Growth forecasts for Eastern Europe deteriorated again this month, continuing 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 2.4% in 2013, marking the 10th downward revision to the regional outlook in the past 11 months. The deteriorating prospects reflect lower growth forecasts for seven out of the 14 countries surveyed, including Poland and Russia, which account for more than half of the regional average. Meanwhile, the outlook for another four economies (including Turkey) was left unchanged, while panellists raised their growth forecasts for Hungary, Latvia and Romania. For 2014, the panel expects economic growth to accelerate to 3.3%, which is also down a notch from last month’s projection.
Japan only positive exception while global economic outlook deteriorates
The deteriorating outlook for Eastern Europe comes against a backdrop of worse growth forecasts for the United States and the Eurozone, which are weighing on the outlook for the global economy. In the United States, uncertainty surrounding the effects of the fiscal adjustment prompted economists to adjust their projections downward despite promising signs from the housing sector and the labour market. In Europe, tensions in financial markets have eased further but the fiscal drag and record-high unemployment are seen pushing the Eurozone into the longest recession in its history. Meanwhile, the latest data for China suggest that the Chinese economy is experiencing its second straight quarterly slowdown. Only Japan is helping to mitigate the negative developments in Europe and America. Following a strong rebound in the first quarter (+4.1% saar according to revised data) boosted by the first two parts (fiscal and monetary stimulus) of Prime Minister Shinzo Abe’s “three arrows” strategy, Abe outlined a blueprint of his third arrow: structural reforms to underpin growth in the long run. The program, which is expected to be approved by the cabinet on 14 June, promises to overhaul the ailing Japanese economy with regulatory reforms aimed at bringing more women into the workforce, pushing companies into investing more and promoting industrial innovation.
Worst floods of the decade hinder Central Europe’s economic activity
In large parts of Central Europe economic activity was severely hampered, as a period of heavy rain has caused the worst flooding in a decade throughout the region. Among the economies included in the survey, Hungary, the Czech Republic and Slovakia are the most affected. With waters still running high it is too early for an estimate of the damages, but observers see the costs reaching several billion euros, not including production losses. That said, economists estimate that the floods will have little impact on economic prospects for the affected countries.
Nevertheless, the Czech Republic suffered a 0.3 percentage point downward adjustment over the last month to its 2013 growth outlook. Panellists now see the Czech economy contracting 0.3%, which is down from the flat growth forecasted last month and continues a series of 13 downward adjustments over the last 14 months. Hungary, on the other hand, saw its growth outlook improve slightly, as FocusEconomics Consensus Forecast panellists nudged up their GDP growth estimate for 2013 by 0.1 percentage points to the current 0.1%. The growth outlook for Poland, while unaffected by the floods, also suffered another cut, with panellists now seeing the Polish economy expanding 1.3% this year (May: 1.4%).
Erdogan refuses calls for early elections after social protests turned against the government
In Turkey, politics took centre stage, when the government smashed a peaceful protest aimed at saving Istanbul’s Gezi Park in late May. In the following days, demonstrations grew and spread across the country, simultaneously adopting an increasingly anti-government tone. President Abdullah Gul ordered the police to withdraw from Taksim square and adopted a more conciliatory tone but Prime Minister Recep Tayyip Erdogan insists that the protests must end immediately and rejects calls for early elections. On the economic front, industrial production accelerated in April and both business and consumer sentiment reached a one-year high in May. Before the outbreak of the protests, on 16 May, rating agency Moody’s raised the country’s credit rating to Baa3, the lowest investment grade, citing improving structural and institutional reforms as well as reducing vulnerabilities to external shocks. FocusEconomics panellists see the Turkish economy having gained momentum in the first quarter (+3.5% year-on-year) and expect economic activity to gradually gain speed throughout the remainder of the year. In the full year, the economy is expected to grow 4.0%, which is unchanged from last month’s projection. In 2014, the panel expects the Turkish economy to quicken the pace to a 4.8% expansion.
Russian GDP expands below market expectations in the first quarter
Within the Central and Eastern European region, growth in the Russian economy remains lacklustre. According to revised figures, Russian GDP expanded 1.6% in the first quarter over the same period last year. While the reading was above the preliminary growth estimate of 1.1%, it fell well short of market expectations that had the Russian economy growing 2.9% in the first quarter. In the absence of positive news – industrial output and exports remained sluggish in April – FocusEconomics Consensus Forecast panellists further cut their GDP growth forecast for 2013 and now see the economy growing only 2.9% (May: 3.1%). Moreover, economists are less upbeat about prospects for next year and sliced off another 0.1 percentage points of their GDP growth forecast for 2014 to the current 3.4%.
Regional central banks continue to cut interest rates
In April, regional inflation dropped further to 5.0% from the 5.2% rate seen in March, leaving the 5.6% peak reached in January this year well behind. Against the backdrop of subdued economic growth and abating price pressures, central banks in the region have continued to cut interest rates. In Russia, Bank Rossii left key rates unchanged but shaved off 25 basis points from some longer-term refinancing facilities. Meanwhile, at its 28 May meeting, the Central Bank of Hungary cut the policy rate by 25 basis points to 4.50%. The Polish Central Bank followed suit in early June, cutting its reference rate to a record low of 2.75%. In total, the NBP has cut an accumulated 200 basis points off the reference rate since it began easing policy in November last year. 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 moderate to 4.8%, which is down 0.1 percentage points from last month’s forecast.
Note: This is an excerpt from the FocusEconomics Consensus Forecast Eastern Europe – June 2013. Published June 11th, 2013. The full report (154 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.