South-Eastern Europe: Regional momentum dwindles in Q1 amid increased political noise
May 10, 2017
A comprehensive set of data for the final quarter of the year showed that growth in the South-Eastern Europe (SEE) region regained some of the momentum lost following Q3’s meagre performance. Building on a firmer footing in the last three months of 2016, growth in the region for the full year was 2.8%. This, however, still marked the weakest reading in four years and a notable deceleration from 2015’s 4.4% expansion. Swings in economic growth in H2 2016 were largely attributable to Turkey which, having contracted markedly in Q3, rebounded in the fourth quarter as public counter-cyclical measures bore fruit. Elsewhere in the region, Greece stumbled into contractionary territory in Q4 after growing strongly in the previous quarter, while Romania continued to expand robustly on the heels of soaring private spending.
Meanwhile, Turks narrowly voted in favor of a series of constitutional amendments designed to transform the country’s parliamentary democracy into a strong executive presidential regime. The slim majority obtained by the ‘Yes’ camp means that elections will not be called before 2019, which gives the government ample leeway to work on improving the country’s lackluster economy. Beyond Turkey, headlines across the region continue to be dominated by political events. The Croatian government only just survived a no-confidence vote in early May, casting doubt on the ruling party’s ability to continue at the head of the executive. In Macedonia, a protracted crisis reached fever pitch in late April when MPs from the leading opposition party were assaulted in parliament. Tensions also ran high in Albania, where political wrangling ahead of June’s parliamentary elections put reforms necessary for the country’s accession to the EU on the backburner.
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Growth prospects in the SEE region will continue to be closely linked to those in the European Union. A pickup in economic activity, coupled with an increased inflow of EU funds under the European Structural Funds 2014-2020 program, will guarantee some degree of resilience across SEE economies. Nonetheless, a further complication of the political situation in several countries and a deterioration in Turkey-EU relations risk economic fallout in the region. Our panel of analysts expect growth in the SEE region to have decelerated in the first quarter to a 2.7% expansion.
Growth projections revised upwards
The removal of some uncertainty in Turkey has prompted FocusEconomics panelists to revise their forecasts upwards for 2017. They now expect the regional economy to increase 2.7%, which is up 0.2 percentage points from last month’s forecast. The panel also reassessed their projections for 2018 and now expect the SEE economy to expand 3.0%, which is up 0.2 percentage points from last month’s report.
The upward revision to the 2017 growth forecast was primarily due to a brighter outlook for the Turkish economy on the back of upbeat survey data and diminished uncertainty following the referendum’s results. However, weak dynamics in the key tourism sector and some still-lingering political noise, particularly among opposition members who reject the referendum outcome, could revert these recent gains. Upward revisions in Turkey and Bosnia outstripped yet another severe downgrade to Greece’s outlook, which is facing increasing difficulties due to fresh austerity measures and poor hard data. Macedonia and Cyprus also faced downgrades this month, while the rest of the region’s country forecasts were unchanged.
Kosovo and Romania are expected to be the fastest growing economies in 2017 with expansions of 3.8% and 3.9%, respectively. On the other side of the spectrum, major-player Greece and Cyprus are expected to be the worst performers, growing 1.0% and 2.5% respectively.
BULGARIA | Center-right GERB forms coalition government
On 27 April, the center-right GERB party, which won March’s snap elections but without an outright majority, signed a coalition agreement with United Patriots (UP), an alliance of three nationalist parties. The agreement came after GERB accepted to increase the minimum state pension and to double teachers’ salaries in early April and will allow GERB’s leader, Boyko Borisov, to serve as prime minister for a third time. The newly formed GERB government spells good news for the economy—which ended 2016 on a positive note—as the party is committed to prudent fiscal policies and strong ties to the European Union, thus allowing Bulgaria to benefit from the expected inflows of EU funds and maintain political stability.
Fixed investment growth is expected to accelerate due to higher inflows of EU funds, but increased imports could constrain growth this year as domestic demand strengthens. A slower-than-expected absorption of EU funds poses the main downside risk to Bulgaria’s economy. FocusEconomics Consensus Forecast panelists expect GDP to expand 3.2% in 2017, which is unchanged from last month’s forecast, and 3.1% in 2018.
CROATIA | Political unrest risks economic fallout
The country has been shaken by a period of political turmoil in recent weeks, after Prime Minister Andrej Plenkovic dismissed three ministers—members of MOST, the junior coalition partner—who failed to support the finance minister in a corporate scandal involving stressed agro-food giant Agrokor. Although the government subsequently survived a no-confidence vote by the skin of its teeth, doubts remain as to how it will govern after the collapse of the governing coalition. Political uncertainty risks denting an economy which has performed fairly well so far this year. Unemployment continued to drop in March, benefiting from rising tourist inflows in the first quarter of the year, and stronger external demand led goods exports to expand strongly in the first two months of 2017, likely aided by a strengthening EU economy.
This year the economy should broadly mirror last year’s economic performance. Another record tourist season and a reduced tax burden will underpin private consumption, which together with stronger FDI and EU fund inflows will support growth. Nevertheless, rising political instability and economic spillovers from Agrokor’s restructuring could cloud the outlook. Analysts expect GDP to grow 2.9% in 2017 and 2.6% in 2018.
ROMANIA | Economy maintains positive momentum in Q1
An upward revision to GDP growth showed that the economy ended last year in a stronger position than initially estimated, on the back of surging household spending. Robust wage growth along with accommodative fiscal and monetary measures is supporting booming momentum and the Romanian economy is performing well above the majority of its regional peers. Incoming data for the first quarter suggest that dynamics remained healthy at the start of 2017, although growth likely moderated: industrial production and retail sales posted healthy expansions in February and the unemployment rate edged down in March. Meanwhile, the government backtracked on a bill to pardon corrupt officials on 4 May following largescale protests. Social unrest has risen in recent months due to backsliding on anti-corruption measures, although it is unlikely to have a significant economic impact in the near-term.
The economy should record another year of robust growth this year, however, risks of overheating are increasing. Our panelists predict an expansion of 3.9% in 2017, which is unchanged from last month’s forecast, with growth of 3.4% penciled in for 2018.
TURKEY | Erdogan clinches victory in referendum as economy firms up
The economic recovery continues to gain traction as political noise linked to last month’s referendum abates. Industrial production expanded for a sixth month running in March, while both consumer and business sentiment gained ground in the aftermath of Erdogan’s victory in his quest to transform Turkey into a presidential regime. Economic confidence has been rising in recent months as growth-inducing measures from Ankara continue to be felt among Turkish households. In a bid to shore up Turkey’s labor market—the unemployment rate rose to a seven-year high in January—the government also launched an employment campaign that is expected to be reflected in February’s print and onwards. Although these measures will provide respite to the ailing domestic economy, massive government-led stimulus risks creating a hole in the state’s finances, with the fiscal deficit already widening substantially in Q1.
Building on Q4’s strong rebound, the Turkish economy is expected to prove more resilient than originally expected this year despite myriad headwinds. In addition, a narrow victory for Erdogan will ensure some degree of stability until elections are held in 2019, which paves the way for potentially higher investment inflows. FocusEconomics panelists expect the economy to expand 2.7% in 2017, which is up 0.3 percentage points from last month’s estimate. In 2018, the panel expects growth of 3.1%.
INFLATION | Price pressures surge in March
Inflation in the South-Eastern Europe region leaped from 6.3% in February to 7.0% in March, which marked the highest rate since April 2012. The figure reflected higher inflation in a majority of countries, including Turkey—the largest economy in the region—despite economic slack.
This month, our panelists upgraded their 2017 inflation forecast to 5.8% from last month’s 5.7%. Increases were seen among seven countries, including Turkey, while four countries saw their forecasts for this year unchanged and only Romania had its forecasts revised downwards. For 2018, the panel expects inflation to ease to 5.4%.