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Region’s growth slows in Q2 after gaining speed in Q1

The majority of economies in Central and Eastern Europe (CEE) began this year growing at a remarkable rhythm as they were starting to benefit from the nascent recovery in the Eurozone. According to a GDP growth estimate for the region, the economy of Central and Eastern Europe increased at a rate of 3.4% in the first quarter, which marked a notable acceleration compared to the 2.6% rise observed in the last quarter of 2014. Growth was propelled by a substantial increase in economic growth in the Czech Republic and Romania, as well as by positive impulses from the economies of Bulgaria, Hungary, Poland and Slovakia. However, the region’s growth dynamics in Q2 suggest a slowdown. CEE’s economy is expected to have been dragged down by a deceleration in the same economies that grew fastest in Q1. The Czech Republic and Romania are now expected to have slowed down in Q2, while the economies of Bulgaria, Hungary, Poland and Slovakia likely either saw the pace of growth moderating or remaining similar to the previous three-month period.

 

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In Romania, politics has taken center stage in recent weeks as relations between Prime Minister Victor Ponta and President Klaus Iohannis broke down once and for all. Prime Minister Ponta continues to resist President Iohannis’ request that he resigns, and the President widened the scope of his attack against Ponta by rejecting the new fiscal code that the government had presented, which proposes cutting taxes in the period between 2016 and 2018. Prime Minister Ponta has defended the new fiscal measures as part of a pro-growth and anti-austerity program. Doubts remain regarding whether Ponta will be able to keep his post as he is hoping to rally popular support through populist measures—such as the tax cuts—yet his political survival depends on his being able to maintain support from his party and its parliamentary allies.

 

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Growth prospects stabilize this month, region is seen growing faster in 2015

The economic outlook for Central and Eastern Europe stabilized in August after three consecutive upward revisions. While the region’s economy is expected to have slowed in Q2, our panel of analysts sees growth picking up momentum in the second half of the year. Heading into the second half of 2015, analysts surveyed by FocusEconomics expect the region’s economy to grow 3.1% in 2015, which matches last month’s projection. If the forecast is confirmed, it will represent an acceleration over the 2.8% expansion seen in 2014. For 2016, our panel of economists foresees the economy maintaining the pace of growth at 3.1%.

Risks to the region’s growth outlook remain contained despite the flare up in the Greek debt crisis and the recent turbulence seen in China's stock market. The stabilization in the regional outlook this month stemmed from unchanged revisions to the economic forecasts for 5 of the 11 economies surveyed. Growth prospects for the Czech Republic, Romania, Slovakia and Slovenia improved over last month, while GDP growth forecasts for Estonia and Lithuania were cut. 

 

CZECH REPUBLIC | Growth prospects for 2015 still robust despite moderation in Q2 

czech-car-manufacturingFollowing Q1’s outstanding start to the year, when the economy unexpectedly expanded at the fastest pace in over seven years due to strong one-off contributions from taxes and inventories, recent indicators suggest that the Czech Republic continued a milder but still solid grow path in Q2 and Q3. While industrial production and exports was moderated, recent confidence and PMI data points growth in industrial production and retail sales going-forward. In addition, steadily-declining unemployment and still-positive consumer confidence bode well for private consumption.

For a fourth consecutive month, FocusEconomics Consensus Forecast panelists’ growth prospects for the Czech Republic are brighter. They expect that the economy will be boosted by the Euro area’s strengthening economic outlook and a pick-up in external demand, expansionary fiscal policy, still low oil prices and rising private consumption. Panelists project an expansion of 3.2% in 2015 and of 2.8% in 2016. 

 

HUNGARY | Growth momentum likely moderated in Q3 as it did in Q2

orban-mercedes-hungaryHungary expanded at a remarkable pace in 2014 and started this year on a very high note. However, economic growth momentum in Q2 and at the outset of Q3 appears to have moderated, although it remained robust.

While investment is expected to fade this year, exports performance will likely be solid, partly thanks to increased auto production capacity. In addition, private consumption will benefit from lower household debt, the past conversion of foreign currency loans into forint, loose monetary policy, falling unemployment, and envisaged tax cuts. Our panel of economic analysts sees GDP expanding 3.0% in 2015, which is unchanged from last month’s projection. For 2016, the panel forecasts an expansion of 2.5%.

 

POLAND | Economy remains robust; recent polls suggest victory for PiS

polish-prime-ministerPoland's expanded a healthy 3.6% in Q1 over the same quarter last year, accelerating from Q4’s 3.3% rise and marking the fastest growth since Q2 2014. The economy was mainly driven by the external sector’s improved performance, which more than offset a slowdown in domestic demand. Recent indicators painted a mixed picture of the economy in the second quarter and the beginning of Q3. While retail sales and industrial production growths accelerated in July. Meanwhile, Poland is going through an important reshaping of its political landscape following the surprise victory of Andrzej Duda, of the right-wing Law and Justice (PiS) party, in the 24 May presidential election. In the last two months, polls have seen the gap between the PiS and the Civic Platform (PO) party widening significantly with the latest poll on 29 July giving a 17% lead to the PiS party, suggesting that it stands a good chance of winning October’s parliamentary elections. Another victory for PiS would lead to major changes in Poland’s policies as the party is strongly nationalist and moderately eurosceptic.

Private consumption will be supported by a healthier labor market and a dynamic credit market this year. However, political changes cast significant uncertainty regarding future economic policies. FocusEconomics Consensus Forecast panelists expect the economy to expand 3.6% in 2015, which is unchanged from last month’s forecast. For 2016, the panel sees economic growth remaining at 3.6%.

 

ROMANIA | Standoff threatens political stability and could cloud economic outlook

victor-pontaFollowing Q1’s outstanding performance, recent indicators suggest that momentum cooled in Q2. While the unemployment rate fell markedly in May, retail sales moderated and industrial production deteriated. On 17 July, President Klaus Iohannis rejected the new Fiscal Code law, the key measure of which is a large reduction of 5 percent points in VAT next year. The envisaged tax cuts sparked strong criticism from the Central Bank and international institutions as they threaten to undermine the country’s past fiscal consolidation efforts. The parliament will resume talks about the bill in mid-August and then may pass it without any further input from the President. Meanwhile, in July, Victor Ponta stepped down as leader of the ruling Social Democratic Party (PSD) over pending criminal investigations against him. President Iohannis requested Ponta’s resignation as prime minister, but Ponta has rejected the call.

The government’s planned fiscal easing initiatives will likely give a boost to private consumption in the mid-term, helped by June’s increase in the minimum wage. On the downside, the envisaged tax cuts threaten to widen the fiscal deficit. FocusEconomics Consensus Forecast panelists expect the economy to expand 3.5% in 2015, which is up 0.1 percentage points from last month’s forecast. For 2016, the panel sees growth of 3.4%.

 

INFLATION | Deflation returns in June

InflationCEE-June15Inflationary pressures in the region remain persistently low, owing mainly to low energy prices. According to a FocusEconomics estimate, consumer prices in CEE fell in annual terms again in June after a temporary respite in May. Consumer prices dropped 0.4% over the same month last year in June, which was below May’s flat reading.

As recent downward pressures on consumer prices are weighing on inflation expectations, our panel of analysts cut their inflation prospects for Central and Eastern Europe over the previous month. They expect consumer prices to fall 0.1% in 2015. This month’s result reflected a cut in inflation forecasts for 5 of the 11 economies surveyed, while panelists maintained the inflation prospects for five economies. Deflationary pressures are expected to fade next year due to expectations of higher oil prices and firmer economic growth in the region. For 2016, panelists expect inflation to pick up to 1.6%. 

 

Source: Focus-Economics blog