CEE Quarterly 3Q15:
CEE economic growth 2015 surprises partially to the upside

  • EU-CEE sub-region benefits most thanks to its deeper integration with the euro area
  • Russia and Ukraine will remain in recession this year due to falling commodity prices, long-standing structural rigidities and the conflict in eastern Ukraine

Central and Eastern Europe (CEE) saw a good start into 2015. Buoyed by the rebound in demand in the euro area and ample liquidity thanks to the ECB´s quantitative easing, CEE economic growth surprised to the upside, but not everywhere. While it firmed in Central Europe, growth remains lackluster in Turkey and elusive in Croatia and Serbia. This is one of the key findings of the latest "CEE Quarterly", which is published every quarter by UniCredit Economics & FI/FX Research and is devoted to economic activity in the region. Russia and Ukraine, meanwhile, sank deeper into recession as the fallout of the drop in commodity prices has been exacerbated by the geopolitical tensions between and the related sanctions on Russia.

Increasingly divergent growth outlook
Despite the generally favourable global backdrop, growth performance in the CEE sub-regions has become increasingly divergent with regards to the 1Q15 outcome. The new EU members in Central Europe (EU-CEE1) benefitted the most thanks to their deeper integration with the euro area. Moreover, unlike the recent past, this time the rebound in growth has been broad based, with fixed investment picking up on the improved growth outlook and private consumption finally taking off in response to improving labor markets, rising real income and the winding down of the multi-year deleveraging process that begun in the aftermath of the 2008 global financial crisis. As a result, growth is likely to firm above 3 percent on average and become more sustainable and less dependent on foreign demand.

 GDP change in % Forecast for 2015   Forecast for 2016 
   EU Members  
 Bulgaria  2.1  2.4
 Croatia  0.3  0.8
 Poland  3.8  3.9
 Romania  3.7  3.4
 Slovakia  3.2  3.3
 Slovenia  2.3  2.2
 Czech Republic  3.8  2.7
 Hungary  3.2  2.9
    EU candidates and  others
 Bosnia-Herzegovina  2.0  3.5
 Russia  -3.4  -1.6
 Serbia  0.2  1.5
 Turkey  2.7  2.4
 Ukraine  -13.0  2.0

"The EU-CEE sub-region also benefits from the virtual absence of macroeconomic imbalances. Inflation is all but non-existent, current accounts are in balance or in surplus, fiscal deficits well anchored below 3 percent of GDP and local banking systems, which are to a large extent foreign-owned, are well-capitalized and liquid", said Lubomir Mitov, Chief CEE Economist at UniCredit, "For this reason markets´ risk perceptions are low and policy flexibility is much larger than elsewhere with little or no need for further fiscal adjustment."

In contrast, fiscal policy will remain a drag on growth in Croatia and Serbia, both of which have fiscal deficit on the order of 5% of GDP and government debt at more than 80% of GDP. Croatia, as an EU member, has pledged to reduce its fiscal deficit under the EU’s Excessive Deficit Procedure, while Serbia has committed to a significant fiscal adjustment under an IMF standby arrangement. Lesser integration and less enabling investment climates, along with restrictive fiscal stances, will prevent both Croatia and Serbia from benefitting from the rebound in the euro area as much as the EU-CEE. This said, UniCredit researchers expect eventually Croatia to exit recession this year. Serbia should return to growth, too, but the pace of economic expansion will remain modest at less than 1 percent. Plagued by political uncertainty, heightened market volatility and sluggish exports, growth in Turkey will languish in 2015.

Russia and Ukraine will remain in recession this year as a result of the combination of falling commodity prices, long-standing structural rigidities and the fallout of the conflict in eastern Ukraine. However, the economic outlook is quite different in each country: In Ukraine, real GDP now looks likely to drop by as much as 12 to 13 percent, and any recovery is contingent on securing additional official funding and reaching a durable negotiated solution in the country´s east. In Russia, the recession is likely to be shallower, but also more protracted. This would reflect not only the stabilization of oil prices and the ruble, but also the delayed response to the drop in demand. At the same time prospects for recovery appear muted by long-standing structural weaknesses and the consequences of international sanctions.

Fed rate hikes may question growth of some CEE countries through global risk appetite
After all downside risks remain plentiful. Some of these would affect the whole CEE region, and some would have a more limited impact. Among the global risks, key for the region are a potentially renewed slowdown in Europe and the impact of the upcoming Fed rate hikes. A potential renewal of the fighting in Ukraine and a disorderly Grexit are two risk events with a more limited impact. "We judge the likelihood of a slowdown in Europe as low, but feel that markets tend to underestimate the potential impact of the Fed rate hikes on global risk appetite and capital flows to emerging markets", stated Lubomir Mitov. The effect of the Fed hikes will be more nuanced and would vary depending on the macroeconomic vulnerability of each country.

A possible intensification of fighting in Ukraine or a disorderly Grexit are likely to have relatively limited contagion effects beyond countries directly involved. Renewed hostilities in Ukraine would mostly hurt Russia and Ukraine themselves barring sustained natural gas supply interruptions. A Grexit would hit trade in the neighbouring countries, but a broader dislocation should be averted with local subsidiaries of Greek banks well ring-fenced.


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1 The EU-CEE sub-region includes the Baltic states, Bulgaria, the Czech Republic, Poland, Romania, Slovakia, Slovenia and Hungary.