Southeast Europe's economic growth paths diverge

By bne IntelliNews February 6, 2015

Clare Nuttall in Bucharest -


Economic growth rates in Southeast Europe will vary dramatically in 2015, with Turkey expected to achieve the continent’s fastest growth at 3.7%. At the other end of the scale, Serbia, whose economy was hit by flooding in 2014, will contract by 0.3%, while at just 0.2%, Croatia’s growth forecast is the lowest in the European Union.

The European Commission’s winter forecast, published on February 5, reveals that for the first time since 2007, all EU member states will show positive growth. Contributing factors include falling oil prices, the European Central Bank’s (ECB) quantitive easing decision, and the EC’s new Investment Plan for Europe, according to the European Commission.

"Europe's economic outlook is a little brighter today than when we presented our last forecasts,” said Pierre Moscovici, European Commissioner for Economic and Financial Affairs, Taxation and Customs, in a statement. “The fall in oil prices and the cheaper euro are providing a welcome shot in the arm for the EU economy. Meanwhile, the Investment Plan for Europe and the ECB’s important recent decisions will help create a more supportive backdrop for reforms and smart fiscal policies.”

However, their impact across the 28-country bloc will vary, with both Bulgaria and Croatia expected to have minimal growth this year, and a modest increase to just 1% in 2016.

The EC report acknowledges that, “the divergence in economic performance across the EU is likely to continue". Deleveraging rates differ strongly across the EU, while the impact of falling oil prices on European economies will depend on the country’s energy mix. Oil producers such as Albania and Romania will not benefit to the extent of those countries that rely wholly on imports.

Alongside this divergence, the EC report also identifies an increase in uncertainty over the economic outlook. “This is due to geopolitical tensions, renewed financial market volatility in a context of diverging monetary-policy across major economies, and incomplete implementation of structural reforms,” the report says. “On the positive side, certain factors could lead to a stronger-than-expected boost to global and EU growth stemming from low energy prices.”

Rising exports are the sole reason behind Croatia’s expected emergence from its six-year recession this year, while other factors will continue to drag on the economy. Domestic demand growth will remain negative as investments continue to contract. Uncertainty over whether Croatia’s numerous Swiss franc debtors will be able to continue to service their loans, together with the weak labour market, will result in flat private consumption.

Bulgaria managed to weather a year of political uncertainty to achieve 1.4% growth in 2014 but this is expected to dip to just 0.8% this year. Confidence in the banking sector was eroded by the run on Corporate Commercial Bank in mid-2014, and the future of the bank, which was taken under central bank administration, is still uncertain. Private sector consumption is also expected to take a hit from fiscal tightening and the expected weak growth in real disposable income.

Meanwhile the recovery in investment seen since mid-2013 is coming to an end, and public sector investment is expected to decline in 2015, while private companies are also expected to either freeze or postpone investment plans.

By contrast, both public and private sector investment are expected to rally in neighbouring Romania after falling in 2014. Along with higher private consumption, this will contribute to Romania’s “above potential” growth of 2.7% in 2015, rising to 2.9% in 2016 - though this represents a modest slowdown compared to 2013 and 2014. Romania is unusual among EU countries in this respect, since across the bloc, “sputtering investment has so far prevented a broader and more robust acceleration of domestic demand", according to the report.

Slovenia’s strong 2014 performance was driven by EU-funded investment together with rising exports. However, this year, higher private sector investment is expected to only partially compensate for a deceleration in investments co-funded by the EU, resulting in a modest fall a slight slowdown 1.8% growth this year, before rebounding to 2.3% in 2016.

Slovenia’s fiscal deficit also dropped substantially from 14.6% of GDP in 2013 to just 5.4% this year, and the EC expects a continuing decline, given that the risks of “ additional bank related one-off costs affecting the 2015 deficit appear to have been mitigated”. By 2016, the deficit is expected to drop further to just 2.8% of GDP.

With the exception of Serbia, Southeast Europe’s EU candidate countries are set to outstrip most existing member states.

In Turkey, the region’s fastest growing economy, private domestic demand and falling energy prices are expected to be the main factor behind the forecast 3.7% and 4.0% growth in 2015 and 2016 respectively. A rise in consumers' purchasing power will offset the decline in output growth caused by falling exports to Russia, Ukraine and the Middle East, and the appreciation of the lira.

Strong growth is also expected this year in Macedonia (3.5), Albania and Montenegro (both 3.0%), Public infrastructure projects will be the driving force for growth in both Macedonia and Montenegro, though in Montenegro in particular this has raised concerns about fiscal risk connected to a hike in the government’s infrastructure spending.



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