Outlook for Eastern Europe detoriates again

Growth forecasts for Eastern Europe deteriorated again this month and remained on the downward trajectory that began in January 2012. FocusEconomics Consensus Forecast panelists cut their projections by 0.2 percentage points over last month and now expect regional GDP to expand 2.0% in 2013, marking the 13th downward revision to the regional outlook in the past 15 months. The deteriorating prospects this month are mainly due to downward revisions for Russia and Turkey, which account for two thirds of the region. An additional 5 of the 14 countries surveyed also experienced downward revisions. The forecasts for five countries remained unchanged and the forecasts for two economies improved. Economists are less upbeat about the prospects for 2014 as well. They cut the regional GDP growth forecast for 2014 by 0.2 percentage points over last month to 2.9%.

photo by Mukumbura

photo by Mukumbura

The deteriorating outlook for Eastern Europe comes against a backdrop of a stabilizing global growth forecast for 2013, as improving prospects for the Euro area and the United Kingdom compensate for worsening projections for the United States. Following a series of upward revisions in the previous months, economists have not changed their growth forecast for Japan. Similarly, economists maintained the 2013 GDP growth forecast for China at 7.5%. The 2014 forecast for the main economies remains unchanged over last month, which implies that the more pessimistic view on Eastern Europe mainly reflects domestic issues.

Russia: Downward trend persists

The outlook for the Russian economy continues to slide as the most recent economic data show that economic growth is even weaker than expected. In the second quarter, GDP expanded 1.2% over the same period last year, which was well below the previous government estimate of a growth rate of 1.9%. Moreover, industrial output contracted in July, pointing to a weak start to the third quarter. The weaker economy is already eroding tax revenues, which has prompted the government to consider cutting public expenditure. Furthermore, Prime Minister Medvedev’s administration is considering freezing regulated prices in order to ease the impact of slowing growth on private households. While the plan would negatively affect investment in the gas, railway and power sectors, it would help to reduce inflation. Thus far the Central Bank has resisted calls to ease monetary policy as inflation remains above the Bank’s 6% target. If the price freeze is enacted, the Central Bank is more likely to cut interest rates. Most analysts still expect the Russian economy to pick up speed in the second half of the year, with current growth projections at 3.3% (last month: +3.5% year-on-year). For the full year, FocusEconomics Consensus Forecast panelists cut their GDP growth forecast further and now see the economy growing just 2.3% (August: 2.6%). Moreover, prospects for a meaningful rebound next year are waning. Panelists expect the economy to grow 2.9% in 2014, which is also down 0.3 percentage points over last month’s forecast.

photo by mountaineer

photo by mountaineer

Threat of military action against neighboring Syria causes Turkish lira to weaken

In Turkey, attention was focused on the threat of imminent military action against neighboring Syria. Investors are concerned that military action against Syria would hurt the Turkish economy, sending the lira to a record low of 2.01 per dollar and driving 10-year bond yields above 10%. The Central Bank of Turkey (CBRT) pledged to support the lira by drawing on foreign-exchange reserves if needed. However, given weak economic growth, the CBRT seems reluctant to raise the policy rate in order to defend the currency. Instead, monetary authorities prefer to rely on adjustments to reserve requirements to prevent excessive depreciation of the lira. Meanwhile, economic data paint a mixed picture. The current account deficit narrowed to USD 4.5 billion in June, the lowest deficit in seven months and industrial production accelerated to a strong 4.6% expansion in July. However, forward-looking indicators deteriorated further in August, which suggests that economic growth will weaken even more in the third quarter. Against the uncertain geopolitical backdrop, Consensus Forecast panelists cut their GDP growth forecast for 2013 by 0.2 percentage points over the previous month to 3.6%. Prospects for 2014 are also under pressure; panelists lowered the 2014 GDP growth forecast by 0.2 percentage points and now see the Turkish economy growing just 4.2% next year.

Early elections to be held in late October

In the Czech Republic, political developments dominated the headlines. The country will hold early elections on 25 and 26 October. The decision to hold early elections came after lawmakers voted to dissolve the parliament in a bid to end the political crisis that began in June when a corruption scandal brought down the center-right government of Petr Necas. The caretaker government led by Jiri Rusnok lost a confidence vote on 7 August, prolonging the crisis. The latest opinion polls suggest that the center-left Social Democratic Party will emerge as the strongest party. However, polls also show that the Social Democrats will need support from other groups in order to form a government. Amid increasing political uncertainty, panelists cut their GDP growth forecasts for 2013 by 0.2 percentage points over the previous month and now see the Czech economy contracting 0.9% this year. In 2014, the economy is seen rebounding 1.7%, which is unchanged from last month’s forecast.

Regional inflation continues to moderate

Regional inflation inched down from 5.3% in June to 5.2% in July. According to preliminary data, inflation fell to 5.1% in August, as inflation eased again in Turkey, following a sharp spike in consumer prices in June and July. Over the past month, most central banks in the region stayed put because rate hikes to stem the slide of the currencies would cause additional drag on their economies at a time when growth is already lagging behind. Inflation expectations improved in Eastern Europe; FocusEconomics Consensus Forecast panelists now expect regional inflation to reach 4.8% this year, which is down a notch from last month’s forecast. For 2014, the panel expects inflation to remain virtually unchanged with a forecast of 4.7%.

Note: This is an excerpt from the FocusEconomics Consensus Forecast Eastern Europe – September 2013. Published September 10th, 2013. The full report (155 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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