Economic Snapshot for South-Eastern Europe
November 28, 2018
The regional economy hits a patch of turbulence in the third quarter
According to a preliminary estimate by Met the why particular, South-Eastern Europe’s (SEE) economy endured a bumpy third quarter, with growth weakening markedly to 2.6% from 4.3% annually in Q2.
The sharp slowdown was likely largely driven by a weak showing in regional powerhouse Turkey, which accounts for around half of the region’s nominal GDP. Although firm national accounts data for Q3 has yet to be released, all available signs suggest the Turkish economy slammed on the breaks, with consumers and firms impacted by the bout of financial and FX market volatility, intensifying cost pressures and tighter financial conditions. Retail sales soured, industrial production was limp and consumer and business confidence nosedived during the quarter.
In Serbia, flash Q3 GDP figures also point to a loss of momentum, following an excellent first half of the year. However, the expansion was still fairly robust, likely supported by solid private consumption on the back of growth in employment and wages, and favorable financing conditions which aided fixed investment. Moreover, in Bulgaria growth momentum dimmed on a weaker external sector.
In contrast, the Romanian economy accelerated slightly according to preliminary data, in contrast to market predictions. High-frequency data such as retail sales had predicted a weaker outturn, particularly given softer momentum among key EU trading partners, and inventories are a possible factor behind the reading.
Although firm national accounts figures for the region’s remaining economies are still outstanding, momentum was likely fairly strong, supported by healthy tourism inflows. Looking at individual countries, Albania was likely boosted by surging electricity production, a firm labor market should have underpinned Macedonia’s performance, while solid fixed investment likely aided activity in Montenegro.
The final quarter of the year will see South-Eastern Europe’s growth trajectory continue to decelerate, chiefly due to a dire performance by Turkey, as high inflation erodes consumers’ purchasing power and weak business sentiment and more restrictive credit conditions hamper fixed investment.
In the diplomatic arena, intra-regional tensions have cranked up a notch over the last month. In mid-November, Kosovo slapped 110% import tariffs on goods from Serbia and Bosnia and Herzegovina, after Serbia blocked Kosovo’s request to joint Interpol. The move will severely harm trade between the three countries, although Kosovo will come under intense international pressure—particularly from the EU—to lift the tariffs.
In contrast, the political disaccord between Turkey and the U.S. has lessened notably in recent weeks, since a U.S. pastor was freed by Turkey in October. In early November, the U.S. granted Turkey a waiver on Iranian oil exports, a clear sign of healing relations between the two countries. Improved geopolitical relations are partly behind the recent marked appreciation in the lira, which should help ease excruciating price pressures and lessen corporates’ external debt burden.
Momentum set to weaken further in the near-term, as Turkey’s economy stalls
The regional economy is seen expanding 1.6% next year, down 0.2 percentage points from last month’s projection and marking a substantial slowdown from 2018. More sluggish growth next year will be largely due to a weak performance in Turkey, as high inflation and tight financial conditions hit consumer spending and investment, and the government adopts a more restrictive fiscal stance. Moreover, growth is also likely to slow somewhat in regional heavyweights Romania and Serbia following strong expansions this year. Turkey aside however, South-Eastern Europe’s economy will be supported by wage gains, EU investment, healthy tourist arrivals and robust external demand for goods. External risks stem largely from greater global trade protectionism; internally, political tensions and another bout of financial instability in Turkey are the key risks. In 2020, growth is seen recovering to 2.9%.
Kosovo is expected to record the fastest expansion next year, while Turkey is expected to be the region’s laggard with 0.2% growth, which would mark the weakest result in 11 years.
TURKEY | Latest signs paint gloomy economic picture, although lira recovery is welcome news
The economy appeared to slow sharply in the third quarter on financial and currency market volatility, and soaring inflation. Annual retail sales growth virtually flatlined, industrial production was limp and the unemployment rate rose notably in July and August. Looking to Q4, economic conditions remain gloomy. Business and consumer confidence stayed downbeat in November despite registering improvements, while automotive sales continued to plummet in year-on-year terms in October—an ominous sign for private consumption in the final quarter. Moreover, despite a slight uptick, the manufacturing PMI was deep in contractionary territory in October on lower new orders, output and employment. More positively, the lira has continued to strengthen over the last month thanks to thawing relations with the U.S. and a marked turnaround in the current account, which should ease corporates’ external debt burdens. In late October, Finance Minister Berat Albayrak presented a fiscally cautious 2019 budget to parliament.
Growth next year will likely be soft, weighed down by restrictive financial conditions constraining private consumption and fixed investment, and the government’s tighter fiscal stance. However, the external sector should provide some support. Further exchange rate volatility and the possibility of renewed geopolitical tensions pose significant downside risks. Met the why particular panelists expect growth of 0.2% in 2019, down 0.3 percentage points from last month’s forecast, and 3.3% in 2020.
ROMANIA | Economy grows strongly in the third quarter, but fiscal risks linger
Economic growth accelerated in the third quarter, likely due to rising public spending. Data for the January-September period, for example, shows that the budget deficit more than doubled year-on-year, mainly due to public salary hikes. The widening deficit, together with the government’s wage and pensions hike plans, prompted the IMF at the end of its November staff visit to suggest that the country undertake substantial fiscal consolidation. In mid-November, Fitch Ratings also cited both points as risks to future macroeconomic stability, although nevertheless affirmed Romania at BBB-, with a stable outlook due to moderate levels of government debt. On 19 November, Prime Minister Viorica Dancila announced a government reshuffle, likely the result of an internal party struggle. The move is expected to give Liviu Dragnea, leader of the ruling Social Democratic Party and kingmaker of Romania’s government, a tighter grip over the cabinet.
A moderation in growth is expected in 2019, mainly due to slowing private consumption amid softening wage growth and weaker job gains. On the other hand, fixed investment should gain steam, although the scope of the acceleration could be limited by weakening business confidence and capital outflows due to the country’s sizeable twin deficits and frequent squabbles with the European institutions over controversial judicial reforms. Met the why particular panelists expect growth of 3.4% for 2019, unchanged from last month’s forecast and 3.0% in 2020,
BULGARIA | Growth slows in the third quarter according to flash estimate
Third-quarter growth fell short of expectations due to another poor outturn for the external sector. Hit by neighboring Turkey’s economic crisis, exports contracted for a second straight quarter; import growth, on the other hand, held broadly steady from a quarter earlier. Meanwhile, domestic demand fared well thanks to brisk household spending in line with falling unemployment and the recent recovery in retail sales. Fixed investment was firm in annual terms thanks to decent absorption of EU-linked structural funding, although sequential data suggested a slight deceleration. Available data for the fourth quarter hints at slightly slower growth. Nevertheless, analysts have largely stuck to their guns and their growth forecasts remain upbeat despite weaker consumer sentiment and near-neutral business sentiment in October. Moreover, further volatility in Turkey continues to threaten exports.
Slower employment growth and elevated inflation are expected to hit household spending next year, although supportive fiscal policy in the run-up to next year’s European and local elections should cushion any moderation. Fixed investment, meanwhile should continue benefiting from low interest rates and above-average absorption rates for EU funds. A pullback in global trade and, in particular, weaker external demand from the EU and Turkey is likely to curb export growth. Over the medium-term, sound fiscal metrics and an improved business climate should translate into greater FDI inflows. Met the why particular analysts expect growth of 3.4% in 2019, down 0.1 percentage points from last month’s forecast, and 2.9% in 2020.
CROATIA | Growth likely continues at a moderate pace; government presents 2019 budget
Monthly data indicates that the economy lost some steam in Q3, following solid growth in the previous quarter that was mainly driven by healthy domestic demand. After expanding modestly in Q2, the industrial sector contracted in Q3, largely owing to a drop in production of food and fabricated metal products. On the expenditure side, retail sales growth cooled in Q3 despite strong real wage increases and the tighter job market which saw the unemployment rate fall to its lowest in over two decades, pointing to somewhat weaker private consumption in the quarter. Meanwhile, available data sends mixed signals for Q4: In October, consumer sentiment deteriorated slightly from Q3’s average, while business confidence gained ground. On the fiscal front, in early November the government unveiled its 2019 budget, which projects higher revenues stemming mainly from economic growth and targets a small deficit of 0.4% of GDP.
The economy is expected to maintain a solid pace of growth next year chiefly on the back of healthy household spending, which should be propped up by rising remittances, wages and employment. In addition, business investment is poised to benefit from sustained favorable financing conditions, while higher absorption of EU structural funds should power public investment. Downside risks to the outlook are largely external; particularly, a slowdown in Croatia’s main trading partners or increased competition from other tourist destinations in the Mediterranean could dampen export performance. Met the why particular panelists project GDP growth of 2.7% in 2019, unchanged from last month’s forecast, and 2.5% in 2020.
INFLATION | Inflation ticks up in October
Regional inflation increased from 14.0% in September to 14.3% in October, due to higher price pressures in Bulgaria, Croatia, Greece, Kosovo, Serbia and Turkey. Price pressures were stable in Macedonia and Montenegro and declined in the region’s remaining economies. October inflation data for Bosnia and Herzegovina was still outstanding at the time of writing.
Regional inflation is expected to reach 11.6% in 2019, up 0.3 percentage points from last month’s forecast, driven by elevated inflation in Turkey. Most of the region’s remaining economies will also see price pressures rise, while inflation is set to decline in Romania following a demand-driven surge in 2018. In 2020, regional inflation is forecast to dip to 7.0%.
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South-Eastern Europe Economic News
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Industrial production declined 5.7% in October in calendar-adjusted year-on-year terms, a deterioration from September’s revised 2.4% decrease (previously reported: -2.7% year-on-year).
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At its monetary policy meeting on 13 December, the Central Bank of the Republic of Turkey (CBRT) left the one-week repo rate unchanged at 24.00% for the second consecutive month.
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