARIA | Growth slows in Q3 on weaker external sector, but signs from Q4 are positive
Available fourth-quarter metrics have been upbeat on the heels of a disappointing third-quarter outturn, which was held back by a fall in exports. Retail sales and industrial output each notched improvement in October and, despite deteriorating economic sentiment into November, hint that domestic demand remained in the driver’s seat through year-end. Furthermore, labor-market dynamics remain tight and inflation finally appears to be moderating, which should continue underpinning growth within the domestic economy in the year ahead. All this follows an underwhelming third quarter during which fixed investment stood out for its decent absorption of EU-linked structural funding and the external sector was hit by neighboring Turkey’s economic crisis. In early January, the Ministry of Finance projected a modest fiscal surplus for 2018 that landed roughly in line with Consensus; analysts, however, are less rosy on 2019 and have penciled in a deficit in light of upcoming European and local elections.
Household spending is expected to moderate this year amid slower employment growth and elevated inflation, although election-year fiscal policy should cushion the cool-off somewhat. Fixed investment, meanwhile, should benefit from cheap borrowing costs and above-average absorption rates of EU funds. On the other hand, a pullback in global trade is likely to curb export growth, as is weaker external demand from the EU and Turkey. FocusEconomics analysts expect growth of 3.4% in 2019, unchanged from last month’s forecast, and 2.9% in 2020.
CROATIA | Economy performs well in Q3, signs from Q4 are largely upbeat
A solid third-quarter outturn was buoyed by upbeat domestic demand; economic growth landed near Consensus and roughly in line with the expansion a quarter earlier. A tight labor market underpinned household spending, as did low inflation. Fixed investment, meanwhile, accelerated on absorption of EU-linked structural funding and despite the fall-off in industrial metrics. On the external front, a pullback in export growth was par for the course amid the broader European slowdown. Looking ahead, available fourth-quarter data has mostly been positive, with upbeat retail sales in October and economic sentiment through November. An uptick in the unemployment rate and sluggish industrial output in recent months, however, are likely to bruise year-end gains.
Lower unemployment and higher wages should keep household spending in the driver’s seat next year, as should stronger remittance inflows. Meanwhile, still-low borrowing costs and higher absorption of EU-tied structural funding are poised to boost fixed investment. External-sector risks have grown in recent months, however, and a pullback in global trade would likely chill exports. Furthermore, tourism will remain vulnerable to competition from other Mediterranean destinations. FocusEconomics analysts expect growth of 2.7% in 2019, unchanged from last month’s forecast, and 2.5% in 2020.
INFLATION | Inflation declines in November
Regional inflation fell from 14.4% in October to 12.3% in November, chiefly due to lower price pressures in Turkey, as the slight recovery in the lira, tight monetary policy and the government’s anti-inflation campaign finally dampened price pressures. Inflation fell in almost all other regional economies too, on the back of the marked decline in global oil prices. Inflation was constant in Bosnia and Herzegovina, and increased in Kosovo and Montenegro. On the monetary policy front, Macedonia cut rates in December to support the economy.
Regional inflation is expected to reach 10.1% in 2019, down 0.5 percentage points from last month’s forecast. This was driven by a large downward revision to Turkey’s projection on recent signs of ebbing price pressures, and as panelists factored in the impact of lower oil prices. In 2020, regional inflation is forecast to dip to 7.3%.