The deterioration of Eastern European growth forecasts accelerated this month. Following the spike of geopolitical tensions in the region, FocusEconomics Consensus Forecast panelists slashed their 2014 GDP growth forecasts for the region by 0.5 percentage points over last month. At the currently-projected 1.6% expansion, regional output growth is a full percentage point below the rate of expansion that was expected at the beginning of the year. The more pessimistic regional outlook mostly reflects downward revisions to Ukraine and Russia. The outlook for other countries remained broadly stable, suggesting limited spill-over effects within the region, as tensions eased in the weeks following the formal integration of the Crimean peninsula into Russia.
Overall, panelists cut their 2014 GDP growth forecasts for 7 of the 14 countries surveyed. Forecasts for one country remained unchanged and six economies saw an improvement in their forecasts. Prospects for 2015 are also deteriorating. Panelists cut their regional GDP growth outlook from the 2.8% expected last month to 2.7%, as the crisis is seen to have repercussions on the Russian and Ukrainian economies beyond the current year.
Climate of uncertainty in Russia continues
The Ukrainian crisis continued to dominate news over the past month but with diplomacy substituting bold political maneuvers, it became increasingly unlikely that Russia would make further incursions into Ukrainian territory. As announced, the West has answered the annexation of Crimea with sanctions (details see page 100). However, those sanctions remained mostly focused on individuals considered to be close to the Putin administration. Some additional measures followed —the Group of Eight (G-8) suspended Russia’s membership and NATO ordered an end to cooperation with the country— but the West refrained from imposing sanctions against vital sectors of the Russian economy, such as energy. Nevertheless, economists have become more skeptical about the prospects for the Russian economy, as some risks of a further escalation of tensions persist given the latest developments in eastern Ukraine. Moreover, the Russian economy will have to cope with the 150 basis-point rate hike imposed by the Russian Central Bank in early March to stem the slide of the ruble. Higher political uncertainty and tighter monetary conditions are likely to dent both investment and, to a lesser extent, consumption. Against this backdrop, FocusEconomics Consensus Forecast panelists slashed their GDP growth forecasts for the current year from the 1.9% expected last month to 1.2% this month. The outlook for next year also deteriorated, with panelists now seeing the Russian economy growing 2.1% in 2015, down from the 2.4% expansion projected last month.
Energy market in the spotlight of Western Europe
Forecasts beyond 2015 dropped only slightly as economists still have to factor in the longer-term repercussions of deteriorating ties with the West. In particular, the Russian energy sector could suffer a setback. Western Europe, long dependent on Russian gas, is beginning to mull alternatives to reduce its reliance on a country that it now considers a less reliable energy supplier than only a few months ago. At an EU-US energy summit in early April, EU officials claimed that reducing dependency on Russian hydrocarbons is a pillar of a comprehensive new energy strategy. However, phasing out imports of Russian gas will take many years. Currently, the EU relies on Russia for about a third of its oil and gas and contractual obligations bind Europe to the delivery of Russian gas even beyond 2020. Meanwhile, Russia is likely to try to reduce its reliance on European customers by looking for new partners in Asia. Nevertheless, on balance, losing the European energy market would have a significant impact on the Russian economy in the long term.
IMF offers financial aid to Ukraine
The short-term outlook for Ukraine looks dire. In light of the geopolitical crisis, the international community was quick to come up with a financial aid package to support the heavily indebted country and to stave off sovereign bankruptcy. On 27 March, the IMF announced an agreement with Ukrainian authorities on a two-year loan amounting to between USD 14 and 18 billion. The agreement will be complemented with aid coming from other international sources that will add up to USD 27 billion over the next two years. However, while welcome, the assistance is conditional on the implementation of reforms to reduce the country’s rampant public sector deficit and the proposed austerity measures are expected to weigh on the already struggling Ukrainian economy. Consequently, FocusEconomics Consensus Forecast panelists have again slashed their GDP growth forecasts and now expect the Ukrainian economy to contract 4.0% in the current year, which is down from the 0.3% recession expected last month. Next year, economic growth is seen bouncing back to 1.3% (March forecast: 1.6%).
Turkey: Election results ease political uncertainty
In Turkey, Prime Minister Recep Tayyip Erdogan’s ruling Justice and Development party (AKP) won the local elections held on 30 March. Despite various headwinds including corruption allegations and the ongoing struggle with the Gulen movement, the AKP garnered over 45% of the vote. Erdogan’s comfortable victory paves the way for a bid in the August presidential election. More important for the economic outlook, the strong showing in the election helps to relieve political uncertainty that has eroded investor confidence over the last months. FocusEconomics Consensus Forecast panelists nevertheless continued to cut their forecasts for economic growth and now see the economy growing only 2.2%, following last month’s 2.4% projection. In 2015, the Turkish economy is expected to grow 3.6%, which is 0.2 percentage points down from last month’s estimate.
Regional inflation expectations jump
Regional inflation inched up a notch from 4.3% in February to 4.4% in March. However, inflation expectations jumped in the region. While panelists cut their inflation estimates for 10 of the 14 surveyed countries, rising expectations in the remaining four economies pushed the regional average from an average 4.5% expected last month to 5.1% this month. In Ukraine, inflation forecasts more than doubled from 4.5% to 9.4%, amid a 44% gas price increase imposed by Russian state-owned Gazprom. In addition, panelists raised their inflation forecast for Russia from 5.1% to 5.9%, mainly reflecting the pass-through of a weaker ruble. In 2015, regional inflation is expected to fall back to 4.6%. On the monetary policy front, all but one country stayed put last month. Hungarian monetary authorities continued their long-term easing policy and cut the base rate for a 20th consecutive month to a new record low.Note: This is an excerpt from the FocusEconomics Consensus Forecast Eastern Europe –April 2014. Published April 8th, 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.