South Eastern Europe Economic Forecast

Economic Snapshot for South-Eastern Europe

April 3, 2019

South-Eastern Europe regional growth seen moderating further in 2019

Despite still-robust domestic fundamentals, regional economic activity eased at the close of last year. Moderating growth in Romania and Greece, and a steep contraction in the region’s behemoth, which is suffering amid high inflation and unemployment, led the downturn. This year, regional growth is seen moderating further chiefly owing to a prolonged recession in Turkey.

South-Eastern Europe is expected to grow 1.0% in 2019, down 0.2 percentage points from last month's forecast. For 2020, regional growth is projected to come in at 2.8%.

 

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Turkey Economic Outlook

The lira has again come under severe stress in recent weeks, due to concerns over monetary and fiscal policy, with last year’s currency crisis still fresh in the minds of investors. In late March, the offshore overnight swap rate sky-rocketed and the Central Bank’s international reserves plummeted in attempts to prevent short-selling of the currency. The local elections, in which the AKP lost control over Ankara and Istanbul, took place against the background of a battered economy, which contracted sharply at the close of last year on collapsing domestic demand, undermined by deteriorating sentiment, high inflation and tougher financial conditions. Data on Q1 2019 remained grim, with consumer sentiment and the manufacturing PMI remaining depressed through March, suggesting the economy shrank in the quarter; however, fiscal stimulus should have alleviated some pains.

The economy will likely contract this year amid feeble domestic demand due to persistently high inflation, rising unemployment and currency weakness. In H2, the economy should recover somewhat, which would provide room for the Central Bank to loosen monetary policy and spur activity. Currency volatility and lingering geopolitical tensions cloud the outlook.

 
Romania Economic Outlook

Fourth-quarter growth moderated somewhat but was nonetheless upbeat, landing roughly in line with analysts’ expectations. Household spending remained firmly in the driver’s seat, as consumers appeared to benefit from the tight labor market and lower inflation. Investment continued to contract; absorption of EU-linked structural funding was sluggish. On the external front, weaker industrial output regionwide ate into local manufacturing activity and bruised export growth. Looking at the new year, some familiar trends stand out. On the upside, unemployment fell lower in January and retail sales jumped. On the downside, industrial output growth stalled. In late March, facing a stock-market backlash, the government largely scrapped its controversial new tax on banks’ assets; the move should lift business confidence and, in turn, investment.

Economic growth is expected to cool this year as slower employment growth and labor shortages weigh on household spending gains. Investment, meanwhile, is still expected to be hit by weak economic sentiment in light of the government’s tax proposals, as well as rising labor costs. Twin deficits also pose downside risks, especially in the event of a global downturn.

Croatia Economic Outlook

The economy lost steam in Q4 2018 on the back of waning external demand from EU trading partners and despite the strengthening domestic sector. Turning to Q1 2019, available data points to an uptick in economic activity: Industrial production rebounded strongly in January and business confidence was upbeat in the first two months of the year, which bodes well for private sector activity. On the demand side, while retail sales accelerated in January, the unemployment rate rose again in the same month and consumer confidence worsened in January−February. Meanwhile, S&P upgraded Croatia’s credit rating from BB+ to BBB- in late March, citing the country’s improving fiscal metrics as the main reason behind the upgrade. The ratings agency stressed the role of tourism-related inflows, solid domestic demand and fiscal consolidation measures in driving the improved fiscal performance.

Growth should be resilient this year, underpinned by solid domestic demand. Rising inflows of EU funds and a buoyant construction sector are poised to drive an acceleration in fixed investment. Moreover, moderate price pressures and further job gains will buttress consumer spending. Marked economic weakness in Italy and Germany could restrain growth, however.

South-Eastern Europe Monetary & Financial Sector News

Inflation in the region eased slightly to 11.0% in February, from 11.2% in January. This largely reflected a moderating inflationary pressure in Turkey even as inflation in most other nations, including Romania and Greece, picked up pace in February. Going forward, regional inflation should remain relatively stable despite a pick-up in inflationary pressures in Turkey.

Monetary policy movements in the region were limited in recent weeks with the central banks of Turkey, Romania and Albania all staying put. North Macedonia’s Central Bank, however, cut its rate by 25 basis points to 2.25% on 12 March due to positive foreign exchange market developments. Meanwhile, the ECB also held fire and now expects a first rate hike next year.

Last year, regional currencies depreciated significantly against the U.S. dollar, owing to the currency crisis in Turkey. The lira came under renewed pressures recently ahead of the 31 March local elections and is again seen falling noticeably against the greenback this year. However, most other currencies are expected to regain lost ground this year, led by a euro rally.

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