Stuttering growth in the Eurozone, asset market volatility and the stresses testing the cohesion of the EU all present growing challenges to Central Europe’s small and open economies, the International Monetary Fund warns in its latest update to the World Economic Outlook released on April 12.
The pressures going around the globe have led the international institution to lower its growth forecasts across the board. The forecast for global growth has dropped 0.2pp from the last outlook in January, and stands at 3.2%. On top of that, risks of even weaker growth scenarios “are becoming more tangible", the IMF warns, even as it tries to talk up an accelerating global recovery in 2017.
Weighed down not only by the weakening global sentiment but also “crisis legacies", including high debt, low investment, eroding skills, aging and poor productivity growth, Eurozone GDP is likely to come in at just 1.5% in 2016. Even more downbeat, the prediction for 2017 is just 1.6%, the report states, and average growth is likely to remain around just 1.5% in the medium term.
Among the “purely economic risks is a return of financial turmoil itself, impairing confidence and demand in a self-confirming negative feedback loop", the IMF analysts write. Added to that, uncertainty created by the slowdown in emerging markets, the migrant crisis, the potential exit from the EU by the UK, and terrorism have hit investor confidence hard.
The slowdown and draining confidence will inevitably hit Central Europe, which is heavily reliant on export demand from Western Europe. Compounding that risk this year, the states in the region already face a slowdown because of reduced EU funds as the new 2014-2020 window comes into effect.
GDP growth is expected to moderate in the Czech Republic from 4.2% in 2015 to 2.5% in 2016 as the effects of the high absorption of European Union funds gradually disappear. The IMF forecasts 2.4% GDP growth in 2017.
Consumer price inflation is set to remain well below target, the IMF forecasts. In its latest inflation report, the Czech National Bank (CNB), which capped the koruna against the euro in November 2013, cited slower wage growth as a downside risk to inflation. That’s despite IMF projections that unemployment should fall from 5.0% in 2015 to 4.7% in 2016, and further decrease the following year to 4.6%.
The CNB expects inflation to hit its 2.0% target in the first half of 2017. The IMF projects it will drop to 1% in 2016 but rise to 2.2% the following year.
The Czech Republic is expected to record a current account surplus equivalent to 0.6% of GDP in both 2016 and in 2017.
GDP growth is expected to moderate in Hungary from 2.9% in 2015 to 2.3% in 2016 as the effects of the high absorption of European Union funds gradually disappear. The IMF forecasts 2.5% GDP growth in 2017.
Hungary is projected to experience headline consumer price inflation well below target in 2016. In its latest inflation report, the Magyar Nemzeti Bank (MNB) dropped its prediction for 2016 to 0.3% from the previous outlook of 1.7%. The IMF projects a slightly bigger increase of 0.5% in 2016, and then a spike to 2.4% the following year.
Hungary is expected to record a current account surplus equivalent to 5.4% of the GDP in 2016, and 5.2% in 2017, further helping to reduce its vulnerability. According to the IMF’s projections, unemployment should fall from 6.9% in 2015 to 6.7% in 2016, and further decrease the following year to 6.5%.
Polish economic growth is projected to reach 3.6% in 2016 and 2017, with an outlook for 2021 at 3.5%. The projection for 2016 was raised by 0.1pp compared to the IMF’s previous forecast as consumption drives onwards. The forecast puts Poland in the top half of performers from the emerging and developing markets group.
One of the major drivers for the ongoing rise in consumption - falling unemployment - is expected to continue. The IMF forecast the jobless rate will come down to 6.9% in 2016 – compared to a forecast of 7.2% from October - and it will remain at that level in 2017 as well.
Poland’s consumer prices will likely fall 0.5% through this year, the IMF forecasts, before rebounding to grow 0.5% in 2017. In 2021, inflation will come in at 1.7%, the IMF claims. Poland has been experiencing deflation since mid-2014, but rate setters continue to hold out against a return to monetary easing.
The outlook for current account balance has been revised downward to -1.8% in 2016, from -1% seen in the IMF’s previous forecast. The deficit will widen further to -2.5% in 2017. In 2021, it will be at -3%, the IMF predicts.
GDP growth is expected to slow in Slovakia from 3.6% in 2015 to 3.2% this year as EU fund absorption slows. The IMF forecasts 3.4% GDP growth in 2017.
Slovakia’s headline consumer price inflation is expected to continue to drop. In its latest inflation report, the Slovak National Bank (SNB) cautioned that the inflation forecast has been revised “markedly” and that CPI will finish this year at just 0.2%. That IMF projects the same figure, with a rise to 1.4% in 2017.
Slovakia is expected to record a current account deficit equivalent to 1.1% of GDP in 2016 and 2017. According to the IMF’s projections, unemployment should fall from 11.5% in 2015 to 10.4% in 2016, and further decrease the following year to 9.6%.
All three Baltic states are likely to improve their economic growth readings during 2016 and 2017, compared to subdued figures in 2015.
Growth in the Baltic states, which are all members of the Eurozone, will be faster than the average expansion of 1.5%-1.6% predicted for the Eurozone in 2016 and 2017, respectively. Still, as members of the common currency area, the Baltic states’ economies will operate in the environment of weakening external demand, outweighed by the favourable effects of lower energy prices, a modest fiscal expansion, and supportive financial conditions.
Lithuania is expected to grow its economy 2.7% in 2016 and 3.1% in 2017. Latvia will manage growth of 3.2% in 2016 and still expand on that to record a 3.6% expansion the following year. Regional laggard Estonia should push to 2.2% growth in 2016 – clearly faster than 2015’s disappointing 1.1% – and then recover further to 2.8% in 2017.
Inflation across the region should pick up in 2016, although still remain rather slow, with 0.5% expected for Latvia and 0.6% for Lithuania. Driven by the tightening labour market, Estonia could see prices grow 2% in 2016. All three should then see inflation recover further in 2017, with CPI set to rise 1.9% in Lithuania, 1.5% in Latvia, and 2.9% in Estonia – the fastest rate in the Eurozone.
Unemployment is forecast to continue to fall across the region. In Lithuania, it is expected to drop to 8.6% in 2016 from 9.1% in 2015, before compressing very slightly to 8.5% the following year. In Latvia, the joblessness rate is expected at 9.5% in 2016 and 9.1% in 2017. The lowest unemployment rate will be seen in Estonia, at 6.5% both in 2016 and 2017.
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