Growth forecasts for Eastern Europe slipped again this month, resuming the downward trend that began in June 2013. The trend was only briefly interrupted last month at which time forecasts for the region were unchanged over the previous month. FocusEconomics Consensus Forecast panelists expect Eastern European GDP to grow 2.6% in 2014, which is down slightly compared to last month’s expectation of 2.7%. Nevertheless, at the growth rate currently projected for 2014, Eastern Europe will experience a notable recovery compared to the anemic 1.7% expansion estimated for 2013. The recovery will mostly reflect an upturn in the Euro area, where output is expected to swing from the 0.4% contraction estimated for 2013 to a 1.0% expansion in 2014. Hence, countries with greater exposure to the Euro area, such as the Czech Republic and Poland, will see a more pronounced pick-up in economic growth versus countries that do not depend as much on Eurozone demand, such as Russia. This month’s downward revision reflects lower growth forecasts for Russia, Turkey and Ukraine, which account for more than half of the region’s GDP. An additional 4 of the 14 countries surveyed also experienced downward revisions. The forecasts for four countries remained unchanged and the forecasts for three economies improved.
Economic outlook for Russia deteriorates further
The Russian economy maintained its lackluster rhythm and expanded by just 1.2% in Q3, the same pace as in Q2. In part, the dismal growth reflects weak turnout in the agricultural sector, which suffered from the rainiest September in history. However, the weak result also shows that the government’s plan to rekindle growth with an investment-led model has not had the expected impact on the economy. Thus, the Russian economy remains largely dependent on private consumption. While retail sales continue to grow, the latest figures show a deceleration amid sluggish developments in both employment and disposable income. This suggests that overall growth will remain lethargic, even if Economy Minister Alexey Ulyukaev’s claims are true that investment, industrial production and inventories are gathering momentum in the current quarter. Disappointing economic growth puts pressure on the Russian Central Bank to cut interest rates and provide much-needed policy support. The trend of declining inflation observed this year seems to have provided the necessary backdrop for Bank Rossii to ease monetary policy. However, inflation rose unexpectedly for the first time in five months in October due to the spike in food prices caused by a delay in the grain harvest. Against this backdrop, the Central Bank refrained from cutting interest rates at its 8 November meeting, which was in line with expectations. Monetary authorities expect the increase in food prices to be brief and see inflation moderating further in 2014. Therefore, most analysts expect the Central Bank to cut rates in 2014. However, the Central Bank is likely to only ease policy gradually as it continues to focus on strengthening its credibility ahead of officially adopting an inflation target policy at the end of 2014. With limited policy support, economists remain skeptical regarding Russia’s growth prospects. FocusEconomics Consensus Forecast panelists cut their 2014 GDP forecast over the previous month and now see the economy growing just 2.5% (November: 2.6%), following on an estimated 1.7% expansion in 2013.
Uncertainty regarding tapering in Turkey persists
In Turkey, industrial production surprised on the upside and grew at the fastest pace since November 2011. The rebound in industrial output partially reflects the nascent European recovery, which is also reflected in stronger exports. Domestic demand remains robust, prompting an even stronger pick-up in imports. As a result, the current account deficit bucked the downward trend observed in recent months and rose in September. The large current account deficit—the current annual gap is equivalent to 7.0% of GDP—continues to be Turkey’s Achilles heel and is making the country precariously dependent on capital inflows. This dependence has led to a persistent depreciation of the Turkish lira, which, in turn, tied the Central Bank’s hands, preventing it from providing more policy support. The Fed’s decision to delay tapering has eased pressure on the Turkish lira, but the effect of the depreciation earlier this year is still pushing inflation higher. With the timing of Fed tapering still uncertain, the Central Bank will stay on the sidelines until slowing capital inflows and a weakening lira require policy action. In 2014, FocusEconomics Consensus Forecast panelists expect the Turkish economy to grow at the same 3.7% rhythm estimated for 2013. The 2014 forecast is down a notch from last month’s 3.8% projection.
Russia and EU vie over influence in Ukraine
In Ukraine, politics took center stage after the government decided to withdraw from an association agreement with the European Union and instead recuperate trade ties with Russia. The agreement that had been negotiated over the last six years was seen by most analysts as a turning point in Ukraine’s history because it implied a shift toward the European Union and a reduction in the country’s dependence on Russia. Over the last months, Russia had stepped up pressure on Ukraine to reject the trade and cooperation agreement with the EU, threatening the country with economic retaliation. President Viktor Yanukovich’s decision to scrap the EU deal triggered the largest protests since the 2004 Orange Revolution with an estimated 300,000 people taking to the streets on 1 December. Developments over the past few days have left Yanukovich in a precarious situation: the rapidly-increasing political opposition is strongly pressuring him to reach out to the European Union again, although European leaders previously reacted coolly to a request for new talks. Moreover, Russia continues to threaten the country with economic sanctions, thus blocking the way for renegotiating the terms of the treaty.
Regional inflation remains stable
Regional inflation remained at 4.6% in October, with diverging trends in Russia (where inflation surprisingly rose) and Turkey (where inflation dropped). Over the past month, most central banks in the region stayed put. Hungarian and Romanian monetary authorities were the exception; both central banks cut interest rates, continuing the trend of a more accommodative monetary policy setting. Inflation expectations continue to decline in Eastern Europe. FocusEconomics Consensus Forecast panelists now expect regional inflation to reach 4.5% in 2014, which is unchanged over last month’s forecast and just 0.2 percentage points below the 4.7% inflation rate estimated for 2013.Note: This is an excerpt from the FocusEconomics Consensus Forecast Eastern Europe – December 2013. Published December 3rd, 2013. The full report (154 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.