Central, Southeast European growth set to stutter, predicts EBRD

By bne IntelliNews January 19, 2015

bne IntelliNews -


Lower commodity prices could benefit countries in Central and Southeast Europe by helping to offset anaemic growth in the Eurozone, the European Bank for Reconstruction and Development suggests in its latest economic outlook, published on January 19. However, weak export demand from the single currency area and the effects of the stand-off with Russia make the development bank drop its growth forecasts for both regions.

"A scenario of renewed turbulence in the Eurozone would have the strongest adverse impact on the economies of [Central Europe and the Baltics] and [Southeast Europe], which have the closest trade and financial links with the single currency area," the EBRD’s Regional Economic Prospects report says.

The upshot of the external pressure is that the economies of Central and Southeast Europe will depend more heavily on an upturn in domestic demand. While investment and consumption is indeed pushing higher in the region, the rising external pressures make the EBRD drop its estimates on GDP growth for all Central and East European (CEE) economies except Hungary since the last outlook was published in September.

The picture for the Southeast Europe region is more mixed. The region as a whole is expected to grow by just 2.2% in 2015, down from an earlier forecast of 2.6%, but forecasts for several economies in the region have been either raised or remain unchanged, with the EBRD lowering its forecasts for just four countries.

However, additional external risks are piling up, the development bank warns. Any prolonged uncertainty stemming from the elections in Greece on January 25 could add extra pressure on the economies of Central and Southeast Europe, it worries. The prospect of a hike in US interest rates also persists, and "may abruptly push borrowing costs higher and reduce net capital inflows".

"On the upside, commodity importers stand to benefit from significant terms of trade gains and some additional space for macroeconomic policy that can boost growth," the report adds in one of its few nods to optimism. Overall, commodity-importing countries - which include all those in Central Europe and the Baltics - should have a modest pick-up in growth from 2.1% in 2014 to 2.4% in 2015.

While improving labour market dynamics in Central Europe, coupled with low inflation have helped to offset poorer export performance, the EBRD warns that credit growth remains subdued as parent banks continue to shrink exposure. At the same time, the pace of investment and consumption are vulnerable to rising real interest rates if deflation sets in.

All of which makes the EBRD drop its forecasts for all the countries it covers in Central Europe and the Baltics, except Hungary. While raising its estimate for 2015 growth in Hungary by 0.2 percentage points to 2.4%, like others the development bank notes that the country's strong recent performance (it's set to lead the region alongside Poland in 2014 with 3.2% growth) is largely driven by the government.

"In Hungary, growth has also been supported by one-off factors, namely, accelerated disbursement of EU funds at the end of the EU financial cycle and a boost to household disposable income from cuts in utility tariffs," the EBRD cautions. While it doesn't expand on the topic, the 0.8pp drop in growth predicted for this year speaks volumes. By way of contrast, although Poland sees its 2015 outlook cut 0.3pp, the EBRD still expects expansion of 3%.

Every other country should find 2015 growth trumping its performance last year, the EBRD predicts. Lithuania should lead the region with 3.2% growth, despite a 0.2pp drop compared with the September estimate. Meanwhile, neighbouring Latvia will have the deepest cut in expectations in the interim, with its outlook cut 0.7pp to 3%.

Estonia should continue its slow climb over the past poor couple of years, with growth of 2.2% this year. Slovakia is set to grow by 2.6%, the EBRD also suggests.

In SEE, the EBRD has cut its 2015 growth forecasts for Bulgaria, Moldova, Serbia and Turkey, with the most dramatic downward change in Moldova, which in September 2014 was expected to achieve growth of 4.0% in 2015. This forecast has since been slashed to zero, down from 3.0% in 2014 and an impressive 9.4% the previous year. Moldova relies to a much greater extent than other SEE countries on remittances from Russia, which are set to drop this year as the Russian economy slumps to an expected 4.8% contraction following modest 0.4% growth in 2014.

Elsewhere, Bulgaria’s GDP growth is now expected to slow from 1.5% in 2014 to just 0.8% this year, down from a forecast of 2% made by the EBRD in September 2014, following a year of political turbulence. Serbia, where the economy shrank by 2.0% in 2014 in the aftermath of catastrophic floods, is expected to grow by 0.5%, compared to the September forecast of 2.0% growth. Both countries are also among those most affected by the Russian decision to cancel the planned South Stream gas pipeline.

Turkey’s growth forecast has also been lowered slightly from 3.2% to 3.0%, though this still represents a modest acceleration from the country’s 2.9% growth in 2014. Turkey’s growth will be “supported by the lower oil import bill and potential monetary easing. However, continued weakness in external demand and lower spending by Russian tourists could be negative factors,” the report says.

Meanwhile, the EBRD has upped its forecasts for Macedonia, Montenegro and Slovenia. The Slovenian economy is now expected to expand by 1.6%, compared to an earlier forecast of 1.0%, though this is still a slowdown compared to the 2.7% growth in 2014. Both Macedonia and Montenegro had their forecasts raised by 0.5pp to 3.5% and 3.0% respectively.


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