Eastern Europe: A cloudy outlook for economic growth

The deterioration of Eastern European growth forecasts accelerated this month. After over six months of steady downward revisions to the regional outlook, FocusEconomics Consensus Forecast panelists stepped up the rate of downward adjustments and shaved 0.2 percentage points off from last month’s 2014 GDP forecast of 2.5%. Turkey was the main driver behind this month’s downward revision; conditions in the country are deteriorating rapidly, which contributed to panelists slashing their GDP growth forecast by 0.7 percentage points over last month. This month’s cut to Turkey’s outlook is one of seven downward revisions in the past eight months. Nearly two percentage points have been docked from projected 2014 GDP growth since July 2013. Panelists are also more pessimistic regarding the outlook for Russia and Ukraine. Overall, panelists cut their 2014 GDP growth forecast for 6 of the 14 countries surveyed. The forecasts for six countries remained unchanged and just two economies saw an improvement in their forecasts. Prospects for 2015 are also deteriorating. Panelists cut their regional GDP growth outlook from the 3.0% expected last month to 2.9%.

photo by Emmanuel Dyan

photo by Emmanuel Dyan

In Turkey, attention turned to the Central Bank when it decided to double its key interest rate to 10.0% at an unscheduled monetary policy meeting on 28 January (for details see page 131). Monetary authorities tightened policy to support the weakening Turkish lira after it slid to an all-time low in late January. In part, the decline of the lira reflected the Fed’s decision to continue tapering its bond purchases, which has affected a host of emerging market currencies. However, in the case of Turkey, domestic issues also played an important role. Political uncertainty has risen sharply over the last couple of months, following the graft probe concerning several politicians connected to the government. The graft probe is part of an internal power struggle between the ruling Justice and Development Party (AKP) and Fethullah Gulen, an influential U.S.-based cleric who has a large following in Turkey. The Gulen movement had provided the additional votes Erdogan needed to win elections in the past. Without Gulen’s backing, Erdogan lacks the critical support he requires ahead of this year’s electoral cycle. Polls from early January show that support for Erdogan’s AKP has dropped to 42.5%, which is well below the 50% that carried him into a third term in June 2011. Local elections will be held in March and the presidential election in which Erdogan is expected to run will take place in August.

Turkey: Government seeks to increase control over the Internet

Faced with increasing opposition, the Turkish government is trying to tighten control over the Internet. On 5 February, the Parliament passed a highly-debated bill that enables the government to block websites and seize personal data without a court order. Against the backdrop of tighter monetary policy and rising political uncertainty that is weighing down on consumer and business confidence, analysts are increasingly skeptical about the country’s growth prospects. In 2014, FocusEconomics Consensus Forecast panelists expect the Turkish economy to grow 2.9%, which is down 0.7 percentage points over last month’s 3.6% growth forecast and marks the largest monthly downward revision for Turkey in the past two years. The economy is expected to grow 4.1% in 2015, which is 0.2 percentage points below last month’s projection.

Political tensions flare up in Ukraine

In Ukraine, anti-government protests flared up again last month, triggering the resignation of Prime Minister Mykola Azarov and forcing President Viktor Yanukovich to make large concessions to the opposition. The protracted political crisis is having a palpable impact on the country’s already precarious economic conditions. The Ukranian hrvynia (UAH) depreciated rapidly over the course of the last few months and fell to an all-time low in early February. As a result, the Central Bank, which had been depleting its international reserves in an attempt to stem the slide, was forced to abandon its crawling peg regime and move to a managed float and start from a weaker 8.71 UAH per USD (before: 7.99 UAH per USD) on 7 February. Monetary authorities hope that a weaker hrvynia can help the economy recover by boosting the Ukraine’s exports.

Most analysts are skeptical about Ukraine’s growth prospects. Weighed down by twin deficits in the current account and the public sector, rapidly diminishing reserves and stifling external debt levels, it seems that Ukraine is alarmingly dependent upon help from the outside in order to tackle the challenges ahead. Yet the country’s political uncertainty is keeping potential rescuers at bay. On one hand, the European Union and the IMF are waiting for the opposition to foster its agenda of closer ties with the West; on the other hand, Russia has delayed the next tranche of its support package until Yanukovich appoints a new prime minister. Against this backdrop, FocusEconomics Consensus Forecast panelists expect Ukraine’s 2014 GDP to grow only 1.0% (unchanged over last month but down from 3.0% growth expected in June last year). Panelists are also increasingly pessimistic about the prospects for recovery next year and slashed their 2015 GDP growth forecasts from 2.4% expected last month to 1.6%.

Russia growth weak, other indicators show  mixed signals

In Russia, a weak December pushed the full-year growth reading for 2013 below expectations of 1.5%. According to a flash estimate from 31 January, GDP expanded a meager 1.3% last year, which was less than half of the 3.4% expansion recorded in 2012 and marked the weakest growth since 2009. While FocusEconomics panelists are generally optimistic that growth will recover this year, GDP forecasts have continuously declined over the past seven months. The 2.2% expansion that is currently projected for this year is a full percentage point below the level that had been forecast in August. On a positive note, oil prices have recovered lately, which, if sustained, should provide the government with the additional revenue it needs to rekindle growth through public infrastructure programs.

photo by brafanta

photo by brafanta

On the monetary front, the prospects for policy stimulus look less promising: the recent depreciation of the Russian ruble—the currency dropped to a five-year low against the U.S. dollar at the beginning of February—further limits the Central Bank’s maneuvering room. Monetary authorities successfully intervened in the market to stem the slide. However, the Fed’s ongoing tapering of bond purchases is providing an adverse setting for emerging market currencies. Cutting interest rates in this environment would prompt even more pressure on the ruble, which would collide with the Central Bank’s target of lowering inflation to 5.0% in 2014. With limited policy support, FocusEconomics Consensus Forecast panelists cut their 2014 GDP forecast over the previous month yet again; they now see the economy growing just 2.2% (January: +2.3%). In 2015, the Russian economy is expected to grow 2.5%, which is also down a notch compared to last month’s forecast.

December’s regional inflation remained at the 4.7% observed in November, but preliminary data suggest that figures will decrease in January as a sizeable drop in Russia more than offsets rising inflation in Turkey. The Central Bank of Turkey took center stage in regional monetary policy news over the past month as it decided to double its key interest rate in an attempt to halt the slide of the lira. In addition, the central banks of Hungary and Romania made further cuts to interest rates, thus continuing the trend of a more accommodative monetary policy setting. Meanwhile, inflation expectations for the region reversed the trend that had been observed over the past five months and increased over January’s projection. The increase was mainly driven by a higher inflation forecast for Turkey. FocusEconomics Consensus Forecast panelists now expect regional inflation to reach 4.5% in 2014, which is up a notch compared to last month’s forecast. In 2015, regional inflation is expected to inch up to 4.6%.

 Note: This is an excerpt from the FocusEconomics Consensus Forecast Eastern Europe – February 2014. Published February 11th, 2014. The full report (156 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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