Eastern Europe: Decline in Eastern European Growth Forecast Finally Slows

The downward revisions to Eastern European growth forecasts finally slowed this month after having experienced strong cuts since the Ukraine crisis began. FocusEconomics Consensus Forecast panelists cut their GDP forecast for Eastern Europe by just 0.1 percentage points over the previous month. Nevertheless, at the 1.5% expansion that is currently expected, regional output growth is 1.2 percentage points below the rate of expansion that was expected when the crisis began in November last year. This month’s more pessimistic regional outlook mostly reflects a downward revision to Russia, while Ukraine experienced a very small downward adjustment following last month’s massive cut. The outlook for other countries remained broadly stable, suggesting limited spill-over effects within the region. Some central European countries even saw their growth forecasts pick up amid more upbeat sentiment for the Euro Area.

Photo by Emmanuel Dyan

Photo by Emmanuel Dyan

Overall, panelists cut their 2014 GDP growth forecasts for 6 of the 14 countries surveyed. Forecasts for five countries remained unchanged and three economies saw their forecasts improve. Prospects for 2015 are also continuing to deteriorate. Panelists cut their regional GDP growth outlook from last month’s 2.7% to 2.6%. The slight decrease mainly reflects a weaker outlook for Russia, as the country’s increasing risk profile is expected to have longer-term repercussions on its economy.

Russia-Ukraine Agreement Fails to End Violence, More Western Sanctions Expected

Attention was focused on the Ukrainian crisis again this month as diplomatic efforts to defuse the conflict did not succeed in stopping violence from spreading. The agreement that the United States, Russia, Ukraine and the European Union negotiated in Geneva on 17 April fuelled hopes that the conflict would be resolved peacefully. However, the agreement proved short-lived and the conflict flared up again between the Ukrainian government and pro-Russian separatists who have seized control of several cities. The West accused Russia of supporting the separatists and responded on 29 April with a second round of sanctions, thus broadening the circle of individuals and companies that were targeted in the first round of sanctions in March. So far, the direct impact of the measures on the Russian economy has been limited and the West appears reluctant to target Russia’s vital energy sector due to fears of an economic backlash. As the crisis escalates, it is becoming more likely that broader and more painful sanctions will be imposed. The threat of additional measures is already gnawing at investor confidence and has triggered massive capital outflows, prompting the Russian Central Bank to raise interest rates again in an effort to stave off the weakening of the ruble.

Deteriorating sentiment, increased capital outflows and tighter credit conditions are expected to dent economic activity this year; investment, in particular, is expected to slide. Consumption will continue to expand, albeit at less than half the pace observed last year. FocusEconomics Consensus Forecast panelists expect overall economic activity to grow just 0.9% this year, which is down from the 1.2% expected last month. The outlook for next year also deteriorated; panelists now expect the Russian economy to grow 1.9% in 2015, which is down from the 2.1% expansion projected last month

Meanwhile, the Ukrainian government is trying to contain separatist movements in eastern parts of the country which are largely Russian-speaking. If the conflict in eastern Ukraine escalates further, the presidential elections scheduled for 25 May could be jeopardized. Petro Poroshenko, supporter of the people’s revolution that ousted President Viktor Yanukovich in February, currently leads the polls with 48% of the votes. He is trailed by former Prime Minister Yulia Tymoshenko from the Fatherland Party with 14%.

IMF Approves Aid to Ukraine, New President Faces Mounting Challenges

Ukraine’s new president will face the challenge of reconciling a divided country and mending the ailing economy. Prospects for the economy improved when, on 30 April, the IMF approved the two-year USD 17.1 billion Stand-By Arrangement (SBA). The approval of the SBA will also unlock an additional USD 15 billion in funds from other donors that will help steer the country away from bankruptcy. Despite broad-based international support, Ukraine’s short-term outlook is dire. FocusEconomics Consensus Forecast panelists expect the economy to contract by 4.1% this year (last month: -4.0%) before recovering to a 1.3% expansion in 2015.

Photo by epSos.de

Photo by epSos.de

Regional Inflation Rises on Faster Prices in Russia, Turkey and Ukraine

Regional inflation jumped from 4.4% in March to 4.9% in April amid faster price increases in Russia, Turkey and Ukraine. Nevertheless, regional inflation expectations for 2014 dropped a notch over last month to 5.0%, as lower projections for Poland and Russia compensated for a higher inflation forecast for Ukraine.

On the monetary policy front, most central banks in the region stayed put last month. The Hungarian Central Bank continued its long-term easing policy and cut the base rate for the 21st consecutive month. The base rate is now at a new record low. Conversely, the Russian Central Bank hiked rates by 50 basis points to stem the slide of the ruble.

Note: This is an excerpt from the FocusEconomics Consensus Forecast Eastern Europe –May 2014. Published May 6th 2014. The full report (155 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 www.focus-economics.com.

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