Eastern Europe outlook stabilizes after five consecutive downward revisions

Growth forecasts for Eastern Europe remained stable this month, ending a five-month streak of uninterrupted downward revisions to the 2014 growth forecast. FocusEconomics Consensus Forecast panelists left their projections for regional 2014 GDP growth at the 2.7% expected last month. The stabilization in prospects mainly reflects an unchanged outlook for Turkey, whereas projections for Russia were again revised slightly downward. For 2014, panelists lowered their projections for 7 of the 14 countries surveyed. Forecasts for four countries remained unchanged and the forecasts for three economies improved. In 2013, regional output is estimated to grow 1.8%.

In the United States, the political gridlock that led to a 16-day government shutdown was resolved and funding for operations was secured through 15 January. However, the shutdown will take a toll on economic activity in the fourth quarter. Moreover, protracted negotiations between Democrats and Republicans regarding the country’s debt ceiling—the government’s borrowing authority was only extended until 7 February—have added uncertainty to the U.S. economic outlook. In the Eurozone, the economic news flow supports the notion that the region will return to moderate growth next year. Meanwhile, emerging markets are suffering the impact of lower capital inflows as advanced economies’ ultra-accommodating monetary policies draw to an end. Countries that depend on these inflows to finance their current account deficits are particularly vulnerable and have suffered further downward revisions.

photo by Bracketing Life

photo by Bracketing Life

Russia´s outlook deteriorates further

The outlook for the Russian economy continues to deteriorate. According to preliminary estimates, GDP expanded only 1.2% annually in the third quarter. Thus, the economy grew at the lackluster rhythm observed in the second quarter, quashing hopes for acceleration in the second half of the year. In part, the dismal third-quarter growth reflects how flooding affected the harvest and precluded the strong rebound expected in the agricultural sector after last year’s drought-induced slump. The weak harvest is also slowing downside development in consumer price inflation, thus limiting the Central Bank’s potential to cut interest rates in the short term. That said, inflation remains on a downward trajectory and a number of analysts expect the Central Bank to cut rates by 25 basis points by the end of the year. On the fiscal side, the government is benefiting from the weaker currency, which increases oil revenue in ruble terms. With the deteriorating economic outlook, however, revenue will be constrained, which prompted the Putin administration to apply expenditure cuts to the budget plan for 2014-2016. This suggests that the public sector will be a drag on economic growth next year. Against this backdrop, economists are increasingly skeptical about Russia’s growth prospects. FocusEconomics Consensus Forecast panelists cut their 2013 GDP forecast over the previous month and now see the economy growing just 1.8% (October: 2.0%). Moreover, prospects are waning for a meaningful rebound next year. Panelists expect the economy to grow 2.6% in 2014, which is down 0.1 percentage points over last month’s forecast.

Outlook for Turkey stabilizes

In Turkey, the Fed’s decision to delay tapering has eased pressure on the lira and has made the Central Bank’s job of finding the right balance between fighting inflation and supporting growth a bit easier. Nevertheless, although inflation remains on a downward trajectory, it remains well above the Central Bank’s 5.0% target. Moreover, while the tapering was delayed, it was not cancelled altogether and thus the risks of slowing capital inflows and a weakening lira persist. Meanwhile, the government announced its 2014–2016 mid-term economic program, which is aimed at narrowing the current account deficit, lowering inflation and supporting growth and job creation. With upward and downward risks currently balanced, Consensus Forecast panelists maintained their GDP growth forecast for 2013 at 3.6% and at 3.8% for 2014.

Social Democrats win elections in Czech Republic

In the Czech Republic, the Czech Social Democratic Party (CSSD) emerged as the winner of the 25–26 October legislative elections. However, the party’s margin of victory fell short of expectations, winning only 50 seats in the 200-seat Lower House of Parliament, instead of the expected 70 seats. Billionaire Andrej Babis’ ANO 2011 Party surprisingly came in a close second, wining 18.7% of votes and securing 47 seats in Parliament. In total, seven parties surpassed the 5.0%-threshold required to enter parliament. The fractioned Parliament means the Social Democrats are forced to negotiate with a variety of parties. Most analysts expect discussions to drag on for some time.

Tension between Ukraine and Russia remain high

Ukraine is expected to sign a free trade agreement with the European Union on 29 November, provided it meets the EU’s conditions, which include releasing former prime minister Yulia Tymoshenko from prison. Russia is eyeing the Ukraine’s shift towards the EU and away from the Russia-led Eurasian Customs Union with suspicion. While Russian Prime Minister Dmitry Medvedev denied that Russia would cut gas supplies to Ukraine, he emphasized demands for the country to pay its outstanding gas bills, indicating that the “special relationship” between the two former Soviet republics will change if Ukraine signs the agreement with the EU. The Ukrainian export industry is already feeling the pinch of the so-called “Chocolate War”—a series of reciprocal non-tariff barriers between Ukraine and Russia. Ukrainian President Viktor Yanukovych has stepped up efforts to bridge long-standing differences with the IMF in order reach an agreement with the Fund to provide standby financing to Ukraine. Despite the European Union’s support in obtaining IMF funding, rating agency Standard and Poor’s (S&P) is increasingly skeptical about the ability of the government to “secure sufficient foreign currency to meet its elevated external financing needs.” Accordingly, S&P downgraded Ukraine’s long-term sovereign credit rating one step to B-, six levels below investment grade, with a negative outlook. FocusEconomics Consensus Forecast panelists cut their GDP growth forecasts for 2013 by 0.2 percentage points over last month and now expect the economy to contract 0.1%. For 2014, the panel cut the GDP growth forecast to 1.8% (October: 1.9%).

photo by EU Neighbourhood Info Centre

photo by EU Neighbourhood Info Centre

Inflation expectations continue to improve

Regional inflation dropped sharply from 5.0% in August to 4.6% in September; Russia and Turkey were the main drivers of the decline. Over the past month, most central banks in the region stayed put, as the Fed’s decision to postpone tapering eased pressure on their respective currencies. Hungary’s Central Bank was the exception once again, cutting its base rate by 20 basis points. The cut represented the fifteenth consecutive rate cut in an attempt to boost the economy. 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 over last month’s forecast. For 2014, the panel expects inflation to ease to 4.5%, which is down 0.1 percentage points compared to last month.

Note: This is an excerpt from the FocusEconomics Consensus Forecast Eastern Europe – November 2013. Published November 5th, 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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