Eastern Europe: Forecasts for Eastern Europe economies remain on downward trajectory

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 1.8% in 2013, marking the 14th downward revision to the regional outlook in the past 16 months. The deteriorating prospects this month are mainly due to downward revisions for Russia, which accounts for almost half of the region’s GDP. An additional 4 of the 14 countries surveyed also experienced downward revisions. The forecasts for five countries remained unchanged and the forecasts for four 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 2.7%.

photo by Bracketing Life

photo by Bracketing Life

The global backdrop has mostly been dominated by political developments. In the United States, the impasse on the budget led to a government shutdown. In addition, the government will run out of borrowing authority on 17 October if Congress fails to increase the debt ceiling. Hitting the ceiling would send the United States into an unprecedented default. In the Eurozone, Italy escaped yet another political crisis when members of Silvio Berlusconi’s People of Freedom party (PDL) refused to back Berlusconi’s attempt to bring down the coalition government and instead paved the way to expel him from Senate. Meanwhile, the economic news flow paints a moderately optimistic picture of the global economy, with growth appearing to pick up in the advanced economies. Emerging Markets, in contrast, are seen to be suffering the impact of lower capital inflows, as the advanced economies’ ultra-accommodating monetary policies are drawing to an end.

Cloudy outlook for Russian economy

The outlook for the Russian economy continues to deteriorate. Growth was sluggish in the first half of the year and, while panelists are more optimistic about the second half, the lack of growth drivers puts a lid on forecasts. Agriculture will see a notable boost this year since last year’s wildfires that destroyed large parts of the crops provide for a favorable base for comparison. However, heavy rainfalls in important agricultural regions keep a more meaningful recovery of that sector at bay. Given the current state of public sector finances, the government’s ability to rekindle growth with a fiscal stimulus program is limited. In fact, the draft budget recently sent to Parliament suggests that the public sector will be a drag on economic growth next year.

Simultaneously, the Russian Central Bank seems intent on anchoring inflationary expectations more strongly before it eases monetary policy. However, sluggish growth, fiscal constraint and the government’s decision to limit the tariff increase on state-regulated services in 2014 at 70% of annual inflation should help contain price pressures going forward. In addition, the Central Bank raised its inflation target for 2014 from 4.5% to 5.0% on 27 September, thus widening its maneuvering room. Against this backdrop, most analysts see the Central Bank gradually easing policy throughout 2014. Lower rates would help invigorate sluggish business spending and buttress private consumption that for now remains the only pillar of economic growth. Economists are nevertheless increasingly skeptical about Russia’s growth prospects. FocusEconomics Consensus Forecast panelists cut their 2013 GDP forecast further compared to the previous month and now see the economy growing just 2.0% (September: 2.3%). Moreover, prospects for a meaningful rebound next year are waning. Panelists expect the economy to grow 2.7% in 2014, which is down 0.2 percentage points over last month’s forecast.

Stable outlook for Turkish economy

In Turkey, attention returned to economics after the threat of imminent military action against neighboring Syria waned. Economic activity accelerated in the second quarter, with GDP expanding 4.4% annually, up from the 2.9% rise seen in Q1. The expansion was underpinned by strong domestic demand. More recent data, however, paint a mixed picture. Consumer confidence plunged to an 11-month low, whereas business sentiment rebounded in September. Furthermore, the current account deteriorated in July. The Fed’s decision to postpone tapering as well as easing geopolitical tensions helped to stem the slide of the Turkish lira over the last weeks. Going forward, however, the inevitable reduction of monetary stimulus in the advanced economies is likely to again exert downside pressure on emerging market currencies in general and those with sizeable current account deficits (such as Turkey), in particular. This, in turn, will force the Turkish Central Bank to tighten policy to mitigate price pressures resulting from the weaker lira. With headwinds from tighter monetary policy, Consensus Forecast panelists maintained their GDP growth forecast for 2013 at 3.6% but cut their forecast for 2014 by 0.4 percentage points over last month to 3.8%.

Czech Republic prepares for general elections, while panelists cut GDP forecasts

The Czech Republic is preparing for general elections on 25 and 26 October. The Czech Social Democratic Party (CSSD) leads the polls, but is unlikely to garner a majority. Hence, CCSD leader Bohuslav Sobotka will require at least one coalition partner to form government. Despite the political turmoil, consumers and businesses are increasingly optimistic, driving economic sentiment to its highest level since March 2012. Nevertheless, panelists cut their GDP growth forecasts for 2013 again and now see the Czech economy contracting 1.0% this year. In 2014, the economy is seen rebounding 1.7%, which is unchanged from last month’s forecast.

photo by Bracketing Life

photo by Bracketing Life

Regional inflation stable

Regional inflation dropped from 5.2% in July to 5.0% in August. According to preliminary data, inflation fell to 4.7% in September as inflation eased further in Russia and Turkey. Over the past month, most central banks in the region stayed put, as the Fed’s decision to postpone tapering eased pressure on the currencies. Hungary and Romania’s central banks were the exception, cutting the rates. Inflation expectations continue to improve in Eastern Europe; FocusEconomics Consensus Forecast panelists now expect regional inflation to reach 4.8% this year, which is unchanged compared to last month’s forecast. For 2014, the panel expects inflation to ease to 4.6%, which is down 0.1 percentage points over last month.

Note: This is an excerpt from the FocusEconomics Consensus Forecast Eastern Europe – October 2013. Published October 8th, 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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