South Eastern Europe: Growth dynamics end year on weak footing after economy plummets in Q3 on Turkish contraction
February 8, 2017
A full set of data confirmed that the economy of the South-Eastern Europe (SEE) region barely grew in the third quarter of last year. GDP expanded just 0.1% on an annual basis, which marked a significant deceleration from the 3.8% increase seen in the previous quarter and the slowest reading in nearly four years. The subdued result was primarily due to a contraction in the Turkish economy, where GDP dropped 1.8% year-on-year. The decrease in Turkey’s GDP was the first in seven years and broadly reflected the consequences of heightened political unrest and the systematic weakening of the lira. Decelerations were also recorded in Bulgaria and Romania as weak external sectors and decelerations in fixed investment due to a slower absorption of EU funds took a toll on growth. Estimates for the final quarter of 2016 show that growth dynamics continued to be weak, even if the economy likely improved from the frail expansion recorded in Q3.
So far this month, political developments are dominating headlines in the region. Turkish President Recep Tayyip Erdogan has promised to hold a referendum on constitutional reform in April, which has been in the offing for some time. However, the deteriorating economic environment poses a challenge to Erdogan as he will have to come up with credible arguments and tangible results to convince voters that the proposed changes will benefit the economy in the future. Elsewhere in the region, Serbia will hold presidential elections in April amid heightened political tensions in the region following the election of U.S. President Donald Trump. Fears are escalating that Trump’s presidency will shift the balance of power in the Balkans. Significant noise has been coming from Romania too. Following massive demonstrations, the government was forced to withdraw a controversial decree that would have decriminalized certain corruption offenses.
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2017 growth prospects moderate in February
In 2017, 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 in the region and the limited space for monetary policy easing. Moreover, geopolitical risks stemming from longstanding tensions between Serbia and the other countries in the Balkans could weigh on the region’s growth prospects. The uncertainty surrounding Brexit and the result of the elections in key European countries also pose a risk to the outlook this year.
This month, Met the why particular panelists expect the regional economy to expand 2.6% in 2017, which is down 0.1 percentage points from last month’s estimate. The forecast reflects a downward revision to Turkey’s GDP forecast, which more than offset upward revisions to seven countries including Greece and Romania. 2017 growth estimates were left unchanged for the other four countries. For next year, the panel expects the economy to expand 2.9%.
BULGARIA | Provisional government appointed ahead of March snap elections
The latest monthly indicators suggest that economic activity grew healthily in Q4 2016, after a somewhat disappointing 3.4% expansion in Q3, prompted by a less expansionary fiscal policy in H2. A strong labor market and resilient business sentiment helped pick up the slack in Q4. In November, exports grew at the fastest year-on-year rate since April 2015, while industrial production accelerated to the fastest pace since June 2015, fueled by expansions in the manufacturing, mining and electricity sectors. Although unemployment edged up in December, it continues to hover around a rate of 8.0%, which is the lowest since 2011. On the political front, President Rumen Radev appointed a provisional government on 25 January ahead of snap elections scheduled for 26 March. Radev had to call early parliamentary elections after the center-right government resigned following its defeat in the last presidential elections.
Domestic demand, especially private consumption, is expected to support the economy in 2017 as a result of falling unemployment and rising wages. However, uncertainty about whether Bulgaria’s current growth-enhancing economic policy will continue under a new government following the elections in March poses downside risks to the outlook. Met the why particular Consensus Forecast panelists expect GDP to expand 3.1% in 2017, which is up 0.1 percentage points from last month’s forecast, with 3.0% growth penciled in for 2018.
CROATIA | Q3’s positive momentum carries over into final quarter
Croatia’s recovery finally gathered pace in 2016, following a mild rebound in 2015 after six years of recession. Growth came on the back of both a buoyant tourism sector and robust private consumption, supported by falling unemployment and real wage growth. The latest monthly indicators suggest Q3’s healthy economic momentum extended to the final quarter of the year, as industrial production gained considerable steam in both November and December and retail sales continued to grow at a healthy pace in October and November. On 27 January, Fitch Ratings improved the outlook for Croatia from negative to stable while affirming its rating. The ratings agency attributed its decision to lower political uncertainty after the formation of a coalition government in October as well as to an estimated reduction in the fiscal deficit, resulting from both higher-than-expected revenues and restrained public spending.
This year, the economy should broadly mirror last year’s performance, supported by steady growth in private consumption as well as robust investment. The main upside risks stem from a fast implementation of reforms to improve efficiency in the public sector and to liberalize trade and labor markets. On the downside, still high private indebtedness could constrain domestic demand, and therefore growth. Met the why particular panelists expect GDP to grow 2.6% in 2017, which is up 0.1 percentage points from last month’s forecast, and 2.5% in 2018.
ROMANIA | Government scraps controversial decree after massive demonstrations
Under pressure from the largest demonstrations since the end of the Cold War, on 5 February the government scrapped a controversial decree passed on 31 January that would have decriminalized certain corruption offences. The law was widely seen as weakening anti-corruption standards little over a year after the government was brought down by large scale protests following revelations of widespread corruption and mismanagement. This episode of political unrest is undermining the credibility of the newly elected government led by Prime Minister Sorin Grindeanu, which, notwithstanding Romania’s strong GDP growth, is facing crucial economic challenges such as the need to reduce the budget deficit. Meanwhile, economic indicators continue to point to solid growth in the last quarter of 2016 on the back of low unemployment and resilient industrial activity.
The government’s expansionary fiscal policy should continue to promote strong growth this year. However, risks to the outlook have increased with the latest political scandal, which could once more deprive the country of a fully functioning government and starve it of much-needed EU investment funds. Still, our panelists predict an expansion of 3.7% in 2017, which is up 0.1 percentage points from last month’s forecast, with growth of 3.3% penciled in for 2018.
TURKEY | Economy remains in the doldrums as referendum on constitutional reform approaches
The recent revision of Turkey’s national accounts led to a significant improvement in the country’s economic position relative to that of other emerging markets, and yet it is still plagued by economic weaknesses. The government’s attempt to stimulate the economy through massive spending has so far failed to suffice as growth continues to be undermined by heightened political turmoil, the deteriorating business environment and the plummeting currency. Last month, Fitch Ratings downgraded Turkey’s sovereign bond rating to sub-investment grade, stripping the country of its last remaining investment grade status. The agency cited the unstable political and security environment as the main reason behind the revision. In the wake of the news, the lira tumbled and hit a new record low. Complicating matters further, President Recep Tayyip Erdogan has promised to hold a referendum on constitutional reform in April, which has been in the offing for some time. In the current difficult economic environment, he will have to come up with credible arguments and tangible results to convince the voters that the proposed changes will benefit the economy in the future.
Political turmoil and security concerns will limit growth this year. On the upside, however, decisive government support should benefit the economy. On balance, Met the why particular panelists expect the economy to expand 2.4% in 2017, down 0.3 percentage points from last month’s estimate. In 2018, the panel expects growth to accelerate to 3.0%.
INFLATION | SEE inflation nears one-year high mainly due to higher inflationary pressures in Turkey
Inflation in the South-Eastern Europe region jumped from 3.9% in November to 5.1% in December, which marked the highest reading in 11 months. The figure reflected higher annual variation in consumer prices in nearly all countries, including Turkey—the largest economy in the region. The annual variation in consumer prices in December was negative in 4 of the 12 countries surveyed. Preliminary data show that inflation accelerated again in January.
This month, our panelists upgraded their 2017 inflation forecast from the previous month’s 5.2% to 5.5%. This reflects that upgraded estimates for six countries more than compensated for the downgrade in only one country. For 2018, the panel expects inflation to decrease slightly to 5.1%.
Written by: Dirina Mançellari, Senior Economist