Growth Seen To Improve Slightly This Year after the Slowdown
The European Bank for Reconstruction and Development (EBRD) was established in 1992 to help Russia and former communist states such as Poland, Hungary, and Czech Republic among others in their transition to market-based economies. In its January forecast, the London-headquartered bank sounded optimistic over the economic prospects of most of the countries covered in this review, which also include Turkey. The bank said on the whole, the central and eastern European region would register a slightly higher growth this year than what was recorded in 2012, based on the premise that the Eurozone crisis is unlikely to deteriorate further. Regarding the major economies in the region, the EBRD sees Russia maintaining the same rate of growth, while the emerging economy of Turkey, which comes under the purview of the bank due to its close ties with Europe, is forecast to pick up speed after last year’s slowdown. However, the bank singled out Poland as the laggard and cut the growth forecast for the biggest economy in central Europe. Debt-laden Hungary is expected to grow marginally this year, while the Czech Republic, now seen as successfully completing the transition process, is no longer covered by the EBRD.
The slowdown in Russia has to do partly with the cooling of energy prices as well as domestic factors such as rising inflation, while Turkey is faced with the problem of reducing its current-account deficit. Export-dependent Poland’s growth prospects hinge on how fast the economic climate in the Euro-zone improves, while Hungary and the Czech Republic are bogged down by fiscal austerity measures and the slowdown in Germany, their main export market.
Russia: Slowing Growth Raises Questions about Oil-Fed Expansion
Russia’s economy barely managed to expand in the first quarter of the year due to contraction in the oil industry and stunted growth in retail sales, especially food retailing. The near-zero growth in the European Union, which contributes half of Russia’s trade revenues, hurt demand for the country’s strategic commodity exports. Companies scaled back on fresh corporate investment, while domestic consumption was hurt by growing inflation. The marked slowdown in the economy triggered calls for interest-rate cuts to revive growth, which the government said would be below its initial forecast of 3.6 percent for the year.
Russia’s economic fortunes are known to be closely linked to international forces, particularly the ups and downs in oil prices, a fact demonstrated by the sharp contraction of the economy during the financial crisis of 2009. The economy is projected to grow at a slightly speedier pace than what was recorded last year, a healthy trend compared to the plight of some of its neighbors in Eastern Europe. Still, it is clear that the country’s slowing growth also has something to do with domestic factors such as inflation, which showed a reading of 7.2 percent year-on-year in March, fanned by the drought-driven rising food prices as well as transport costs. The Central Bank of Russia, though, left its main policy rates unchanged recently, recognizing the improved situation in the labor market.
Stimulating domestic demand or providing fiscal or monetary stimulus is likely to push consumer prices up, further slowing growth, which hit a meager 2.1 percent in the fourth quarter of 2012. It has become clear that
Russia cannot continue to rely entirely on energy prices to balance its economy as it had done over the past decade with the shale gas boom in the United States and elsewhere likely to redraw the contours of the global energy map in the near future. While the Central Bank seems to be on the right track with its monetary policy and inflation targeting, it is widely believed that only structural reforms can improve the country’s investment climate and create a diversified industrial base.
Turkey: Economy Tries to Rebalance after Last Year’s Slowdown
Turkey’s fast-paced economic growth during 2010-2011 was fuelled mostly by healthy domestic demand. However, the rate of growth also fanned the current-account deficit, widely seen as the Achilles’ heel of the economy. During the fourth quarter and the year 2012, the economy experienced a sharp slowdown as the central bank raised interest rates to allay concerns of economic overheating.
Though Turkey’s total exports recorded a year-on-year increase in the fourth quarter, thanks partly to gold exports to Iran, the trend is not seen as sustainable as its Middle Eastern neighbor still reels under sanctions. Moreover, the slackening demand for Turkey’s goods from a troubled European Union, which still accounts for about 40 percent of its exports, contributed to the big dip in growth rate.
Amid slowing growth, Turkey also has to grapple with the current-account deficit, a situation where the total value of goods and services imported exceeds that of exports, a key measure in assessing a country’s fiscal health. Thanks to the economic slowdown and the drop in consumer spending, Turkey’s current-account deficit had reduced considerably last year, which also prompted rating agency Fitch to upgrade Turkish debt to investment grade. But recent data showed that the deficit is still being financed largely by short-term portfolio flows, otherwise known as “hot money” in investor jargon, rather than foreign direct investment, which has shown a declining trend with the privatization process losing steam. To put things in perspective, total foreign direct investments into Turkey last year amounted to $8 billion, while $40 billion flowed into the country by way of portfolio funds and other short-term capital.
However, Turkey’s central bank, which has been following a widely perceived unorthodox monetary policy to strike a balance between sustainable growth and financial and currency stability, sprang a
surprise recently when it cut interest rates. The rate cut is seen to boost consumer loan growth that in turn would widen the current-account deficit further. Meanwhile, Turkey’s $800-billion economy received a shot in the arm recently when Standard & Poor’s upgraded the country’s credit rating, citing a resilient economy and steps initiated by the Erdogan administration to end a long-standing insurgency problem.
Poland: Spotlight Back on Exports as Growth Slows
Poland, the biggest of the Eastern European economies, managed to avoid a recession during the financial crisis of 2009, helped by a stimulus program launched by the government, a tight monetary
policy, and tough banking regulation that restrained the borrowing in foreign currency. That was then. Currently, growth in the 38-million strong economy is mirroring that of neighbors like Hungary and the Czech Republic, despite Poland’s traditional strengths such as skilled, but cheap labor and the culture of innovation. Low domestic consumption and slowing growth in export markets such as Germany reflected in the country’s purchasing managers index for the month of March, an indicator of the contraction in the manufacturing sector. Lower consumption is likely to mean less budget revenue for the government through value-added tax. Moreover, government spending is expected to be restrained as EU funds run dry and the focus shifts to fiscal consolidation measures.
For the current year, the projected growth rate of 1-2 percent will likely put pressure on the Donald Tusk administration to revise its fiscal deficit goals. Poland’s growth rate last year had slowed down to almost half of the rate clocked in 2011. Meanwhile, the proposal to slap a levy on companies involved in the exploration of shale and natural gas is estimated to reduce these firms’ profits by 50 percent, a big dampener for Poland’s plans to reduce its reliance on Russian energy sources and boost economic growth. On a positive note, the long-delayed privatization process seems to be taking flight as the government has proposed to sell off its majority stake in LOT Polish Airlines SA, which should help boost state finances.
The Polish central bank has been cutting interest rates at regular intervals to revive economic growth. While unemployment remains stubbornly high, the key reason for reduced consumer spending, inflation has remained below the central bank’s target rate. If consumer spending saved the day for the Polish economy during the 2009-2011 period, the spotlight is now on exports, which contribute a whopping 47.5 percent of the country’s GDP. Though anemic growth in the Euro-zone remains a concern, Polish food and cosmetics exports seem to make up for any shortfall in auto exports.
Hungary: Central Bank Pitches In to Revive Growth
The small economy of Hungary continued to be in recession even as fourth-quarter figures revealed a big contraction from the year-ago period. Though Hungary’s dominant auto parts industry is dependent on the German growth engine, much like its neighbors, the country’s manufacturing index showed a slight expansion in March despite a decline in both exports and imports. The slowdown in Germany and the government’s aggressive fiscal austerity measures seem to have taken a toll on the Hungarian economy. The European Union sees the economy contracting marginally during the year, which will push the country’s public deficit above the bloc’s prescribed range. In the event of such a scenario, Hungary will find it difficult to access EU subsidies. Meanwhile, Viktor Orban has received criticism from the EU for undermining the independence of the country’s judiciary and the central bank, a charge denied by the
Hungarian prime minister.
The central bank’s interest rate cut in March for the eighth consecutive month showed that monetary easing was here to stay as inflation remained near a seven-year low. Still, the International Monetary
Fund urged the Viktor Orban administration to take a pause on reducing interest rates, saying the government’s “interference” in the economy has hurt investments, according to a Bloomberg report. However, the keynote of the announcement made by the new bank governor was the bank’s plan to make interest-free loans available to small and mid-size companies to boost overall economic growth. Though industry reactions have been mixed about the actual outcome of the proposed scheme, the government’s move to engage with Hungarian businesses – retail banks, in this case – is widely seen as a
step in the right direction, at a time when business confidence is on the wane. As expected, Hungary’s bank association welcomed the move saying lending alone can revive growth even as four prominent
Hungarian banks were downgraded by rating agency Moody’s citing the difficult economic situation in the country.
Czech Republic: Consumption and Export Demand Key to Economy’s Revival
Reduced consumer spending is widely seen as the main factor behind the continued contraction of this central European economy, though contagion effects from the Euro-zone are also likely to blame. The central bank governor himself has said that people have enough savings but lack the economic confidence to loosen their purse strings. Retail sales fell in February on a year-on-year basis as the effects of government austerity measures begin to show. The Petr Necas government has been doing all that it can to bring down the budget deficit by reducing investment, increasing sales taxes, and curbing public sector wage growth. These initiatives have yielded results, but at the cost of reduced consumption with less money put in people’s hands. The central bank, which seems to have exhausted policy tools such as rate cuts to revive growth, is looking at ways to weaken the currency.
Looking at the bigger picture, the slight uptick in Czech industrial production in February masked the reduced output and export data in the highly industrialized economy due to shrinking demand from the
Euro-zone. In short, the economy has been hit by the twin blow of reduced demand, both at home and abroad. Car production, the mainstay of industrial activity in the country, has shown a steady decline, forcing some firms to scale back output. With exports to Germany faltering, efforts are being made to revive trade ties with the country’s former imperial master Russia and BRIC nations. The Czech economy’s revival hopes also hinge on the country’s massive power production sector as it has the capacity to export electricity to the whole of Eastern Europe.
Achieving budget deficit targets would be the envy of any government, but Czech voters, reeling under harsh austerity measures, seem to think that anything in excess is bad for their economy. Still, there is optimism that the economy may turn a corner in 2013 as the government is expected to ease up on fiscal tightening ahead of the elections to be held next year.
FORWARD LOOKING STATEMENTS
Certain statements made in this article may be forward looking. Actual future results or occurrences may differ significantly from those anticipated in any forward looking statements due to numerous factors. Thomas White International, Ltd. undertakes no responsibility to update publicly or revise any forward looking statements.
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