SEE economy decelerates in Q1 amid domestic headwinds
May 11, 2016
In the last quarter of 2015, growth in the South-Eastern Europe (SEE) region accelerated markedly and the economy expanded at the fastest pace in nearly five years. As a result, for the full year 2015, the region grew 3.0%, which was the best result in five years. Last year’s acceleration came mainly on the back of an improvement in Turkey’s economy, which expanded at a significant 4.0% due to robust domestic demand. Elsewhere in the region, accelerations were recorded in the economies of Romania and Serbia. Conversely, the Greek economy swung to contraction last year after having expanded for the first time in seven years in 2014.
The never-ending debt crisis in Greece came to a head again earlier this month after Parliament approved a package of unpopular tax and pension reforms in order to achieve the fiscal target imposed by international lenders. The government hopes to persuade creditors to unlock funds from the bailout program that was agreed last summer. Fresh credit is crucial for Greece as the country is due to pay maturing debt in June and July this year. Elsewhere in the region, Prime Minister Ahmet Davutoglu announced on 5 May that he will resign later this month amid tensions with President Recep Tayyip Erdogan. Following the closure of the “Western Balkan route” in March, the European Union struck a deal with Turkey, which it agreed to grant visa-free travel to Turkish citizens in return for Turkey taking back migrants deported from Greece. Moreover, in order to keep the deal on track, Turkey has to make legislation changes and bring some laws in line with EU standards. However, concerns are mounting that Davutoglu’s resignation may provoke the collapse of the agreement since he was its primary negotiator.
Growth prospects in the SEE region will mainly depend on the pace of recovery of the Eurozoneand further policy action by the European Central Bank. 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 at the beginning of the year likely weighed on the region’s economic performance in the first quarter. Our panel of analysts expects the SEE region to have decelerated in the first quarter with the economy expanding 2.8%.
Growth prospects remain unchanged in May
This month, the outlook for South-Eastern Europe’s economy remained unchanged at theprevious month’s 2.7% expansion. Panel participants kept their projections unchanged for 7 of the 12 countries in the survey, including Greece, Serbia and Turkey. Conversely, the outlook improved for three economies, including Macedonia and Romania. Kosovo and Montenegro were the only countries for which the outlook moderated this month. For 2017, our panel of economists foresees the economy expanding 3.0%.
The economies of Romania and Montenegro, in that order, are expected to grow the fastest this year. On the other hand, Greece 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 3.3%.
BULGARIA | Growth prospects remain positive amid strong domestic demand
Bulgaria’s economy is gaining momentum. Following record growth in Q4 2015, the momentum in economic activity continued in the first months of the year. In February, industrial production grew solidly again and there was a firm expansion in retail sales. Further, unemployment fell in March. In February, the Bulgarian government reaffirmed its commitment to decreasing the fiscal deficit. Fiscal revenue increased significantly in February over the same month last year, primarily due to an improvement in tax compliance. Better revenue collection also contributed positively to the government’s coffers in 2015. On top of that, the government issued euro-denominated long-term bonds in March, which boosted international reserves.
While low commodity prices are improving Bulgaria’s net exports, the end of the EU funding program may dampen domestic demand. FocusEconomics Consensus Forecast participants expect GDP to expand 2.5% in 2016, which is unchanged from last month’s forecast. In 2017, panelists see the economy growing 2.8%.
CROATIA | Government approves reforms to boost the economy
Croatia returned to growth in 2015 after a six-year period of recession. The latest monthly data are encouraging, with robust industrial production and progressively-decreasing unemployment in March. On 28 April the government adopted the National Reform Programme, a battery of measures designed to give the economy a push while also reassuring the European Commission that the government is serious about reform. The measures include an increase in the retirement age, the elimination of unnecessary red tape and the privatization of non-strategic assets in order to reduce public debt. However, the difficult cooperation between the main coalition partners represents a potential obstacle to the government’s efforts.
Decreasing unemployment coupled with low inflation will strengthen domestic demand, which may receive further support from the government’s pro-business reforms. FocusEconomics panelists expect GDP to grow 1.6% in 2016, which is unchanged from last month’s forecast. The panel expects economic activity to accelerate to 1.8% in 2017.
ROMANIA | Economy maintains positive momentum in Q1
The Romanian economy expanded in 2015 at the fastest rate since 2008. Economic activity was supported by an aggressive fiscal policy and notable wage hikes ahead of legislative elections this year. Latest indicators confirm that the positive momentum from last year carried over well into the first quarter of this year. Industrial production improved in February and retail sales tallied double-digit growth for the eighth consecutive month in March. Against a backdrop of solid growth in domestic demand, Standard & Poor’s confirmed Romania’s rating and outlook. The agency highlighted that future rating increases are possible if the government resumes implementing budgetary consolidation measures and reduces the public debt.
Growth this year will be fueled by strong private consumption, which will more than compensate for a slowdown in fixed investment and deteriorating exports. However, widening fiscal and current account deficits pose downside risks. Our panelists revised up Romania’s growth forecast for 2016 for the fifth consecutive month and they now see GDP expanding 4.1%. For next year, they expect slower, but still solid, growth of 3.5%.
TURKEY | Geopolitical risks will likely weigh on the economy this year
Prime Minister Ahmet Davutoglu stated on 5 May that he will step down following an extraordinary meeting of the AKP scheduled for 22 May. Davutoglu lost a political struggle against President Recep Tayyip Erdogan. The leaders had clashed on a series of topics, which included their economic views, the conflict with the Kurds and Davutoglu’s less enthusiastic support regarding shifting the country to a presidential system. Moreover, the agreement on the refugee crisis between Turkey and the European Union bolstered Davutoglu’s popularity, which was seen as a threat to Erdogan’s previously unquestioned authority. In this regard, as the deal was Davutoglu’s personal project, it is not clear whether Erdogan will move forward with some of the reforms included in the pact that are needed for the deal to be implemented.
Despite the strong performance observed in 2015, rising political tensions, the ongoing fighting with Kurdish militants in the southeast of the country and geopolitical risks stemming from the war in Syria all have the potential to threaten economic growth this year. On the upside, the economy is benefiting from low oil prices and the temporary halt in the Fed’s tightening cycle. FocusEconomics panelists expect that GDP will rise 3.3% this year, which is unchanged from last month's projection. Next year, the panel sees GDP growth accelerating to 3.5%.
INFLATION | SEE inflation hits eight-month low in March
Inflation in South-Eastern Europe eased from 4.3% in February to 3.3% in March, thus hitting the lowest level in eight months. The decrease came mainly on the back of lower inflation in Turkeyand Serbia. Elsewhere in the region, 8 of the 12 countries in SEE posted negative annual variations in consumer prices. Preliminary data for April point to a continuation of the downward trend and a decrease in Turkey’s inflation continues to be the main factor behind the overall decrease in inflation. On 20 April, the Central Bank of Turkey cut its key interest rate and commented that the decrease in inflation paves the way for further cuts in the future.
This month, our panel of analysts cut the 2016 inflation projection for South-Eastern Europe from last month’s 4.7% to 4.6%. This reflects downward revisions to 11 countries’ inflation forecasts, including Serbia and Turkey. Conversely, the inflation forecast for Greece was left unchanged. The FocusEconomics Consensus Forecast panel foresees inflation of 5.0% in 2017.
Written by: Dirina Mançellari, Senior Economist
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