Eastern Europe’s prospects continue on downward trend

Growth forecasts for Eastern Europe deteriorated again this month and thus remain firmly on the downward trajectory that started in January 2012. FocusEconomics Consensus Forecast panellists cut their projections by 0.1 percentage points over last month and now expect regional GDP to expand 2.2% in 2013, marking the 12th downward revision to the regional outlook in the past 14 months. This month, the deteriorating prospects are entirely due to Russia and Turkey, the only two countries in the region that experienced a downward revision. The forecasts for 10 out of the 14 countries surveyed remained unchanged; forecasts for two economies (Latvia and Romania) improved. Economists are also less upbeat about the prospects for 2014 and cut the regional GDP growth forecast by 0.1 percentage points over last month to 3.1%.

Global outlook remains weak

The deteriorating outlook for Eastern Europe reflects lower growth forecasts for the United States, the Eurozone and the BRIC economies, which more than offset upward revisions to Japan. The outlook for the United States deteriorated over the previous month as headwinds from the fiscal drag and the upcoming tapering of quantitative easing outweigh positive developments in the labor market. The Eurozone—Eastern Europe’s most important trade partner—remained mired in recession in the second quarter. Some forward-looking indicators suggest that the Eurozone will pull out of recession in the third quarter. However, record unemployment and the persistent fiscal drag in the region’s southern economies continue to overshadow the outlook. Prospects for the BRIC economies are also deteriorating. Analysts are particularly concerned about a slowdown in China, where GDP growth fell to 7.5% in the second quarter. To address these concerns, the Chinese government recently announced a “mini-stimulus” package that promises to rekindle its sluggish economy. Analysts mostly agree that the country’s new political leadership is unlikely to fall short on the official growth target of 7.5% in its first year of government. Conversely, analysts are increasingly optimistic about Japan, where Prime Minister Shinzo Abe won the upper house election by a landslide. With a majority in both chambers, Abe now has a strong mandate to implement wide-reaching structural reforms aimed at reviving the economy from its long-lasting slump.

photo by Pavel Kazachkov

photo by Pavel Kazachkov

Russian economy gradually gaining momentum

Within the Central and Eastern European region, the Russian economy is showing signs that it is gradually gaining momentum. In the second quarter, GDP expanded 1.9% over the same period last year, which marks an improvement over the 1.6% expansion recorded in the previous quarter. Additional data suggest that the acceleration stemmed from stronger performance in the industrial sector and a rebound in exports. A looser monetary policy stance is generally considered to be the most effective policy tool to rekindle growth in the Russian economy. So far, the Central Bank’s new governor, Elvira Nabiullina, has refrained from cutting the policy rate. However, inflation dropped to a eight-month low in July, which widens the Central Bank’s manoeuvring room to ease policy. Most analysts expect the Russian economy to pick up speed in the second half of the year, with current growth projections at 3.5%. For the full year, FocusEconomics Consensus Forecast panellists cut their GDP growth forecast further and now see the economy growing only 2.6% (July: 2.7%). Moreover, prospects for a meaningful rebound next year remain dim, with panellists expecting the economy to grow 3.2% in 2014.

Massive conviction on charges of conspiracy to overthrow Prime Minister

In Turkey, attention focussed on the political arena yet again when 254 defendants were convicted on charges of plotting to overthrow Prime Minister Recep Tayyip Erdogan’s Islamist-leaning government. The so-called Ergenekon coup plot trial, which went on for five years, is seen as symbolic of the conflict between Erdogan’s Islamist movement and Turkey’s secularist establishment that fuelled June’s countrywide demonstrations. Those convicted include General Ilker Basbug, Turkey’s military chief from 2008 to 2010, who was sentenced to life imprisonment. The court also sentenced many other high-ranking members of the military, journalists and three opposition members of parliament. Meanwhile, the economy is showing a mixed picture. In July, consumer confidence hit its highest level since March 2012. On the other hand, business sentiment fell to a five-month low. With diverging developments in the forward-looking indicators, the growth path is increasingly uncertain; most panellists leaning to the downside. Therefore, the GDP growth forecast for this year dropped by 0.2 percentage points over the last month to 3.8%. Prospects for 2014 are also coming under pressure; panellists sliced 0.3 percentage off of the 2014 GDP growth forecast and now see the economy growing 4.4% next year. Diminishing growth forecasts put the Turkish Central Bank in a difficult position: while the weakening lira is exerting additional pressure on inflation that is already well above the Central Bank’s target rate, a stricter monetary policy threatens to further choke the economy. Monetary authorities answered the challenge by keeping the policy rate unchanged and by raising the overnight lending rate, thus effectively widening the interest rate corridor. In addition, the Central Bank implemented several measures that enable it to flexibly adjust its policy without tweaking the interest rate (details on page 128).

photo by jocksyboy

photo by jocksyboy

Political developments take centre stage in Central Europe

In Central Europe, political developments dominated the headlines. The political landscape in the Czech Republic is increasingly uncertain. Following the resignation of Prime Minister Petr Necas in June, President Milos Zeman appointed Jiri Rusnok as the caretaker premier. However, Rusnok lacks political support and is likely to lose a confidence vote scheduled for 7 August. Meanwhile, protests continue to destabilise the government in Bulgaria. After massive protests ousted the government of Boiko Borisov in February, protesters again took to the streets in June, this time demanding the resignation of the new Socialist-led administration of Prime Minister Plamen Oresharski that was elected in May. Whereas the February protests were directed against high electricity bills, the current unrest reflects the population’s general discontent with a political class it considers to be incompetent and corrupt. The economic outlook for the countries remains unaffected by the political uncertainty. GDP growth forecasts for 2013 remained unchanged over last month for both Bulgaria and the Czech Republic.

Consensus inflation expectations stable

In June, regional inflation inched up to 5.3% from 5.2% in May. Turkey in particular recorded a sharp spike in consumer prices that took annual inflation from 6.5% in May to 8.3% in June. In July, Turkish inflation rose even further to 8.9%. Over the past month, most central banks in the region stayed put; Turkey, Hungary and Romania were the exceptions. While Turkey’s monetary authorities continue to follow an unorthodox policy path, Hungary implemented a standard 25 basis point rate cut in an attempt to boost the economy. Romania followed with a higher-than-expected 50 basis point cut on 5 August. Inflation expectations remain benign in Eastern Europe. FocusEconomics Consensus Forecast panellists expect regional inflation to reach 4.9% this year, which is unchanged 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 – August 2013. Published August 6th, 2013. The full report (153 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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