With the exception of energy exporter Russia, economic conditions appear to have taken a turn for the better in emerging Europe. Even for Russia, the Ukraine ceasefire and hopes that sanctions may be eased later this year provided some respite though a weaker currency and lower oil prices still cloud the outlook for the economy. Turkey’s problems appear to be more political than economic as President Erdogan is perceived by foreign investors as trying to influence the central bank’s monetary policy.
The scale of the domestic economy and the additional boost from exports as the Euro-zone improves helped the Polish economy grow during the review period. Consumer spending, the economic uptick in Germany and easing by its central bank drove Hungary’s strong performance, the best in central Europe. With lower oil prices acting as a catalyst, domestic demand rather than auto parts exports is expected to drive economic growth in the Czech Republic this year. Though the threat of Greece leaving the currency bloc is off the radar for now, the southern European economy urgently needs to come up with some viable reform proposals to convince its creditors to release bailout funds.
At a Glance
Russia: While Russia’s 0.6 percent GDP growth for 2014 was the slowest pace of expansion since the recession in 2009, the economy unexpectedly managed to grow 0.4 percent in the fourth quarter compared to the same period in 2013.
Turkey: In a populist move, the Erdogan government has launched a welfare scheme worth $2.9 billion to recharge the flagging economy, according to a Bloomberg report. The package is intended to boost pensions and create about 120,000 temporary jobs, which the government hopes would help Turkey clock a growth rate of 4 percent in 2015.
Poland: In fact, the Polish economy seems to have made steady progress on various counts, going by certain economic indicators. The budget deficit, which has been the bane of the central European economy for long, came in at 3.2 percent of GDP in 2014, the lowest level seen since 2007.
Hungary: The Hungarian economy expanded 3.4 percent year-on-year during the last quarter of 2014, while it grew 0.9 percent on a quarterly basis. Hungary’s growth rate highlighted the economy’s resilience, notwithstanding the uneven trends in the European Union.
Czech Republic: Household consumption increased by 2 percent in the fourth quarter, according to the website of Prague Radio. Economic growth also got a boost from the manufacturing industry, which mainly produces machinery and automobiles.
Greece: The fears of a “Grexit” or Greece exiting the Euro-zone seem to have receded with Greek Finance Minister Yanis Varoufakis agreeing to make a $505-million debt repayment to the International Monetary Fund on April 9. The latest commitment by Greece also helped allay doubts about the south European nation’s solvency.
RUSSIA: OUTLOOK REMAINS CLOUDY
While Russia’s 0.6 percent GDP growth for 2014 was the slowest pace of expansion since the recession in 2009, the economy unexpectedly managed to grow 0.4 percent in the fourth quarter compared to the same period in 2013. Still, these marginal growth numbers offer little consolation for Russia, which continues to reel under the impact of Western sanctions, foreign debt, a steep fall in the ruble, and lower prices of oil.
On the domestic front, problems are manifold. Hit by sanctions imposed on the country by the United States and the European Union following its annexation of Crimea in 2014, the Putin administration cut down on public spending. The decline in real wages of government employees, which followed spending cuts, hit them hard. The government’s strike back with a ban on the import of some of the essential Russian staples compounded matters further, adding to the skyrocketing inflation and a devalued currency that plummeted 40 percent in the last twelve months. Therefore, it seems highly unlikely that Russian consumers will be contributing to the country’s economic growth in the near term.
On the policy front, the government does not appear to be in a position to announce a stimulus package as it has already allocated about $50 billion from the country’s currency reserves to plug the budget deficit. What’s more, Russian companies and banks are saddled by foreign debt due to be repaid in 2015 to the tune of about $109 billion.
Latest retail sales and employment data point to a deteriorating economic trend as the first quarter of 2015 comes to a close. Retail sales, a key indicator of consumer confidence, decreased 7.7 percent year-on-year in February, while real wages were down by 9.9 percent, supporting the forecast that the economy would contract in 2015.
TURKEY: GOVERNMENT PUSH TO BOOST GROWTH IN ELECTION YEAR
Turkey’s economy expanded 2.6 percent in the fourth quarter of 2014, while the growth rate for the year came in at 2.9 percent. Household spending, which was hit by the central bank’s raising of interest rates in January 2014, was the main factor that affected the economy, which had expanded 4.2 percent in 2013. The consumer confidence index fell to 64.4 in March, the lowest in six years, a Bloomberg news report noted. Punctuating the consumer pessimism, the number of people who see unemployment rising by 2016 also reached a new high since February 2009.
Amid slowing growth, Turkey seems to have been caught in a war of words between President Tayyip Erdogan and the central bank. The central bank had almost doubled the interest rate early last year to stem the fall of Turkey’s currency the lira. The lira has fallen about 13 percent against the U.S. Dollar in 2015. Though the central bank has reduced rates since, the Erdogan administration has been urging the central bank to reduce rates further ahead of the general elections this June. Rating agency Fitch has already raised concerns about political interference in monetary policy. Lower energy prices have been a boon for Turkey, which imports a majority of its oil, and have helped reduced its inflation levels to 7.55 percent, though it is still above the central bank’s target rate.
In a populist move, the Erdogan government has launched a welfare scheme worth $2.9 billion to recharge the flagging economy, according to a Bloomberg report. The package is intended to boost pensions and create about 120,000 temporary jobs, which the government hopes would help Turkey clock a growth rate of 4 percent in 2015.
POLAND: DOMESTIC DEMAND KEEPS THE ECONOMY IN GOOD SHAPE
Poland, the largest eastern economy in the European Union, clocked a growth rate of 3.3 percent in 2014, thanks to consumer demand and business investment. During the fourth quarter, the economy advanced 0.6 percent quarter-on-quarter. In fact, the Polish economy seems to have made steady progress on various counts, going by certain economic indicators. The budget deficit, which has been the bane of the central European economy for long, came in at 3.2 percent of GDP in 2014, the lowest level seen since 2007, according to report published in Warsaw Business Journal.
Likewise, the unemployment rate in the country fell to 7.8 percent in February 2015. The Consumer Confidence Index also showed a slightly higher reading in March, a report from the Central Statistical Office said. Encouraged by favorable trends in domestic demand, lower food and oil prices, as well as lower interest rates, Goldman Sachs said it expects the economy to grow by 3.5 percent this year.
Meanwhile, rating agency Standard & Poor’s upgraded Poland’s credit rating from stable to positive, citing the economy’s resilience and balanced growth. Despite the slowdown in the euro area, its main export market, and counter-sanctions imposed by Russia, the economy performed well, according to the S&P report. As conditions improve in the Euro-zone, Poland stands to gain on the export front as well. On another note, the European Central Bank’s quantitative easing program is expected to spur capital flows into the economy as Poland has close trade ties with the euro area.
Though deflation due to the downturn in commodities such as oil remains a concern, the situation does not appear to be harmful for economic growth, according to Polish central banker Jan Winiecki. The Polish central bank has kept interest rates at 2 percent for several months to boost economic growth, but has ruled out further rate cuts for now.
HUNGARY: LEADS THE PACK IN CENTRAL EUROPE
Driven by consumer spending and an economic uptick in Germany that boosted their exports, many Central European economies registered healthy growth rates in the last quarter of 2014. The Hungarian economy expanded 3.4 percent year-on-year during the quarter, while it grew 0.9 percent on a quarterly basis. Hungary’s growth rate highlighted the economy’s resilience, notwithstanding the uneven trends in the European Union. The reduction in household energy bills and the reversal of some charges by banks put more money in the hands of Hungarian consumers.
Outperformance in a single quarter is not generally considered a reliable indicator of an economy’s turnaround. However, there is evidence that Hungary’s economy has improved on various counts and rating agencies like Standard & Poor’s too have taken note. In its latest assessment, S&P raised Hungary’s credit rating by one notch to just below investment grade. The agency had withdrawn its rating in 2011 after the then government slapped high taxes on banks and nationalized some private pension funds.
Besides resilience to external shocks, Hungary’s industrial output increased 7.7 percent in January compared to the year-ago period. Retail sales too surged in January, pointing to a recovery in consumer spending along with improvements in other sectors of the economy such as tourism, construction and agriculture, a Bloomberg report said. What’s more, it appears that Hungary could bring down its public debt last year to 76.9 percent of GDP in 2014, thanks to economic growth.
As deflation seems to have taken root across many parts of Europe, some central banks in emerging Europe appear to be following the path of monetary easing. Close on the heels of the reduction in rates by the Polish central bank in March, its counterpart in Hungary cut interest rates to a low of 1.95 percent after delaying further reductions for about seven months. The bank said the easing cycle would continue until inflation reached its target of 3 percent. Consumer prices in Hungary were down 1 percent in February compared to the year before.
CZECH REPUBLIC: ECONOMY SET FOR STEADY GROWTH
The economy of the Czech Republic, which emerged out of a prolonged recession in 2013, clocked a year-on-year growth of 1.5 percent in the fourth quarter of 2014, helped by domestic demand and exports. Household consumption increased by 2 percent in the quarter, according to the website of Prague Radio. Economic growth also got a boost from the manufacturing industry, which mainly produces machinery and automobiles. Remarkably, Skoda Auto, the top manufacturing firm in the country, registered a 46 percent jump in net profit for 2014. Looking ahead, it is expected that domestic demand would be the main driver of growth in 2015, rather than exports, with lower oil prices acting as a catalyst. According to Jan Bures, chief economist at Era Postovni sporiteina, the Czech economy is slated to grow about 2 percent this year.
The European Central Bank’s $1.3 trillion bond-buying program may bring cheer even to economies outside the currency bloc, according to bankers and economists quoted in a Bloomberg news report. The argument is that the ECB’s action would spur lending across borders and boost growth in the Euro-zone, which is the main trading partner of many of the smaller European economies such as the Czech Republic.
Following a decline in transportation costs due to cheaper oil, Czech consumer prices dropped 0.1 percent in February, leading to deflation. To contain any damage to the economy from falling prices, the Czech central bank had weakened the currency koruna in 2013 and set a cap against the euro. Czech President Milos Zeman has been an ardent critic of the central bank’s weak koruna policy, even going to the extent of saying he would appoint central bankers who back his point of view.
The debate over whether to join the euro seems to have surfaced again in the Czech Republic with Prime Minister Bohuslav Sobotka setting the ball rolling, saying the economy would benefit from the move. However, given the complexity of the matter and the difficulty in reaching a political consensus, the topic is unlikely to gain traction anytime soon.
GREECE: SITUATION REMAINS FLUID
The fears of a “Grexit” or Greece exiting the Euro-zone seem to have receded with Greek Finance Minister Yanis Varoufakis agreeing to make a $505-million debt repayment to the International Monetary Fund on April 9. The latest commitment by Greece also helped allay doubts about the south European nation’s solvency.
The beleaguered country took heart recently from the International Monetary Fund’s (IMF) assurance that the agency would be “flexible” in its assessment of the reform proposals made by Athens to its creditors. The country has not received bailout funds since August 2014 pending the final approval of reforms by the IMF and the European Union. For now, Greece has pinned its hopes on the summit of Euro-area finance ministers to be held towards the end of April to receive more funds from its creditors. Amid the uncertainty, Greece received the backing of German Chancellor Angela Merkel who said she is even prepared to face German discontent to keep the country in the Euro-zone if Prime Minister Alexis Tsipras comes up with a practical plan that can be implemented. Russia too extended long-term co-operation to Greece during Tsipras’ recent Moscow visit, but stopped short of offering any financial aid.
Greece managed to avoid the recent default situation by mobilizing funds from semi-government entities. Still, before the country’s creditors are convinced to lend them anymore euros, Greece’s leaders need to implement some bold measures, which are bound to be unpopular with the electorate. Some of the issues that warrant discussion by both the Greek government and its creditors ahead of their meeting include implementing pension reforms, widening the tax net and making the banking sector free of political intervention.
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