SEE: SEE decelerates in Q2 amid slowdown in Turkey
October 5, 2016
The economy of the South-Eastern Europe (SEE) region slowed in the second quarter, expanding 2.9% in Q2 over the same quarter of the previous year, which was a significant deceleration over the 3.5% increase seen in the first quarter. The slowdown was mainly due to Turkey’s weak expansion in Q2—the slowest increase in over a year—as fixed investment contracted and the external sector disappointed. Turkey is the region’s biggest economy and fluctuations in its GDP contribute to the volatility of the SEE’s growth rate. The Turkish economy has likely decelerated further in the third quarter on the back of the fallout from the coup attempt, the deterioration of the tourism sector and the recent downgrade of the country’s credit rating to junk. In the region’s other key player, Greece, the parliament passed reforms in late September to cut pension spending and expedite privatizations, as sought by the country’s international creditors. This paves the way for the country to receive more financial aid under the third bailout program. The Greek economy contracted at the softest pace in a year in the second quarter but economic momentum remains weak as the austerity measures coupled with unfavorable conditions in the labor market have harmed private consumption.
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Political and policy uncertainty coupled with low commodity prices have dampened global growth expectations, including in the European Union, which is a major trading partner of the South-Eastern Europe region. Despite the weak external context, growth in countries such as Albania, Montenegro and Serbia remains firm, mostly due to robust investment and accelerations in private consumption as the labor market gradually recovers. Moreover, these countries have experienced higher lending to the private sector due to lower lending rates this year. In the coming quarters, growth dynamics in SEE will be dominated by the escalating political uncertainty and security concerns in Turkey, the ongoing debt saga in Greece, the continuing refugee crisis and the uncertainty regarding Brexit. Our panel of analysts expect the SEE region to have decelerated further in Q3, expanding 2.2%.
Growth prospects unchanged for second consecutive month in October
This month, the outlook for South-Eastern Europe’s economy was unchanged again over the previous month’s estimate. FocusEconomics panelists expect the SEE economy to expand 2.7% this year. Projections were kept unchanged at last month’s forecasts for five countries including Bosnia and Herzegovina and Cyprus. In contrast, GDP forecasts were revised up for six economies including Bulgaria and Serbia. Turkey’s economy was the only country for which this year’s projection was downgraded. For next year, our panel of economists foresees the economy expanding 2.8%.
Romania is forecasted to be the fastest growing economy this year, followed by Montenegro. On the other hand, the worst performers are expected to be Greece, Cyprus and Croatia, in that order. Turkey will grow the fastest of the other major economies in the region, with a projected expansion of 3.1%.
BULGARIA | Economy remains robust this year due to strong fundamentals
Bulgaria’s recent high-frequency indicators paint a mixed picture of the economy at the outset of Q3. In July, retail sales slowed to a six-month low and industrial production decelerated, reflecting a slowdown in manufacturing and a contraction in energy supply. Yet, the unemployment rate fell to 8.0% in August, which marked the lowest reading since January 2010. In other news, on 30 September, the Finance Ministry announced that the budget surplus as a percentage of GDP improved by three percentage points in the first eight months of 2016, in comparison to the same period last year. A recent IMF mission to Bulgaria praised the government’s ongoing fiscal consolidation plan and also revised up the country’s economic outlook due to “improved sentiment and rising private consumption”—an impressive review considering the economic uncertainty that currently reigns in the Euro area.
While Bulgaria’s economic fundamentals remain sound, subdued growth in the Euro area and instability in Turkey could weigh on the country’s outlook. FocusEconomics Consensus Forecast participants expect GDP to expand 2.8% in 2016, which is up 0.1 percentage points from last month’s forecast. In 2017, panelists see the economy also growing 2.8%. .
CROATIA | HDZ wins simple majority in parliamentary elections, paving the way for coalition talks
The Croatian economy accelerated in Q2, on the back of stronger government consumption and fixed investment. According to the latest high-frequency data, the good economic momentum likely carried over into Q3: retail sales growth speeded up in July, while in August unemployment continued to fall and industrial production accelerated. In the political arena, elections were held on 11 September. The conservative Croatian Democratic Union party (HDZ) won a relative majority but needs junior partners to form a government. It is likely to renew a coalition with its current partner, the Bridge of Independent Lists (MOST), thus opening door to a market-friendly majority. On 28 September President Kolinda Grabar-Kitarović started official consultations, which are expected to deliver an outcome in the coming weeks.
The economy seems to have gathered pace, on the back of robust domestic demand and the strong performance of the tourism sector. The major downside risks to growth come from a possible weakening of the EU’s growth rate and rising oil prices. FocusEconomics panelists expect GDP to grow 2.1% in 2016, which is up 0.1 percentage points from last month’s forecast. The panel expects economic activity to expand 2.1% in 2017 as well
ROMANIA | Boost in private consumption supports economy in Q2
An expansionary fiscal policy, public sector wage hikes and low prices have spurred a consumption spree. Revised data confirmed that annual economic growth in Q2 accelerated to an almost eight-year high of 6.0%, making Romania the most dynamic economy in the region. The latest indicators suggest that the positive momentum from Q2 carried over into Q3. While industrial production faltered in July, retail sales logged another double-digit expansion and unemployment came in at an over eight-year low in August, pointing to a still-solid domestic economy. The political arena has, however, been more turbulent. The leader of Romania’s Liberal Party, the country’s second-biggest party, stepped down in late September over corruption allegations. The resignation is expected to weaken the party just months shy of the 11 December parliamentary elections.
Although strong domestic demand will support growth and shield Romania from economic headwinds, Brexit-related uncertainties and waning growth in the Eurozone pose downside risks in the short-term. Growing macroeconomic imbalances such as a deterioration in the public and external accounts constitute medium-term risks to the outlook. Panelists expect the economy to grow 4.7% this year, which is up 0.2 percentage points from last month’s forecast. In 2017, the panel foresees economic growth moderating to 3.5%.
TURKEY | Economy slows in Q2, near-term outlook faces downside risks
The Turkish economy decelerated in Q2 and GDP expanded at the slowest pace in over year, but growth was still healthy relative to that of many emerging market economies. In Q2, fixed investment contracted and the external sector dragged on the economy. Growth in private consumption slowed but remained robust against the backdrop of a more accommodative monetary policy and the impact of this year’s increase in the minimum wage. More recent indicators show that the economy likely decelerated further in Q3. Industrial production contracted for the first time in nearly two years in July and the manufacturing sector continued to shrink in September. The lira and Turkish stocks slid on 26 September following the news that Moody’s downgraded Turkey’s credit rating to Ba1. This is the second time since the failed coup that the country’s credit rating has been downgraded amid concerns regarding a slowing economy and risks related to the country’s external funding requirements.
Mounting political turmoil following the coup, security concerns and the recent extension of the state of emergency by another three months could drag on business sentiment going forward. On the upside, decisive government support and a more accommodative monetary policy will benefit the economy. On balance, FocusEconomics panelists expect that the economy will expand 3.1% this year, which is down 0.2 percentage points from last month's forecast. Next year, the panel sees GDP growing 3.2%.
INFLATION | SEE inflation eases in August
In August, inflation in the South-Eastern Europe region decreased from a six-month high of 4.6% in July to 4.3%. August’s decrease was due to lower inflation in Turkey—the region’s largest economy. Elsewhere in the region, negative annual variations in consumer prices were recorded in seven countries while Albania was the only country where inflation picked up in August.
This month, our panelists increased their 2016 inflation forecast from the previous month’s 4.2% to 4.3%. This reflects increased estimates for Greece and Turkey. Our panel forecasts that inflation will accelerate to 4.9% in 2017.
Written by: Dirina Mançellari, Senior Economist