Eastern Europe: Outlook continues to slide

Growth forecasts for Eastern Europe deteriorated again this month. Apart from a brief pause in February, the outlook for this year remains on the downward trajectory that started in January 2012. FocusEconomics Consensus Forecast panellists cut their projections by 0.1 percentage points over the last month and now expect regional GDP to expand 2.5% in 2013, marking the ninth downward revision to the regional outlook in the past 10 months. The deteriorating prospects reflect lower growth forecasts for six out of the 14 countries surveyed, including Poland and Turkey, which account for more than 30% of the regional average. Meanwhile, the outlook for another six economies (including Russia) was left unchanged, while panellists raised their growth forecasts for Hungary and Romania. For 2014, the panel expects economic growth to accelerate to 3.4%, which is unchanged from last month’s projection.

by Raphaël Labbé

by Raphaël Labbé

Region’s deteriorating outlook persists amid a background of stable global growth prospects

The deteriorating outlook for Eastern Europe comes against a backdrop of moderate but stable global growth prospects, with improving forecasts for the United States and Japan compensating for the persistent slide in predictions for the Euro area. Following the bailout of Cyprus, European financial markets have entered calmer waters. Bond yields for Italy even dropped to a two-year low after the country left the political impasse behind with the nomination of Enrico Letta as the new prime minister, with a similar development also taking place in Spanish bonds. However, the real side of the economy remains in the doldrums, as the fiscal adjustment continues to drag on the peripheral economies. Meanwhile, the U.S. economy is sending mixed signals: so far, the economy has withstood the downside impact from the fiscal retrenchment, and the labour and housing markets remain more resilient than expected. Going forward, however, the so-called sequestration – a set of automatic budget cuts that entered into force on 1 March – will inevitably dent economic growth. Simultaneously, sentiment for Japan continues to improve. The suite of stimulus measures introduced by Prime Minister Shinzo Abe – dubbed Abenomics – promises to pull the Japanese economy out of its lacklustre growth pattern. In particular, the massive monetary easing implemented by newly inaugurated Central Bank Governor Haruhiko Kuroda should help boost the country’s export industry by weakening the yen. On 10 May, the currency broke past the 100 yen per dollar threshold for the first time in more than four years and has now completed a slide of nearly 30% against the greenback since November 2012.

Russia plans to boost infrastructure investment to fight its slow growing economy

Within the Central and Eastern European region, growth in the Russian economy tumbled to a paltry 1.1% year-on-year reading in the first quarter, the slowest pace since 2009. The government announced a plan to boost infrastructure investment in order to support the ailing economy. While details are still pending, the Putin administration is believed to tap the country’s National Welfare Fund – a rainy-day fund that is financed from oil exports – to fund the stimulus measures. FocusEconomics panellists believe that the first quarter reading marked the trough in the current economic cycle and see the Russian economy starting gathering steam in the current quarter. For the full year, the panel sees Russian GDP growth reaching 3.1%, which is unchanged from last month’s forecast. In 2014, the panel sees the Russian economy to continue accelerating to 3.5%.

by Alf Altendorf

by Alf Altendorf

Panellists expect Turkish economy to gradually gain speed throughout the remainder of the year

In Turkey, recent data releases paint a mixed picture. While industrial production slowed in March, business confidence was virtually unchanged and consumer sentiment gained some ground in April. In the political arena, rebel fighters of the Kurdistan Workers’ Party (PKK) have begun to withdraw from Turkey after the ceasefire declared in March, enhancing the prospects for a successful resolution of the decades-old conflict. After bottoming out in the fourth quarter 2012 with a year-on-year GDP growth rate of 1.4%, FocusEconomics panellists see the Turkish economy having gained momentum in the first quarter (+3.4% year-on-year) and expect activity to gradually gain speed throughout the remainder of the year. In the full year, the economy is seen growing 4.0%, which is down 0.1 percentage points over last month’s projection. In 2014, the panel expects the Turkish economy to quicken the pace to a 4.8% expansion.

Bonds with sluggish Eurozone slow Central Europe economies

The outlook for Central Europe remains sombre, as those economies have closer ties to the sluggish Eurozone. In Poland, industrial output fell again in March and retail sales rose a meagre 0.1% annually in the same month. Forward-looking indicators, paint a brighter picture: in April, consumer confidence rebounded notably and business confidence rose to the highest level in eight months. However, given the stickiness of the current soft patch, the government has lowered its forecast for GDP growth this year from the 2.2% expected previously to 1.5%. The adjusted government forecast is now more in line with FocusEconomics Consensus Forecast panellists that see the Polish economy growing 1.4% this year, which is down 0.1 percentage points over last month. Next year, GDP growth is seen almost doubling to 2.7%, which is also down a notch from last month’s forecast.

by Veni Markovski

by Veni Markovski

Regional inflation drop offers a hint of price pressure mitigation

In March, regional inflation dropped to 5.2% from the 5.5% rate seen in February, and preliminary data for April suggest that price pressures are easing further in most economies. Against the backdrop of subdued economic growth in 2013, regional inflation expectations remain benign, with FocusEconomics Consensus Forecast panellists expecting regional inflation to reach 5.0% this year, which is unchanged from last month’s forecast. For 2014, the panel expects inflation to inch down to 4.9%, which is up 0.1 percentage points from last month’s forecast.

Note: This is an excerpt from the FocusEconomics Consensus Forecast Eastern Europe – May 2013. Published May 14th, 2013. The full report (152 pages, covering 14 major economies from Central and Eastern Europe is available for immediate download at the FocusEconomics Online Store). For more information and a free sample of the report please visit our website.

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