South-Eastern Europe: Growth bounces back in Q4, but remains on a feeble footing
March 8, 2017
Preliminary data suggest that the economy of South-Eastern Europe regained traction in the fourth quarter after a sharp contraction in Turkey caused the region’s growth to nearly flat-line in Q3. GDP expanded 2.0% annually in Q4, a notable improvement from Q3’s meagre 0.2% expansion but still moderate growth in a historical context. Croatia’s economy gained steam in the final quarter of 2016, growing at the fastest pace in nine years, thanks to booming tourism, rising wages and upbeat sentiment in the economy. Bulgaria’s economy also remained on a firm footing in the period, growing at the same pace as in Q3, and economic activity accelerated in Romania.
In contrast, Greece’s economy slowed abruptly in the fourth quarter, underscoring the many challenges facing the indebted country. A strong recovery has yet to materialize despite numerous government reforms and bailout packages. Growth in Serbia also inched down in the quarter, largely due to slowing household consumption. Official GDP data are not yet available for the remaining economies in the region, however, our analysts expect activity to have rebounded in major player Turkey. The weak value of the lira is likely helping goods exports, while the tourism sector continues to be hard-hit by security concerns.
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Political uncertainty and security concerns are plaguing the region in the first quarter of 2017 and are likely to remain center stage in coming months. In Turkey, political noise is high ahead of the 16 April constitutional reform referendum on whether to switch the country to a presidential system. A crackdown on political dissent and the government’s dominant voice in the media have weighed on sentiment in the country and added to political tensions. Moreover, in the near term, economic matters are likely to slide to the backburner as President Recep Tayyip Erdogan focuses on campaigning. Meanwhile, Greece’s review of its bailout program continues to face delays over differences in reforms and a rift between European lenders and the IMF. The country faces a hefty debt repayment schedule in July and continued support by creditors is critical for the outlook. In addition, protests over anti-corruption matters continue to dominate headlines in Romania and Bulgaria heads to the polls this month for early elections. Despite the political uproar, the FocusEconomics panel sees economic activity firming in the first quarter of 2017 and GDP increasing 2.2%.
2017 growth prospects moderate
Geopolitical risks continue to hamper growth dynamics in SEE and the region’s GDP forecast was cut by 0.1 percentage points this month. The FocusEconomics panel expects the regional economy to expand 2.5% in 2017, moderately above the 2.3% growth seen for 2016. In 2018, the economy is seen gaining speed and growth should come in at 2.8%.
This month’s downward revision reflects cuts to the GDP growth projections of Kosovo and Turkey. Meanwhile, the growth forecasts for eight economies were held unchanged, while Croatia and Romania saw upgrades. Kosovo and Romania are expected to be the fastest growing economies in 2017 with expansions of 3.8%. On the other side of the spectrum, major-players Greece and Turkey are expected to be the worst performers, growing 1.7% and 2.3% respectively.
BULGARIA | Growth steadies before snap vote
According to preliminary estimates released on 14 February, GDP growth in Q4 was broadly in line with Q3’s robust result thanks to a strong expansion in total consumption, which more than offset a contraction in fixed investment. GDP growth in Q4 suggests that in 2016 the economy likely expanded at a rate similar to that of last year, thus making Bulgaria one of the fastest-growing economies in the region. The country had expanded at a lackluster rate in the five years following the 2009 recession, but increased spending on EU-funded infrastructure projects has boosted the Bulgarian economy in the past two years. On the political front, the country will hold snap elections on 26 March to elect the 240 members of the National Assembly. Polls show the Bulgarian Socialist Party (BSP) having a narrow advantage over the center-right GERB party. Three other smaller parties are expected to make it to the legislature.
While investment is expected to pick up due to higher inflows of EU funds, increased imports will keep a lid on growth this year as domestic demand strengthens. However, a slower-than-expected absorption of EU funds poses a serious downside risk to Bulgaria’s outlook. FocusEconomics Consensus Forecast panelists expect GDP to expand 3.1% in 2017, which is unchanged from last month’s forecast, with 3.0% growth penciled in for 2018.
CROATIA | Activity strengthens in Q1
Croatia’s economy has continued to recover at the start of 2017. Rising wages and personal income tax cuts have buttressed consumer sentiment, while easing financing conditions together with lower corporate taxes have sustained business confidence so far this year. This comes on the back of an acceleration in GDP growth in the last quarter of 2016. Q4 saw the fastest pace of expansion in nine years as a result of stronger domestic demand, and this brought growth for the full year to a nine-year high of 2.9%. Faster growth translated into higher government revenues which, coupled with contained expenditure growth, most likely caused the fiscal deficit to narrow. Moreover, unemployment fell last year as it benefited from a record-breaking year for tourism as well as from robust private consumption.
The country should enjoy another year of healthy economic expansion in 2017. A more favorable fiscal framework will support both private consumption and fixed investment, with the latter also benefiting from stronger inflows of EU investment funds. The main downside risks stem from slower growth in the Eurozone and a tightening of monetary policy. On the upside, a fast implementation of reforms to enhance the efficiency of the public sector, privatize state-controlled enterprises and liberalize the labor market could boost growth. Analysts expect GDP to grow 2.8% in 2017, which is up 0.2 percentage points from last month’s forecast, and 2.6% in 2018.
ROMANIA | Fiscal concerns arise after optimistic budget projections
The economy accelerated at the close of 2016, propelled by strong domestic demand. Q4’s GDP outturn brought 2016’s overall growth rate to 4.8%, the fastest pace since 2007 and the highest mark in the EU. The government is counting on the growth momentum carrying over to justify its 2017 budget, which was passed in February and foresees large spending increases, on defense for example. The budget deficit is expected to come in at 2.99% of GDP this year, within the EU’s 3% limit, but this is based on very optimistic GDP growth forecasts. The projections are so at odds with the consensus view of a slowdown that the President voiced serious reservations regarding the budget’s credibility, despite signing the bill into law. The government is still reeling from its failed attempt to introduce legislation to soften anti-corruption standards, which caused mass protests across the country and cabinet ministers to resign, though the government survived a parliamentary vote of no confidence.
GDP is expected to grow solidly this year, albeit at a softer pace. Private consumption will continue to be the main driver of growth but is expected to be weighed down by higher inflation. Rising regional tensions and an incendiary domestic political climate pose the main downside risks to growth. Still, our panelists predict an expansion of 3.8% 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 on feeble footing
Recent data suggest that the economy continues to show weakness after contracting notably in Q3. Conditions in the labor market deteriorated in November and industrial output slowed in December. Dwindling tourist arrivals in the wake of political and security concerns are also hampering the economy’s performance, although the fall moderated in January. On a positive note, business confidence returned to optimism in February and the weak value of the lira has caused exports to surge. The lira has been hit hard by controversial domestic politics and the political scene is turbulent ahead of the upcoming constitutional reform referendum. President Recep Tayyip Erdogan set 16 April as the date for the vote on whether to switch the country over to an executive presidency system.
Economic weakness is set to persist this year as political turmoil and security concerns act as headwinds to a strong recovery. FocusEconomics panelists expect the economy to expand 2.3% in 2017, down 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 January
Inflation in the South-Eastern Europe region jumped from 5.0% in December to 5.7% in January, which marked the highest rate since July 2013. 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 raised their 2017 inflation forecast from the previous month’s 5.5% to 5.7%. This reflects upgraded estimates for six countries, including Turkey. For 2018, the panel expects inflation to ease to 5.1%.
Written by: Angela Bouzanis, Senior Economist