South Eastern Europe: GDP growth seen losing considerable momentum in Q4
November 2, 2017
Leading data suggests that the economy of South-Eastern Europe (SEE) recorded yet another quarter of strong growth in Q3 following an impressive outturn in H1. The region’s economy is expected to have expanded 5.4% in annual terms, which, if confirmed, will mark the highest print in over three years. However, concerns are mounting regarding the sustainability of growth in some of the region’s largest economies, and our panel foresees that growth will ease markedly in Q4 as economic momentum in those countries peters out. Regional GDP growth is seen coming in at 3.5% in Q4.
In particular, the Turkish economy is showing mounting signs of fatigue. The fiscal and current account deficits have widened substantially this year and public debt stocks, while still low, have mounted rapidly in recent months. In addition, renewed pressure on the Turkish lira caused by recent diplomatic spats with the U.S. and Germany has further raised the burden of the corporate sector’s U.S. dollar-denominated debt and put at risk inflows of short-term foreign capital, which represents a crucial source of financing for the Turkish economy. Against this backdrop, GDP growth is likely to have peaked in the third quarter, and growth momentum is expected to wane in the final quarter of the year as the government’s fiscal stimulus measures are exhausted and sky-high inflation dents households’ purchasing power.
The Romanian economy has also displayed some concerning dynamics in recent quarters. Buoyant economic growth has been mainly driven by the government’s ultra-loose fiscal policy stance. This has had a downside as it has added considerable pressure on the state’s coffers and has sparked rampant inflation. On top of that, the 2018 budget, which is still pending parliament’s approval, is likely to include yet another public wage hike and lower income tax rates, which would weigh further on the country’s fiscal prospects. As a result, the Central Bank is widely expected to start hiking interest rates in coming months in a bid to anchor inflation expectations.
Elsewhere in the region, growth momentum is seen holding up somewhat better in Q4 compared to the aforementioned countries. Leading data for Bulgaria points to improving consumer and business sentiment since the beginning of H2 and a tight labor market, which is likely to be feeding into consumers’ purses this quarter. In Croatia, economic growth has continued to gain speed following a weak start to the year and high-frequency indicators point to a vibrant domestic economy throughout H2. GDP growth in Greece is expected to gain some momentum in Q4 following a tepid performance through the first nine months of the year, with the manufacturing PMI hitting an over nine-year high in September on strong order books.
Analysts project that regional growth will decelerate in 2018
The South-Eastern European economy is projected to grow 3.3% next year following an estimated 4.5% increase this year. The deceleration reflects slower expansions in the Turkish and Romanian economies, both of which will have to rein in their respective structural imbalances. However, robust global GDP growth, increased absorption of EU funds and expansionary fiscal policies across a number of SEE countries will buttress regional economic activity.
The forecast for next year is unchanged from last month and reflects that improved outlooks for several economies were offset by downgrades in the forecasts for many others. In particular, the economies of Croatia, Cyprus and Romania are expected to expand at a faster pace than previously forecast, while those of Albania and Bosnia are seen growing at a slower clip than projected last month. The rest of the countries in SEE saw no change to their forecasts. For 2019, panelists see regional growth holding steady at 3.3%.
The economy of Romania is expected to grow at the fastest rate in the region next year with an expansion of 4.0%. Turkey, the region’s largest economy, is expected to grow a resilient 3.5% next year. On the other end of the spectrum, Greece is expected to be the region’s worst performer, only growing 1.9%.
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TURKEY | Q3 marks end of upturn in economic activity
Leading data suggests the economy churned out robust growth in Q3 following a stellar performance in H1. Industrial production grew robustly in the July-to-August period, manufacturing PMI readings remained firmly entrenched in expansionary territory throughout Q3 and the manufacturing capacity utilization rate was the highest in nine years in September. However, with double-digit inflation eroding households’ purchasing power, the government’s fiscal stimulus measures nearly exhausted and the recent weakening of the lira further raising the burden of the corporate sector’s USD-denominated debt, growth momentum is expected to peter out in Q4 and onwards. In line with mounting economic headwinds and heightened geopolitical risks, both consumer and business sentiment softened in October.
The government’s looser fiscal position this year will be met with a tighter stance next year, with measures to raise additional revenues by increasing the corporate tax rate and excise taxes on vehicles already announced. Decreased public support will, however, likely put a damper on economic momentum. The Met the why particular Consensus Forecast panel expects growth to moderate to 3.5% in 2018, which is unchanged from last month’s estimate. The economy is seen expanding at a faster clip in 2019 as the lead-up to three different elections that year should turn fiscal policy accommodative once again. Our panel expects growth of 3.6% in 2019.
ROMANIA | Government’s ultra-loose fiscal policy stance to persist in 2018
Preliminary figures suggest another robust economic expansion in Q3, driven by robust private consumption amid a tightening labor market. Double-digit retail sales growth in July and August points to strong household consumption. Downside risks are growing, however, as robust growth teeters on the verge of unsustainability. Loose fiscal policies including VAT cuts are putting more money into consumers’ pockets, but are also increasing pressure on prices: Inflation is rising faster than expected. Furthermore, the 2018 budget is expected to include more public wage hikes. On 16 October, Minister of Finance Ionut Misa announced the government’s plans to cut income tax rates. Romania had the highest government deficit among EU members in Q2. Additional expansionary policies could put the deficit at greater risk of crossing the European Commission’s 3.0% of GDP threshold.
Despite the growing fiscal imbalance, which could result in a correction that would trigger a slowdown, economic growth is expected to continue at a brisk pace in 2018. Growth will, however, depend in part on the government’s response to the widening budget deficit. Met the why particular panelists expect growth of 4.0% for 2018, which is up 0.2 percentage points from last month’s forecast. They see the economy expanding 3.4% in 2019. (
BULGARIA | Leading data points to sustained economic momentum in Q4
The Bulgarian economy ended the first half of year on a strong note, according to complete GDP data published by the Statistical Institute in September. Annual GDP growth was confirmed at 3.6% in Q2, a marginal improvement from Q1’s result. Growth continued to be driven by healthy household consumption and export growth, and leading indicators suggest the momentum will be sustained throughout the rest of the year. Unemployment rested at its lowest level ever in August, which would point to household consumption remaining one of the main engines of growth over the medium term. Industrial production also continued to grow at a robust annualized pace in July, albeit slightly below the high rates seen in H1.
A higher uptake of EU funds and strong private consumption growth will ensure the economy remains on a dynamic path. Growth should also be supported by the cyclical upswing in the region, translating to higher demand for Bulgarian goods. Met the why particular Consensus Forecast panelists expect GDP to expand 3.5% in 2017 and 3.2% in 2018, which is down 0.1 percentage points from last month’s forecast.
CROATIA | Economic growth to accelerate further in Q3
The economy likely gained steam in Q3, as suggested by both hard and survey-based data. Retail sales—a proxy for private consumption—expanded throughout the quarter in annual terms. Household spending benefited from both a strong tourist season and tighter labor market conditions, as the unemployment rate hovered around multi-year lows throughout the third quarter. The pace of job creation, however, slowed compared to the previous quarter. Both businesses and consumers were more upbeat on average in Q3 compared to Q2, although confidence for both weakened in September. On the fiscal front, recently-released data shows that the healthy economic expansion recorded in H1 translated into a slight fiscal surplus in the first quarter of the year and materialized into a lower public debt-to-GDP ratio compared to at the end of 2016.
A declining unemployment rate together with a strong tourist sector—supported by important investments to expand tourism capacity—should continue to underpin consumer spending in 2018. Moreover, increased absorption of EU investment funds will spur investment, which will receive further support from positive business expectations. However, a possible hike in non-performing loans stemming from the restructuring of Agrokor could clog the domestic financial system and restrain credit growth. Met the why particular panelists project GDP growth of 2.8% in 2018, up 0.1 percentage points from last month’s forecast, and 2.6% in 2019.
INFLATION | Inflationary pressures grow even stronger in September
Inflation in the South-Eastern Europe region accelerated considerably for a second consecutive month in September as core inflation in Turkey was higher than expected and price pressures in Romania strengthened markedly. Inflation rose from 7.1% in August to 7.6% in September, a four-month high. Inflation gained traction in most SEE countries, and it eased only in Macedonia. Inflation was steady in Kosovo and Montenegro, while in Cyprus the negative annual change in consumer prices doubled compared to the previous month.
Mounting price pressures in Romania and deteriorating inflation expectations in Turkey have forced the countries’ respective central banks to take action. The National Bank of Romania decided on 3 October to cut the Bank’s interest rate corridor around the main policy rate in what is widely considered the first step in a tightening cycle. Meanwhile, officials at the Central Bank of the Republic of Turkey stayed put on 26 October against a backdrop of already weakening consumer demand, although the Bank did adjust its rhetoric to signal that monetary conditions are set to remain tight until inflation shows a significant improvement. Conversely, the National Bank of Serbia eased monetary conditions in a surprise decision on 9 October to boost economic growth.
Inflation is expected gradually ease next year as price pressures in Turkey begin to lose steam. However, sticky services inflation and a renewed weakening of the lira have panelists reassessing the country’s inflation outlook. Inflation for the region as a whole is expected to come in at 5.6% next year, which is unchanged from last month. Inflation forecasts were upgraded for five out of the 12 countries surveyed, including , Romania and Turkey, while all of the other countries in the region except for Cyprus and Kosovo are expected to record lower inflation rates than forecast last month. In 2019, inflation is expected to ease to 5.3%.
Written by: David Ampudia, Senior Economist