Southeast European growth to outstrip EU average, says EC Spring Forecast

By bne IntelliNews May 5, 2015

Clare Nuttall in Bucharest -


Most countries across Southeast Europe will grow considerably faster than the European Union average of 1.8% in 2015 and 2.1% in 2016, according to the Spring Forecast issued by the European Commission on May 5.

Two of the existing EU member states from the region - Romania and Slovenia - will outperform the regional average, as will candidate countries including Albania, Macedonia and Montenegro.

This is despite the increase in the EC forecast for 2015 GDP growth in the EU and the Eurozone by 0.1 and 0.2 percentage points respectively, compared to the Winter Forecast issued in February.

In Romania, the largest economy in the region, growth will continue to be driven mainly by accelerating domestic demand in 2015. Private consumption is rising as consumer sentiment reaches a post-crisis high, while investment returned to positive figures in 2014 after a two-year decline, and is expected to continue increasing through 2015 and 2016.

Downside risks to the Romanian forecast “stem mainly from households constraining consumption more than expected to reduce their indebtedness and from a possible escalation of the Russia-Ukraine crisis”, the report says. It also warns that Romania’s headline deficit is expected to deteriorate to 3.5% of GDP in 2016, assuming that the new Fiscal Code, which will introduce a raft of tax cuts, comes into effect. This figure is considerably less optimistic than the Romanian government’s forecast of a 1% deficit.

The European Commission lifted Slovenia's 2015 GDP growth forecast from 1.8% to 2.3%, although this still represents a moderate slowdown this year from last year's 2.6% expansion, which was supported by rising exports and strong infrastructure investment on European Union-financed projects.

However, both Bulgaria and Croatia will lag other countries in the region, growing by just 1% and 0.3% respectively in 2015, although the projections for both countries have been raised slightly since February.

While the Croatian economy is recovering after years of recession, the EC warns that the “timid recovery ... remains fragile, as it relies exclusively on external demand”. A recovery in domestic demand is not expected until 2016, when growth is set to accelerate to 1.2%.

The slowdown in Bulgaria’s growth is attributed mainly to lower investment, which is expected to decline by 1.7% in 2015 and by a further 2.9% in 2016. The deadline for using EU funds from the 2007-13 programme period is due to expire at the end of this year, while private investment as a share of GDP has been on a downward trajectory since 2008. According to the report, “This situation is not expected to change noticeably in 2015 or 2016, as the uncertainty of the post-crisis period, prolonged by the domestic financial sector turbulence in 2014, is likely to continue to weigh on credit activity and investment decisions.”

The mixed forecasts from Southeast European member states are in line with the EC’s expectations of uneven growth across the EU.

The region as a whole is benefitting from a range of factors including low oil prices, steady global growth, the continuing depreciation of the euro and supportive economic policies, while quantitative easing by the European Central Bank has had a significant impact on financial markets. These “positive economic tailwinds” are boosting an “otherwise mild cyclical upswing” in the EU, the report says.

"The European economy is enjoying its brightest spring in several years, with the upturn supported by both external factors and policy measures that are beginning to bear fruit,” Pierre Moscovici, Commissioner for Economic and Financial Affairs, Taxation and Customs, said in a May 5 statement. “But more needs to be done to ensure this recovery is more than a seasonal phenomenon. Delivering on investment and reforms and sticking to responsible fiscal policies are key to obtaining the lasting jobs and growth Europe needs."

However, “the extent to which each economy benefits will depend on its responsiveness to lower oil prices and the depreciation of the euro in particular,” the report adds. “In some member states ... relatively low capital buffers and high levels of non-performing loans may reduce the positive impact of quantitative easing on bank lending.”

Faster growth is expected in most of the EU candidate countries, with Macedonia expected to achieve the highest growth rate in Europe - 3.8% - in 2015. The average GDP growth forecast for the candidate countries is 3.0% in 2015, rising to 3.5% in 2016.

Serbia, which is still recovering after devastating floods in May 2014, is the exception. However, the EC has improved its forecast on Serbia's economic performance this year, saying GDP will shrink by just 0.1% rather than the previously expected 0.3%. The EC left unchanged its forecast for Serbia's 2016 GDP growth at 1.2%.

Some of the events that are expected to contribute to growth in the near future include stronger external demand that should push up exports, as well as higher gross capital formation encouraged by base effects, lower oil prices, and increased confidence following the recently approved three-year stand-by deal with the International Monetary Fund (IMF).

The EC also notes that the Serbian economy started showing signs of recovery in the final quarter of 2014, when the manufacturing sector started picking up and exports strengthened. However, government spending is expected to fall in line with Serbia's IMF agreement, which will require fiscal consolidation and far-reaching structural reforms resulting in lower public and private consumption. 

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