SEE economy slows in Q1
July 5, 2016
The performance of the South-Eastern Europe’s (SEE) economy was robust in the final quarter of last year. As a result, the growth rate in 2015 was the fastest in five years. Last year’s growth came mainly on the back of accelerations in two of region’s biggest countries, namely Romania and Turkey, which expanded 3.8% and 4.0%, respectively. Conversely, the Greek economy swung back to contraction in 2015 after having expanded for the first time in seven years in 2014.
Looking at individual countries in the region, Greece’s economy remained mired in deep recession in the first quarter and GDP contracted for the third consecutive period. However, the country’s debt crisis eased a bit in late-May when international lenders struck a deal with the government, which cleared the way for the release of approximately USD 10 billion in funds. The funding is vital as the country is due to pay maturing debt in June and July this year. Shortly after the deal, the government announced that Greece would soon be eligible for the European Central Bank’s quantitative easing program before returning to international credit markets next year. This will boost liquidity in the economy and likely help growth in the near future. At the same time, there seems to be no end in sight to the ongoing refugee crisis that has been a focal point in the region in the last year. The resignation of Turkish Prime Minister Ahmet Davutoglu last month threatens to collapse the agreement that the country reached with the European Union in March aimed at slowing down the flow of migrants arriving into Europe. Adding to the crisis, Bulgaria recently tightened its border controls with Turkey amid fears that the country has become part of a new refugee route.
The SEE region likely decelerated in the first quarter of this year amid domestic and external headwinds. A further complication of the political situation in Greece and a continuation of the refugee crisis have the potential to destabilize the region. Moreover, Turkey’s deceleration as a result of the economic sanctions imposed by Russia weighed on the region’s growth in Q1. Economic prospects in the SEE region will also depend on the pace of recovery of the Eurozone and further policy action by the European Central Bank. Our panel of analysts expects the SEE region to have expanded 2.9% in the first quarter.
Growth prospects revised up in June
This month, the outlook for South-Eastern Europe’s economy was upgraded from last month’s 2.7% to 2.8%. Panel participants revised up their projections for 9 of the 12 countries in the survey, including Greece, Serbia and Turkey. Conversely, the outlook was left unchanged for Albania, Cyprus and Macedonia. For 2017, our panel of economists foresees the economy expanding 3.1%.
The economies of Romania and Montenegro, in that order, are expected to grow the fastest this year. On the other hand, Greece, Cyprus 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 3.4%.
BULGARIA | Economy records mild deceleration in Q1 amid weak fixed investment
Bulgaria’s economy decelerated slightly in the first quarter of this year, tallying a 2.9% annual expansion, which was a notch lower than the 3.0% rise recorded in Q4 2015. The result mainly reflected a contraction in fixed investment, while total consumption and the external sector contributed positively to overall growth. Additional data from March were particularly positive: industrial production and retail sales both accelerated and unemployment fell. As the Ministry of Finance reported on 31 May, nominal wages increased significantly in the first quarter over the same period last year. A lack of inflationary pressure in the last seven months is bolstering real wages, which is expected to support consumers’ purchasing power in the coming quarters.
The Bulgarian government intends to attract FDI equivalent to over 4.0% of GDP this year and maintain last year’s almost 20% growth rate, which should support overall growth. FocusEconomics Consensus Forecast participants expect GDP to expand 2.6% in 2016, which is up 0.1 percentage points from last month’s forecast. In 2017, they see growth of 2.8%.
CROATIA | Robust domestic demand boosts growth in the first quarter
According to the Statistical Institute of Croatia, the economy grew 2.7% on an annual basis in Q1 2016, accelerating over Q4’s 1.9% expansion and marking the sixth consecutive quarter of GDP growth. Private consumption and fixed investment expanded faster than in the previous quarter. Exports, while decelerating compared to Q4’s double-digit growth, increased more than imports, increasing the external sector’s contribution to growth. Positive momentum carried over into Q2: industrial production recorded another robust annual increase in April, while unemployment fell significantly. On the political side, the governing coalition is experiencing a very turbulent period, due to an alleged conflict of interest concerning the wife of the major coalition partner’s Deputy Prime Minister. This political impasse could lead, in the worst-case scenario, to early parliamentary elections.
Falling unemployment and higher real wages due to low energy prices are expected to support private consumption this year. Moreover, overall growth will benefit from stronger public investment. However, political instability poses downward risks to Croatia’s outlook. FocusEconomics panelists expect GDP to grow 1.7% in 2016, which is up 0.1 percentage points from last month’s forecast. The panel expects economic activity to accelerate to 1.9% growth in 2017.
ROMANIA | Economy stays robust in Q1, but government’s expansive fiscal policy raises concerns in the European Commission
The Romanian economy accelerated to a seven-year high in 2015 thanks to a strong fiscal stimulus. The economy remains on a strong footing as tax cuts and wage hikes for public employees earlier this year have spurred a consumption boom. Preliminary data show that the economy expanded a solid 4.3% annually in Q1, exceeding Q4’s 3.8% growth. The government’s expansionary fiscal policy has raised concerns in the EU Commission that the country could violate the bloc’s fiscal responsibility rules, but most analysts see the fiscal deficit staying in line with the 3.0% limit.
Growth this year will be fueled by strong private consumption. However, widening fiscal and current account deficits pose downside risks. Panelists participating in the FocusEconomics Consensus Forecast expect the economy to grow 4.2% this year, which is up 0.1 percentage points from last month’s forecast. In 2017, the panel foresees economic growth moderating to 3.6%.
TURKEY | New PM pledges constitutional changes making general elections possible this year
Most of the economic indicators remained strong at the outset of the year despite heightened financial volatility in January, rising geopolitical threats and an uncertain political landscape. That said, it is highly unlikely that the economy maintained the economic momentum from Q4’s astonishing 5.7% expansion in Q1. Binali Yildirim, a very close ally of President Recep Tayyip Erdogan, was appointed on 22 May as Turkey’s new prime minister following Ahmet Davutoglu’s resignation. In his first speech, Yildirim vowed to draft a new constitution in order to create a presidential system. While Erdogan lacks support in Parliament to pass any constitutional reform, analysts believe that Erdogan could call for a constitutional referendum or a new general election as early as this year.
The government’s economic reform plan and the implementation of policies aimed at bolstering consumer spending are expected to support economic growth this year. The main downside risks are rising political tensions should Erdogan move forward in establishing a presidential system and the escalating conflict with the Kurds. FocusEconomics Consensus Forecast panelists expect that the economy will grow 3.4% this year, which is up 0.1 percentage points from last month's projection. Next year, the panel expects the economy to expand 3.5%.
INFLATION | SEE inflation continues downward trend in April
Inflation in South-Eastern Europe eased from 3.3% in March to 2.8% in April, which marked a multi-year low. The drop was mainly due to lower inflation in Turkey and Romania. Inflationary pressures were absent elsewhere in the region and 9 of the 12 countries in SEE posted a negative annual variation in consumer prices. On 24 May, the Central Bank of Turkey cut its key interest rate for the third consecutive meeting amid pressure to boost economic growth.
This month, our panel of analysts cut the 2016 inflation projection for South-Eastern Europe and now expect inflation to average 4.4% this year, which is down 0.2 percentage points from last month’s estimate. This reflects downward revisions to 7 countries’ inflation forecasts, including Romania, Serbia and Turkey. Conversely, the inflation forecast for Croatia was revised up while the estimates for four other countries including Greece and Macedonia were left unchanged. For next year, the panel expects inflation to accelerate slightly to 4.9%.
Written by: Dirina Mançellari, Senior Economist
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