South-Eastern Europe: Projections upgraded for fifth straight month
September 6, 2017
The outlook for South-Eastern Europe’s economy was upgraded for a fifth consecutive month; the 2017 GDP growth forecast was revised from 3.5% last month to 3.7%. The upgrade once again came hand-in-hand with panelists’ more positive assessment of the Turkish economy following a recent string of upbeat data releases. The Romanian economy is also seen growing at a faster pace than previously expected as a result of H1’s performance, despite mounting fiscal concerns.
Elsewhere in the region, the economic outlook for 2017 was also upgraded for Bulgaria, Cyprus and Montenegro. Conversely, Macedonia’s forecast was downgraded marginally this month, while growth in the Serbian economy is also expected to be lower than initially foreseen, the result of a bleak H1 performance. For 2018, GDP for the region as a whole is expected to grow 3.2%.
Romania and Turkey are expected to be the fastest-growing economies in 2017 with expansions of 5.0% and 4.2%, respectively. On the other end of the spectrum, major player Greece is expected to be the region’s laggard, growing 1.0%.
Slowdown in Q2 growth less drastic as expected
Preliminary data suggests that growth momentum in the economy of the South-Eastern Europe (SEE) region held up much better than previously forecast. GDP is estimated to have expanded 3.6% in annual terms in Q2, with several economies, including major players Bulgaria, Croatia and Romania, growing at faster clips when compared with the previous quarter. The result was above the 3.3% growth that had been forecast for the region as a whole. The deceleration compared to the 4.1% increase recorded in Q1 is largely due to the expected slowdown in the Turkish economy, which suffered from a strong base effect in the quarter.
Economic growth in Romania accelerated slightly in the second quarter of the year, reaching the second-fastest pace in nearly 11 years. Growth was driven by pro-cyclical wage hikes and sizeable tax cuts, which prompted both households and the public sector to spend aggressively throughout the quarter. Similarly, second-quarter economic growth in Bulgaria came in slightly above the increase seen in the first quarter, as the country continued to benefit from the upcycle in global trade, particularly increased demand from the EU, and robust domestic dynamics. Croatia’s economic growth also came in at a faster clip in Q2 as the all-important tourism sector continue to boom and households benefited from upbeat labor fundamentals. Growth also picked up, albeit only slightly, in the Greek and Serbian economies, while Cyprus’ GDP growth was steady in Q2 at Q1’s outturn.
Official GDP data is not yet available for the rest of the region, but our analysts expect activity to have decelerated slightly in Turkey as a result of Q2’s negative base effect. However, base effect aside, leading data continues to paint an encouraging picture of the Turkish economy as growth becomes increasingly broad-based and sentiment reaches multi-year highs. The 2017 outlook of the region’s behemoth was upgraded for a third consecutive month in August, which continues to reflect positive spillovers from the government’s loan guarantee scheme and a revival in the tourism sector.
There are reasons to be cautious, however. Although growth in the SEE region is expected to remain robust in Q3, when our panel of analysts expects GDP to expand 3.9% in annual terms, the economy’s performance will likely deteriorate from there onwards as fiscal tailwinds in Turkey wear off and Romania’s heated economy cools down. In Turkey, the USD 70.7 billion Credit Guarantee Fund (CGF) has helped rekindle an economy that analysts had previously expected to fare poorly. That said, as more than 80% of the CGF has already been used to backstop lending by banks, analysts are increasingly becoming concerned about what is in store for small- and medium-sized enterprises and households once the CGF runs dry. On a similarly concerning note, the Romanian government’s spending spree has prompted the fiscal deficit to balloon in recent months, which risks an economic slowdown down the line.
TURKEY | Economy continues to perform robustly on soft credit
The economy has continued to fire on all cylinders as a result of a strong export performance, robust public spending and the government’s loan guarantee fund. The unemployment rate dropped to a one-year low in May, highlighting the positive impact of the government’s employment campaign. In August, the capacity utilization rate inched up, and the manufacturing PMI remained firmly entrenched in expansionary territory in July. The country is also benefiting from a revival in the tourism sector, which is helping plug the gap caused by a widening trade deficit. The upbeat narrative is underscored by Turkey’s economic confidence index, which reached a five-year high in August despite a dip in consumer sentiment. All told, however, economic growth is likely to ease in H2 as the credit impulse provided by the credit guarantee fund facility nears its end and tax cuts on consumer durables expire in September, which should weigh on lending growth to SMEs and lower households’ purchasing power.
The short-term economic outlook remains bright, with private consumption growth being helped by expansionary fiscal policies and export-oriented industries benefiting from the upcycle in global demand, particularly from the EU. Met the why particular panelists expect GDP to expand 4.2% in 2017, which is up 0.3 percentage points from last month’s estimate. However, fiscal stimulus is expected to moderate towards year-end, which will limit growth to 3.4% in 2018.
ROMANIA | Economy accelerates further in Q2 on fiscal stimulus
The Romanian economy, which was one of Europe’s fastest-growing economies last year, ended H2 on a high note and is on track to deliver another strong performance this year. Q2’s outturn delivered the second-highest GDP result in almost ten years and was likely fueled by continued robust private consumption growth. Doubts about the sustainability of the country’s current growth path remain, however, as the upswing has been largely spurred on by populist, pro-cyclical wage hikes and tax cuts. The fiscal deficit has ballooned as a result and could force the government to reign in its ambitions if it is to avoid a hard landing down the line. Depending on the government’s future course of action, the current, and potentially unsustainable, momentum could derail the government’s plans to join the Eurozone within five years, as announced in late August.
The economy seems set for another robust year, although risks of overheating are increasing. Growth is expected to be fueled by strong consumer spending, thanks to a combination of tax cuts and wage hikes. However, the lack of investment and increasing fiscal pressure could lead to an abrupt adjustment down the line if investors turn their backs on the country. Our panelists predict an expansion of 5.0% in 2017, which is up 0.4 percentage points from last month’s forecast, with growth of 3.8% penciled in for 2018.
BULGARIA | Q2 growth carries over positive Q1 momentum
Taking into account preliminary Q2 data, the Bulgarian economy posted a solid result for the first half of the year. In Q2, GDP growth came in at a notable 3.6% annually, a slight improvement over Q1’s outturn. The flash reading revealed a fairly broad-based growth momentum, with the economy having visibly benefitted from positive global trading dynamics. The economy’s strong trajectory is likely to have carried over into the third quarter, as business confidence remained at elevated levels and consumer confidence edged closer to optimistic territory in July and August. At the same time, the country’s unemployment rate fell to its lowest post-crisis level in July, pointing to strong household consumption moving forward.
Higher inflows of EU funds and strong private consumption growth should largely keep the economy on its path of rapid growth. A slower-than-expected absorption of EU funds poses the main downside risk. Met the why particular Consensus Forecast panelists expect GDP to expand 3.5% in 2017, which is up 0.1 percentage points from last month’s forecast, and 3.3% in 2018.
CROATIA | Economy shrugs off concerns over Agrokor as growth picks up pace in Q2
Growth sped up in the second quarter as buoyant private consumption mitigated the effects of a crisis in the country’s largest private company, Agrokor. A booming tourism sector, solid wage growth and a tightening labor market fueled robust household spending, while investment growth edged down in Q2. Incoming data for Q3 suggests that Q2’s tailwinds remain: The unemployment rate rested at a multi-year low in July and tourist arrivals were high. While the tourism sector has become one of the key drivers of growth in recent quarters, the flood of visitors is stoking backlash among some residents. In August, the mayor of Dubrovnik, Mato Franković, stated that he plans to cut back the number of cruise ships allowed to dock in the city, limiting the amount of passengers to a maximum of 4,000 per day.
A thriving tourism sector and strengthening labor market will drive growth in 2017 and help offset the negative effects of Agrokor’s restructuring. Analysts expect GDP to grow 2.8% in 2017, which is unchanged from last month’s projection. Growth is seen cooling slightly to 2.6% in 2018
INFLATION | Inflationary pressures ease again in July
Inflation in the South-Eastern Europe region softened for a third month in July as inflation in Turkey returned to single-digit figures. Inflation eased from 6.8% in June to 6.2% in July, the lowest reading since January. The figure also reflected decelerating inflation in about half of the remaining countries; inflation picked up in Bosnia, Croatia, Macedonia, Montenegro and Romania.
This month, our panelists left their 2017 inflation outlook unchanged at 6.0% which, if confirmed, would mark the highest reading since 2011. The only upgrades made were to the estimates for Kosovo and Macedonia, while the rest of the country forecasts were kept unchanged. For 2018, our panel expects inflation to ease to 5.4%.
Written by: David Ampudia, Senior Economist