Eastern Europe: Growth forecasts continue on downward trajectory

The growth forecasts for Eastern Europe dropped again this month, continuing on the downward trend that began in June 2013 and was only briefly interrupted in November. FocusEconomics Consensus Forecast panelists expect Eastern European GDP to grow 2.5% in 2014, which is down slightly compared to last month’s expectation of 2.6%. Nevertheless, at the growth rate that is currently projected for 2014, Eastern Europe will experience a notable recovery compared to the anemic 1.6% expansion that is 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, according to December’s forecasts. The latest news from the Eurozone has mostly been positive, which may point to further improvements in the growth outlook in the coming months. Countries with greater exposure to the Euro area, such as the Czech Republic and Poland, will see a notable pickup in economic growth this year, whereas countries that depend less on Eurozone demand like Russia will experience a more moderate recovery. Recovery in Eastern Europe is expected to continue in 2015 as panelists project that GDP will grow 3.0%.

photo by simononly

photo by simononly

This month’s downward revision mainly reflects lower growth forecasts for Russia, Turkey and Ukraine, which account for more than half of the region’s GDP. An additional 3 of the 14 countries surveyed also experienced downward revisions. The forecasts for five countries remained unchanged and the forecasts for three economies improved.

Political tensions main source of concern in Turkey yet again

In Turkey, politics took center stage once again. Following the Gezi Park protests, which challenged the government in May/June of last year, the administration of Prime Minister Recep Tayyip Erdogan was shaken by a corruption investigation in mid-December. The graft probe targeted a host of people connected to the ruling AKP (Justice and Development Party), including four ministers. Erdogan denounced the graft probe, claiming that it was a plot to make his government fall. Nevertheless, he chose to reshuffle his cabinet and replace 10 ministers. In an attempt to prevent further corruption probes, the government fired hundreds of police officers who were involved in the investigations and embarked on legal initiatives to tighten its control over the judiciary and the internet.

Analysts believe that the recent developments mostly reflect a power struggle between Erdogan and Fethullah Gulen. Gulen is an influential Turkish Muslim cleric living in the United States, who has gained influence within Turkey’s police force and in the judiciary system over the past decade. In an attempt to both promote an Islamist agenda and to reduce the secularist establishment’s influence, Gulen has supported the AKP since Erdogan took office in 2003. Without the support of the Gulen movement, Erdogan lacks critical support ahead of this year’s electoral cycle. Local elections will be held in March, which will be a crucial test for Erdogan and the AKP in advance of the presidential election scheduled for the summer in which Erdogan is expected to run.

Turkey’s political turmoil has eroded investor confidence and put strong downside pressure on the lira. The Central Bank has been selling dollars to stem the slide of the lira but the currency nevertheless fell to an all-time low in January. Analysts are skeptical about the country’s growth prospects given the likely downside effect of the political jitters on business and consumer sentiment. In 2014, FocusEconomics Consensus Forecast panelists expect the Turkish economy to grow 3.6%, which is down 0.1 percentage points over last month’s forecast. In 2015, the economy is expected to grow 4.3%.

Default concerns fade amid deal with Russia

In Ukraine, the protests that were triggered by President Viktor Yanukovich’s decision to pull out of a landmark deal with the European Union continue. Although hundreds of thousands of people participated in the protests in the early weeks, they no longer pose an immediate threat to Yanukovich’s government as the number of protesters has dwindled to the tens of thousands. Backed by a comfortable majority in Parliament, Yanukovich has resisted protestors’ demands for the government to sign the EU agreement and calls for new elections. The President instead carried on with his agenda to forge closer ties with Russia. The Russian government announced that it would lend Ukraine USD 15 billion in the form of buying new securities. The deal helped mitigate immediate concerns regarding a sovereign default and stabilized the hrvinya. In addition, Russia agreed to cut the price of gas by one third (from approximately USD 400 to USD 269 per 1,000 cubic meters). As a result, Ukraine is expected to save USD 7 billion per year in gas imports. The deal with Russia has solved the country’s liquidity problem and has brought back stability in the short run. Following the announcement, international rating agency Standard and Poor’s improved Ukraine’s outlook from negative to stable. However, most analysts remain skeptical about the implications of the agreement in the long run as the deal with Russia doesn’t set out a path toward sustained recovery for Ukraine’s economy. FocusEconomics Consensus Forecast panelists are increasingly pessimistic about the prospects for recovery and cut Ukraine’s 2014 growth forecast by 0.3 percentage points over last month to 1.0%. Forecasts were also revised down for 2015 and panelists now expect the Ukrainian economy to grow 2.4% (last month: +2.9%).

photo by Ed Yourdon

photo by Ed Yourdon

Cloudy outlook for the Russian economy

In Russia, recent indicators paint a broadly negative picture for the economy. Industrial output contracted 1.0% in November 2013, which marked a deterioration over the 0.1% drop recorded in October and represented the second consecutive decline. Exports fell 5.0% in the same month, which was only a slight improvement over the 5.6% drop recorded in September. Moreover, the recent decrease in oil prices does not bode well for export revenues going forward. In the political arena, the two suicide bombings that took place in southern Russia in late December heightened security fears ahead of February’s Winter Olympic Games that will take place in Sochi. FocusEconomics Consensus Forecast panelists cut their 2014 GDP forecast over the previous month and now see the economy growing just 2.3% (December: +2.5%). If attained, this would still mark an improvement compared to the 1.5% expansion estimated for 2013. In 2015, the Russian economy is seen growing 2.6%.

Regional inflation projections revised downwards

Regional inflation inched up from 4.5% in October to 4.6% in November with diverging trends in Russia (where inflation rose) and Turkey (where inflation dropped). Most central banks in the region stayed put over the last month. Hungarian and Romanian monetary authorities were the exception: both central banks cut interest rates again, thus 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 4.4% in 2014, which is down a notch compared to last month’s forecast. In 2015, regional inflation is expected to edge up to 4.6%.

Note: This is an excerpt from the FocusEconomics Consensus Forecast Eastern Europe – January 2014. Published January 14th, 2014. The full report (157 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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