Eastern Europe growth prospects remain on downward trajectory

Growth forecasts for Eastern Europe deteriorated again this month, and remain firmly entrenched in 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 2.3% in 2013, marking the 11th downward revision to the regional outlook in the past 12 months. The deteriorating prospects reflect lower growth forecasts for eight out of the 14 countries surveyed, including Poland and Russia, which together account for more than half of the regional average. Meanwhile, the outlook for three economies (Croatia, Lithuania and Turkey) was left unchanged, while panellists raised their growth forecasts for another three countries (Hungary, Latvia and Romania). For 2014, the panel expects economic growth to accelerate to 3.2%, which is also down a notch from last month’s projection.

by crossroads foundation

by crossroads foundation

Global outlook remains subdued

The deteriorating outlook for Eastern Europe comes within a global context of lower growth forecasts for the Eurozone and the BRIC economies, which more than offset upward revisions to Japan and the United Kingdom. The outlook for the United States remained unchanged over the previous month, with news mostly focused on the possible timing and pace of the Federal Reserve’s exit strategy from its quantitative easing (QE) programme. Fed Chairman Ben Bernanke indicated on 19 June that monetary authorities may start tapering the QE program later this year, triggering tensions in financial markets that drove yields on 10-year U.S. Treasuries to the highest levels in three years, before a downward revision to first quarter GDP growth figures eased concerns that the Fed will withdraw its stimulus in the near future.

The Eurozone remains deeply mired in recession, with record unemployment and the persistent fiscal drag in most member states overshadowing the outlook, even though some forward-looking indicators are showing first signs of hope. Meanwhile, analysts are increasingly optimistic that the economic stimulus policies implemented by Prime Minister Shinzo Abe in Japan will succeed in jolting the economy from its long-lasting slump. Prospects for the BRIC economies, on the other hand, are deteriorating. In particular, economists are concerned that a possible liquidity squeeze in China could bring about a slowdown of the global growth engine.

Panellists cut Russian prospects as growth remains lacklustre

Within the Central and Eastern European region, growth in the Russian economy remains lacklustre. According to detailed figures, Russian GDP expanded a weak 1.6% annually in the first quarter, which marked the slowest pace in four years. In addition, recent news suggest that the negative momentum persisted in the second quarter, as industrial production unexpectedly contracted in May while exports recorded a seventh consecutive decline in the same month. FocusEconomics Consensus Forecast panellists further cut their GDP growth forecast for 2013 and now see the economy growing only 2.7% (June: 2.9%). Moreover, prospects for a meaningful rebound next year remain dim, with panellists expecting the economy to grow 3.3% in 2014.

by jasmine8859

by jasmine8859

Police cracks down on Taksim Square protests, aggressive government’s reaction tarnishes Turkey’s democratic reputation

In Turkey, politics once again took centre stage when police quashed protests at Istanbul’s Taksim Square on 16 June. The demonstrations, which had started in late May initially to save Instanbul’s Gezi Park from a construction project, quickly spread throughout the country, taking an increasingly anti-government tone and uniting diverse social groups. In total, the protests left more than 4,000 wounded and four people dead. Moreover, the government’s reaction to what started out as a peaceful protest has tarnished Turkey’s reputation as a model democratic state in the Muslim world, with possible negative repercussions on long-term investment flows. In the economic arena, news were mixed: On the one hand, GDP growth more than doubled to 3.0% in the first quarter, up from 1.4% in the final quarter of 2012. On the other hand, leading indicators deteriorated in June and the current account deficit widened further in April. FocusEconomics panellists see the Turkish economy having gained momentum in the second quarter (+3.6% year-on-year) and expect economic activity to gradually gain speed throughout the remainder of the year. The economy is expected to grow 4.0% in the full year, which is unchanged from last month’s projection. In 2014, the panel expects the Turkish economy to quicken the pace to a 4.7% expansion.

Economists see little impact of recent floods on Central Europe’s growth prospects

In Central Europe, economic activity returned to normal after floods had severely hampered output in many parts of Hungary, the Czech Republic and Slovakia in early June. Economists estimate that the floods will have little impact on economic prospects for the affected countries. Nevertheless, the Czech Republic suffered a 0.4 percentage point downward adjustment over the last month to its 2013 growth outlook. However, the downward revision mostly reflects renewed political uncertainty, following the resignation of Prime Minister Petr Necas on 17 June and the appointment of a caretaker government that lacks parliamentary support (details on page 30). Hungary, in contrast, saw its growth outlook improve for the third consecutive month, as FocusEconomics Consensus Forecast panellists raised their GDP growth estimate for 2013 by 0.2 percentage points to the current 0.3%. The growth outlook for Poland, while unaffected by the floods, also suffered another cut, with panellists now seeing the Polish economy expanding only 1.1% this year (June: 1.3%).

by Lady Ema

by Lady Ema

On 1 July, Croatia became the European Union’s 28th member (details on page 23). The outlook for the country remained unchanged, with forecasters seeing the economy contracting 0.7% this year. In 2014, the economy should experience a moderate recovery with a projected 1.0% expansion, as the country will start benefiting from a strong inflow of EU funds.

Panellists cut inflation forecast further

In May, regional inflation dropped further to 4.8% from the 5.1% rate seen in April, continuing the downward trend in place since the beginning of the year when inflation peaked at 5.6% in January. Against the backdrop of subdued economic growth and abating price pressures, several central banks in the region have continued to cut interest rates. Monetary authorities in Hungary, Poland and Romania cut their policy rates each by 25 basis points over the last month in an attempt to rekindle economic growth. Regional inflation expectations remain benign, with FocusEconomics Consensus Forecast panellists expecting regional inflation to reach 4.9% this year, which is down 0.1 percentage points from last month’s forecast. For 2014, the panel expects inflation to remain virtually unchanged with a forecast of 4.8%.

Note: This is an excerpt from the FocusEconomics Consensus Forecast Eastern Europe – July 2013. Published July 9th, 2013. The full report (156 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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