Slovenia bucks negative trend in Southeast Europe, EC predicts

By bne IntelliNews November 4, 2014

bne -


The European Commission raised its 2014 GDP growth forecast for Slovenia to 2.4%, up from an earlier forecast of just 0.8%, citing higher exports and investment. Slovenia was the exception to the overall downward trend among EU member states in Southeast Europe, with Bulgaria, Croatia and Romania all having their 2014 growth forecasts lowered in the EC’s Autumn 2014 forecast published on November 4.

The Slovenian economy already expanded 2.5% year-on-year in the first half of 2014 with net exports remaining the largest growth contributor. Investments also played a key role, driven by EU-funded infrastructure projects, the EC said.

As well as raising its 2014 forecast from the 0.8% projection made in its May 2014 Spring Forecast, the EC also upgraded the country’s 2015 GDP outlook to 1.7% and sees a further acceleration to 2.5% in 2016.

The deceleration in 2015 is attributed to expected lower growth in EU-funded infrastructure projects, although higher private investments are expected to contribute to faster GDP growth in 2016.

With a new government in place after Slovenia’s July parliamentary elections, political instability is no longer considered a major risk, though one downside risk to the growth forecast could come from weakening activity of the Balkan countries and the Commonwealth of Independent States (CIS) - Slovenia's main trading partners - which would negatively impact on exports in 2015 and 2016. On the other hand, a further depreciation of the euro would boost Slovenia's exports.

Elsewhere in Southeast Europe, it was a much gloomier picture. The EC now expects a 0.7% contraction in Croatia this year, due to falling domestic demand, the weak business environment and labour market performance.

While this is only slightly lower than the May forecast of a 0.6% contraction, in 2015, the EC has cut its growth forecast from 0.7% to just 0.2%, in anticipation of a continuing decline in domestic demand and household consumption. However, the EC sees exports of goods rising 4.3% next year, while a rebound in both investment and consumption will contribute to growth as of 2016.

The EC also slashed its 2014 growth forecast for Bulgaria, which is currently mired in political uncertainty, from 1.7% to 1.2%. The economy will lose more of its growth momentum next year, slowing to a 0.6% growth, significantly below the 2% forecast in the spring.

So far in 2014, investment has been driven mainly by public expenditures, which is expected to significantly decrease in the coming years, the EC said. Meanwhile, private investment is seen contracting in 2014-2015 as a result of the deleveraging process in the economy and the low profit expectations. At the same time, private consumption is set to wane after a robust growth in the first half of the year, which was supported by increases in public sector wages and pensions coupled with deflation. On the positive side, exports are set to resume growing at a moderate pace in the next couple of years and the contribution of net trade to overall economic growth is projected to turn positive in 2015.

The EC also adjusted downward its forecast for Romania’s 2014 GDP growth 2%, and its 2015 forecast to 2.4%. This follows a strong deceleration in Q2, when growth dropped to just 1.2% y/y. While private consumption and exports were the main growth drivers, Romania saw a substantial drop in investment in 2014.

However, growth is expected to revive in the next two years, on the back of resilient private consumption, a slight improvement in credit growth, and an increase in investor confidence, the EC report says.

Meanwhile, a stronger performance is expected in EU candidate countries in the region. The EC has raised its 2014 growth forecast for the region’s largest economy Turkey to 2.8% from a previous 2.6%, while keeping its 2015 forecast unchanged at 3.3%.

However, the EC warns that economic activity has decelerated sharply in Turkey after a strong performance in Q1. Stagnating export markets and armed conflicts in neighbouring Syria and Iraq have put a damper on Turkey's economy while real appreciation has lowered its international competitiveness again. The Commission sees downside risks to growth from a potential renewed sell-off in Turkish financial assets as US monetary policy normalises. Another risk, according to the Commission, is the chaotic situation in Iraq and Syria with a possible spill-over to Turkey itself.

Serbia fares less well in the EC’s latest report, which forecasts a 1.0% contraction in GDP this year and stagnant growth in 2015, following the mid-May flooding. Previously, the EC had forecast a 1.1% expansion this year rising to 1.9% in 2015.

Uncertainties around Serbia's structural reforms and fiscal consolidation efforts are also hampering economic confidence, while rising public debt remains a key challenge. The economic recovery will likely be delayed due to the announced cut in public spending and public sector salaries, the weak labour market, and the effects from the floods that might spill over into 2015.

The EC also forecasts that public indebtedness will reach 78.4% of GDP in 2016, up from 68.6% in 2014. The announced wage and pension cuts are considered insufficient to stabilise the government debt and the budget deficit is projected to stay very high at 5.8% of GDP in 2014, declining to 4.8% of GDP in 2016.

Europe-wide, Macedonia is second only to Ireland in the EC’s forecast for 2014 growth, with an expected expansion of 3.3% in 2014, accelerating steadily to 3.6% by 2016. Macedonia’s economic recovery is driven by “a further strengthening of domestic demand, in particular public and foreign direct investment, and a dynamic export activity.” the report says.

Montenegro, while expected to grow by a healthy 2.0% this year, was criticised by the EC for its delayed investment agenda, which alongside the sharp decline in exports resulted in a slowdown in the first half of the year, with growth dropping to just 0.3% in Q2. Albania, which gained EU candidate status in June, is expected to see a gradual acceleration in growth between 2014 and 2016, following the slowdown over the last three years. Growth drivers include a pick-up in bank lending, government plans to clear public arrears clearance and planned large FDI projects.

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