Central Europe and Baltics continue to shadow EU recovery but risks grow, forecasts EU

By bne IntelliNews February 4, 2016

The economies of Central Europe and the Baltics face challenges going into 2016, but recovery should remain on track, the European Commission predicts in its latest forecast for the EU economies, published on February 4.

As ever, the export-dependent region's prospects will rely heavily on the fate of the wider bloc. The European economy is now entering its fourth year of recovery and growth continues at a moderate rate, driven mainly by consumption, the report notes. At the same time, much of the world economy is grappling with major challenges and risks to European growth are therefore increasing.

The "Winter 2016 Economic Forecast: Weathering New Challenges" report shows that the overall growth outlook has changed little since the autumn, but that the risk that growth could turn out worse than forecast has risen, mainly as a result of external factors. In the Eurozone, growth is projected to increase to 1.7% this year from 1.6% last year, and to climb to 1.9% in 2017. EU economic growth is forecast to remain stable at 1.9% this year and rise to 2.0% next year.

Economic growth in the Czech Republic is expected to have risen to 4.5% in 2015 on the back of strong domestic demand. However, as last year's exceptional boost to growth from the last minute rush to draw down EU funds from the 2007-13 window fades, so too will growth.  

GDP expansion is expected to slow to 2.3% in 2016. Despite the coming lull in public investment, domestic demand will remain in the driving seat thanks to consumption. The tightening labour market and low inflation likely pushed household consumption 2.9% higher in 2015. That level of consumption helped push net exports to a rare negative effect on headline GDP last year. The commission expects that to turn around in 2016.

With investment recovering and household consumption remaining strong, growth is expected to pick up again to 2.7% in 2017.

The EU has dropped its forecast for Hungary's economic growth this year by 0.1pp. It is now expected growth to slow to 2.1%, before accelerating to 2.5% in 2017. An expansion of 2.7% is predicted for 2015.

Private consumption will continue to support growth, the report suggests, as real disposable income and household spending are boosted by a 1pp cut in income tax. The conversion of foreign currency-denominated loans into HUF in late 2014 should also continue to have an effect. However, EU funds' absorption and foreign demand will slow at the beginning of the year.

Private consumption will remain the driver of growth in 2017 also. Investment growth is expected to turn positive again next year.

As with its regional peers, there was hardly any surprise in the European Commission’s latest economic forecast for Poland. Growth is forecast at a consistent 3.5% across 2015-2017. Growth will be propped up by private consumption, with investment to grow moderately, the report suggests.

Meanwhile, Polish CPI is not slated to come back until 2017, when it's forecast at 1.7%. The slow recovery maintains speculation that the central bank could yet return to monetary easing. This year is expected to produce a deficit of 2.8%, before the gap is predicted to swell to 3.4%, because of the full-year effect of the new child benefit payments, a lower VAT tax rate due to enter into force in 2017, and the lack of additional one-off revenues, the commission notes. Unemployment data remains positive, with the EU executive pitching joblessness at 7% in 2016 and 6.5% in 2017.

Slovakia's economy is expected to grow faster this year than previously expected, driven by accelerating household spending. However, the economy is likely to expand more slowly than in 2015.

GDP growth is seen slowing to 3.2% this year from an expected 3.5% in 2015. Still, the 2016 outlook represents an upgrade compared to the autumn forecast, when the commission was expecting expansion at 2.9%. Growth should accelerate to 3.4% in 2017, the report predicts.

As elsewhere in Central Europe, investment, which boomed in 2015, is expected to slow down this year. However, the decline in public investment expenditure should be partly offset by stronger private activity as Jaguar Land Rover launches construction of its plant near Nitra.

Household consumption, which is expected to expand 3.4%, will remain the main driver of growth this year, supported by improving employment, solid real wage growth and low credit costs. Exports, on the other hand, are set to slow because of a slowdown in imports from Slovakia's main trading partners.

All three Baltic states are expected to continue their recovery 2015 and 2017. However, Estonia is likely to remain the laggard, with GDP growth predicted to remain capped at 2.1% in 2016 and 2.3% in 2017. In contrast, Lithuania is forecast to grow 2.9% this year and a solid 3.4% in 2017, while Latvia is forecast to grow 3.1% in 2016 and 3.2% in 2017.

Estonia’s likely moderate growth owes to “negative base effects in the electronics sector, sharply reduced demand from neighbouring Russia, and falling international oil prices which have made Estonia's shale oil sector less competitive", the commission writes. As across the region, private consumption, on the other hand, should remain strong. The economies should also see additionally support from recovering exports.


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