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Central East Europe econonomies 2016 growth outlook remains positive

In 2015, Central and Eastern Europe (CEE) has benefited from the gradual recovery in the Eurozone, which is supported by the quantitative easing program launched by the European Central Bank. The economies of CEE also benefited from the fall in commodities prices, especially oil prices, which kept energy costs low across the European continent. Next year, the region’s economy will continue to benefit from the Eurozone’s ongoing economic recovery, as domestic demand will be supported by still-low oil prices and an expansionary monetary policy. However, downside risks to the outlook could arise in the form of a stronger-than-expected impact of the tightening of U.S. monetary policy, which could result in some capital outflows. Moreover, geopolitical risks are expected to remain high.

The economic outlook for CEE remained stable this month and economists polled by FocusEconomics expect that the economy of Central and Eastern Europe will grow a still healthy 3.0% in 2016. Moreover, the Consensus view of our panel of analysts is that the region’s economy will expand 3.2% this year. The 2015 GDP growth forecast was also unchanged from last month’s projection.

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Looking at the countries in CEE, 2016 GDP growth projections were left unchanged for 7 of the 11 economies surveyed, including Hungary, Poland, Romania and the Czech Republic, which are considered regional key players. Meanwhile, analysts raised the forecasts for Croatia and Slovakia, while Estonia and Latvia were the only countries for which forecasts were cut.

Region’s economy shows resilience in Q3

The majority of economies in Central and Eastern Europe (CEE) continue to benefit from lower energy prices and the recovery in the Eurozone. Following a mild deceleration in the second quarter, the region’s economy picked up pace in the third. An estimate elaborated by FocusEconomics showed that Central and Eastern Europe’s GDP increased 3.3% year-on-year in Q3, which came in slightly above the 3.2% expansion registered in Q2. Preliminary GDP data disseminated by national statistical offices and central banks across the region showed that 6 of the 11 economies surveyed accelerated in Q3. Poland, Romania and Slovakia all picked up pace, growing at rates above 3.0%. Bulgaria and, notably, Croatia continued to show solid growth in Q3. Conversely, the pace of expansion in Hungary and the Czech Republic, while remaining healthy, did moderate in the three-month period to September. In the Baltic region, Latvia and Estonia decelerated, while Lithuania’s economy accelerated compared to the previous quarter.

Political events took center stage in November in Romania and Croatia. In Romania, a new government of technocrats that survived a confidence vote in Parliament was sworn in on 17 November, following the resignation of the government of Victor Ponta. In addition, President Klaus Iohannis has effectively imposed a presidential system of government, which has been endorsed by the Parliament, as the legislative power is aware that it has lost public confidence. The new government, composed entirely of technocrats without party affiliation, is expected to remain in office for a year until parliamentary elections are held in December 2016. On the economic front, the new government faces the immediate challenge of preparing the 2016 budget, which should meet the EU’s tight fiscal rules, but at the same time accommodate the new Fiscal Code and other fiscal relaxations that were already approved by the previous government. Although the new technocratic government has pledged to be politically neutral and work closely with parliament and political parties, it is highly inexperienced and it remains to be seen whether it will survive political difficulties as a sizable number of parliamentarians did not endorse it in the confidence vote. Meanwhile, in Croatia, the general elections that took place on 8 November resulted in a hung parliament. Significant uncertainty remains regarding the coalition talks, as political paralysis could derail the nascent economic recovery in a country that experienced six years of recession.

CZECH REPUBLIC | Economy remains solid despite moderation in Q3

The Czech Republic’s economic performance has been extraordinarily strong so far this year and a third consecutive annual expansion above 4.0% was recorded in the third quarter. GDP growth slowed only marginally from Q2’s post-crisis high of 4.6% to 4.5% in Q3. The expansion mainly came on the back of the domestic economy, particularly strong public spending. Incoming data suggest that the economy has remained on a robust track in the final quarter of the year. The unemployment rate fell to an over-six-year low in October and November’s PMI continued to point to expansionary conditions in the manufacturing sector. Both businesses and consumers grew more confident in November, lifting overall economic sentiment.

Economic growth is expected to peak at an eight-year high this year, fueled by rising investment, which receives a boost from strong absorption of EU funds, and public spending. Solid private consumption, which benefits from expansionary monetary policy and low oil prices, also spurs growth. The economy will likely decelerate in 2016 and expand at a more sustainable pace, partly because inflows of EU funds and government spending are projected to slow. FocusEconomics Consensus Forecast panelists see GDP growing 4.0% this year. For 2016, they forecast an expansion of 2.7%, which is unchanged from last month’s forecast.

HUNGARY | Economy loses strength in Q3 and recent data indicate sluggishness in Q4

Hungary’s economy slowed in the third quarter, expanding at the slowest pace since Q2 2013. Growth has lost steam since hitting a multi-year high in Q2 2014 and business confidence fell to a six-month low in November, suggesting that the economy remains on soft footing in the fourth quarter. Averting a notable slowdown next year—after EU development funding diminishes—remains a key obstacle for policy makers. At the end of November, the government proposed a drastic reduction to the country’s banking tax, which is the highest in Europe, and additional measures to incentivize greater lending. The move is in line with Prime Minister Viktor Orbán’s promise to create a more investor-friendly climate in the country and should boost corporate lending if enacted.

Growth is expected to proceed on a more moderate and stable path going forward after hitting a five-year high in 2014. Continued gains in the labor market should support growth next year, however, it remains unclear if the government can prevent a significant moderation in investment going forward. FocusEconomics Consensus Forecast panelists see GDP expanding 2.8% in 2015. For 2016, the panel sees GDP expanding 2.4%, which is unchanged from last month’s forecast.

POLAND | Center-right government rules the country with majority; economy still in good shape

Poland’s economy accelerated in Q3 compared to the previous quarter. The result came on the back of stronger domestic demand, which more than offset a deterioration of the external sector’s contribution to growth. Meanwhile, the right-wing Law and Justice (PiS) party is now ruling the country with an absolute majority in Parliament, following a large victory against center-right Civic Platform (PO) in the general elections that took place on 25 October. Beata Szydło, Vice-Chairman of the PiS, was appointed by President Andrzej Duda (PiS) as Prime Minister on 16 November. A significant policy shift is expected as PiS has campaigned heavily on nationalist and, to a certain extent, populist policies. The party is slightly eurosceptic and has outlined several measures that could discourage international investment such as taxing foreign-dominated sectors. PiS also promised increased social and defense spending, which could threaten a fragile budget equilibrium. However, institutional backstops and spending constraints should ensure a certain fiscal responsibility.

The strong political shift casts important uncertainty regarding future policies and the actual implementation of PiS’ campaign agenda, which is widely seen as unfavorable for international investors and fiscal consolidation. However, limited fiscal room should force the party to water down its promises and strong underlying economic performance significantly reduces downside risks. Our panelists expect the economy to expand 3.5% in 2015. For 2016, the panel sees economic growth at 3.5% as well, which is unchanged from last month’s forecast.

ROMANIA | New technocratic government faces significant challenges ahead of elections at the end of 2016

Romania’s new government’s first major challenge consists in preparing a tight budget for 2016 that complies with EU fiscal targets and accommodates the large-scale fiscal easing plans that were approved by the previous government, including a VAT cut from 24% to 20%. Parliament’s recent initiatives to hike public sector wages add to pressures. The draft budget is expected to be presented in early-December and while PM Dacian Ciolos’ government will likely try to find ways to keep the fiscal deficit in check, political maneuvering room is limited by the absence of permanent backing from a political party in Parliament and by legislators’ intention to gather voters’ support ahead of parliamentary elections scheduled for late-2016. Meanwhile, the economy remained on a solid growth track in Q3, expanding an annual 3.6%, which marked a moderate acceleration over Q2’s 3.4%.

Strong fiscal stimulus will provide tailwinds for household spending and economic growth this year and next. On a negative note, extensive fiscal easing will drag on public accounts. Other downside risks include slowing investment in 2016 due to subdued absorption of EU funds as well as widening current account and trade deficits. Our panelists see GDP growing 3.5% in 2015. Next year, they expect a 3.6% expansion, which is unchanged from last month’s forecast.

INFLATION | CEE expected to see inflation return in 2016

A decline in oil prices of about 40% in year-on-year terms contributed to exerting downward pressure on consumer prices throughout 2015. An inflation estimate elaborated by FocusEconomics showed that consumer prices fell 0.6% over the same month last year in October, mirroring the decrease in September. As this marks the sharpest annual fall in consumer prices since March, the spiraling deflationary trend that began in December 2014 continued. The absence of inflation is likely to spur local currencies and improve the development of capital markets. However, the lack of inflation may increase the real debt burden, which is a particular problem in countries with high corporate and household debt.

Next year, however, stronger domestic demand and a gradual increase in global oil prices could support higher inflation in the region. The group of analysts we polled this month foresee that, after consumer prices fall on average 0.3% in 2015, inflation will return to the region in 2016. Analysts predict that inflation will increase to 1.1% in 2016, which, nonetheless, represents a downward revision of 0.2 percentage points from the previous month’s projection. The result stemmed from downward revisions to the inflation forecasts for almost all of the economies surveyed except for Bulgaria and Lithuania, which was left unchanged.

Source; FocusEconomics

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