Emerging market weakness to hurt Central European growth, says IMF

By bne IntelliNews October 6, 2015

bne IntelliNews -


The slump in commodities prices is the overriding factor in slowing the global recovery this year and next, suggests the International Monetary Fund in its latest World Economic Outlook released on October 6. While cheaper oil should help Central Europe, which imports the vast bulk of its energy, it will also drag on inflation and export demand.

Global growth for 2015 is projected at 3.1%, 0.3pp lower than in 2014, and 0.2pp below the IMF's forecasts made in July. "Prospects across the main countries and regions remain uneven," the report notes. "Relative to last year, the recovery in advanced economies is expected to pick up slightly." However, "in an environment of declining commodity prices, reduced capital flows to emerging markets and pressure on their currencies, and increasing financial market volatility, downside risks to the outlook have risen, particularly for emerging market and developing economies."

"These global factors-and country-specific developments-point to a somewhat weaker recovery in 2015 and 2016 than previously envisaged, and to higher downside risks," the IMF sums up.

Growth in "emerging and developing Europe" is projected to rise modestly to 3.0% in 2015-16. While the region has benefited from lower oil prices and the gradual recovery in the Eurozone, it also affected by the contraction in Russia and the impact of still-elevated corporate debt on investment, the report points out. 

On the one hand, the ongoing recovery in the advanced economies of the Eurozone should offer some support to the economies of Central Europe, which are heavily dependent on exports to the single currency region. However, a likely drop in demand from emerging markets for Eurozone exports will feed through to the region via their role in the supply chain for manufacturing in economies such as Germany.

"The recent further decline in oil prices, as well as in prices of other commodities, should support demand in the majority of advanced economies that are net commodity importers," the analysts point out. However, "the slowdown in emerging markets will imply weaker exports."

That suggests ongoing weakness in investment in particular will continue to haunt Visegrad and the Baltic states. Hungary, in particular, has seen dropping investment dragging on economic growth this year. 

That in turn is impacting productivity and wages growth - a vital element given the emphasis on consumption to drive growth in the region currently. Several Czech officials have remarked on the low level of wages growth despite the country leading the EU in terms of overall economic growth. 

In the Baltics, meanwhile, demographic issues have the labour markets tightening at a pace that threatens to drag on investment and growth. Productivity gains are key to turn that around, but reform is slow.

That's the same in much of the world. As is the mantra from international institutions, the IMF insists: "Structural reforms to raise productivity and remove bottlenecks to production are urgently needed in many economies."

Maintaining momentum?

While the IMF maintains its projection of 3.5% GDP growth in Poland in both 2015 and 2016, the economy does drop out of the European top three for this year, forecast to be overtaken by Ireland, Luxembourg, the Czech Republic, and Iceland. That said, Poland is the only one predicted to maintain momentum in 2016.

Polish expansion is also set to come in above the CEE region's average of 3%. Domestic demand leads the charge, with improved economic conditions in the country's main trading partners an added plus. The chief regional risk is contraction in Russia, the analysts point out.

However, Poland is still struggling with deflation, much of it imported to meet that growing consumption - the current account balance is expected at -0.5% of GDP in 2015, widening to -1% in 2016. That has the IMF expecting CPI to sink 0.8% in 2015, before it rebounds to 1% next year, 0.2pp below the April forecast. 

One of the major drivers behind consumption growth, unemployment is expected to continue its strong decline. The jobless rate - currently around 10% - is likely to drop to 7.5% in 2015, and be squeezed further to 7.2% in 2016. 

Slovakia is also expected to keep up the pace. The IMF raised its April growth forecast by 0.3pp to 3.2%, while it made a similar adjustment to its forecast for next year, with the economic expansion set to accelerate to 3.6%.

The Central European country remains an outperformer in the Eurozone. The IMF predicts growth in the single currency region to grow by an average of just 1.5% this year and 1.6% in 2016. The IMF forecast for 2015 is in line with that of the National Bank of Slovakia. However, the fund shows more optimism regarding next year's economic development.

Consumer prices are seen contracting 0.1% this year, significantly below the 0.7% average predicted in the Eurozone. However, inflation is thought likely to recover to 1.4% in 2016.

Unemployment, the perennial Achillies heel of the Slovak economy, is set to remain high, although it should fall to 11.9% - a dramatic improvement from the 13.2% the jobless total finished 2014 with. The drop should accelerate even further in 2016, with unemployment shrinking to 11.1%.


The recent star of the EU, the Czech economy is now forecast to expand 3.9% this year, a sharp hike of 0.9pp to the IMF's previous outlook. The increased optimism comes in the wake of strong economic growth posted in the first half of the year. 

After exiting a record-long recession last year, the Czech economy is gaining momentum supported by improving domestic demand and strong exports. That said, growth is projected to ease to 2.6% in 2016 and weaken to 2.2% by 2020. The IMF's forecast for 2015 is in line with the Czech government's outlook, while for 2016 it is a touch above the government's 2.5% estimate. 

The strong economic growth and the loose monetary conditions in the country have so far failed to spur price growth in the Czech Republic, with inflation set to remain below the central bank's target of 2% to at least the end of next year. The IMF sees Czech CPI at 0.4% in 2015 before picking up to 1.5% in 2016. 

The Hungarian economy is projected to grow by 3% this year, the IMF predicts. Although weakening from the heady 3.6% recorded in 2014, growth should remain robust, the analysts add. 

The outlook represents an improvement from April, when the institution pitched growth at just 2.7%. However, the slowdown has simply been kicked down the road, with Hungary likely to underperform next year as growth stutters to 2.5%, below the average of 3% in the CEE region. 

The fund sees CPI at 0.3% this year before sharply accelerating to 2.3% in 2016. The forecasts are slightly more optimistic than those of the Hungarian central bank, which expects inflation at zero this year and price growth of 1.6% in 2016.

The IMF also improved its expectations on Hungary's current account surplus, which it now sees widening to 5% of GDP in 2015 from 4% in 2014. In April it had projected this year's surplus at 4.8%. Improving terms of trade and strong export volume growth have helped Hungary maintain a sizeable surplus over the past few years. 

Baltic bounce

The Baltic states should all improve their economic growth readings in 2016, compared to somewhat subdued growth figures in 2015, the IMF report suggests.

The Baltic trio is likely to post slower growth in 2015 compared to 2014; Lithuania is set to disappoint in particular, with growth predicted at 1.8%, compared with the 2.9% expansion last year. Latvia should manage the slowdown better, trimming the fall to just 0.2pp from 2.4%; Estonia is in similar territory, and likely to see growth drop 0.1pp to 2%.

However, next year should look decidedly better for all, forecasts the IMF. Lithuania's economy is forecast to accelerate to 2.6%, Estonia to 2.9%, and Latvia to 3.3%.

Now all members of the Eurozone, the Baltic states will operate in the context of the moderate recovery in 2015-2016, sustained by lower oil prices, monetary easing, and the depreciation of the euro. "At the same time, potential growth remains weak - a result of crisis legacies, but also of demographics and a slowdown in total factor productivity," the IMF notes.

Inflation across the region should also pick up in 2016, with 1.6% expected for Lithuania and Estonia, and 1.8% for Latvia. This year, however, Lithuania will record deflation of 0.4%, while in Estonia and Latvia CPI growth will be minimal at 0.2% and 0.4%, respectively.

Unemployment is on a downward trajectory in all three Baltic economies, although Lithuania and Latvia will likely not manage to push it below 10% over the next couple of years. However, Estonia - whose labour market has been tightening dramatically

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