Russia Slips, Rest Of Emerging Europe On The Road To Recovery
In its latest World Economic Outlook, the International Monetary Fund (IMF) further trimmed its forecast for global growth. The Washington-based lender said expansion will be driven more by developed economies as emerging markets grapple with slowing growth and a tighter global financial scenario as interest rates hint of trending higher in advanced economies such as the United States. However, a reading of economic tea leaves for the Euro-zone and economies such as Russia, Turkey, Poland, Hungary, and the Czech Republic offers room for optimism. To begin with, the currency union registered growth in the second quarter of this year after reeling under recession for six quarters, a shot in the arm for the dependent emerging European economies.
After slowing down in 2012, Emerging Europe bounced back in the first half of this year, thanks to monetary easing and economic recovery in the Euro-zone. Russia, the biggest economy in the region, is anticipated to expand only 1.5 percent in 2013 due to the moderation in commodity prices, a weak external environment, and a decrease in capital inflows. Turkey, another major emerging economy, which had experienced a slowdown last year, is forecast to grow at the rate of 3.75 percent this year, helped by good domestic demand and an increase in exports and government spending, though the tight global financial situation is bound to affect the country’s large portfolio inflows.
Poland, which had grown 2 percent last year, is expected to slow down to a meager 1.25 percent this year, as the sustained growth in domestic demand seems to be tapering off. Still, the economy has managed to expand, albeit marginally, in recent quarters. Smaller economies such as the Czech Republic emerged from recession in the second quarter of 2013, while Hungary expanded by 0.5 percent, thanks to the growth in the euro area, especially in Germany, a key trading partner for both economies.
At a Glance
The IMF said the global economy will be driven more by developed economies as emerging markets grapple with slowing growth and a tighter global financial scenario as interest rates hint of trending higher in economies like the U.S. After slowing down in 2012, Emerging Europe bounced back in the first half of this year, thanks to monetary easing and economic recovery in the Euro-zone. Except Russia, other economies are expected to record moderate growth.
- Russia: It appears economic growth in Russia may trend higher in the last quarter of the year due to the nascent recovery in the European Union, its main trade partner, while stabilized growth in China will likely push commodity prices up.
- Turkey : Turkey seems to have rebounded, going by the higher than expected second quarter numbers. However, the IMF said the country needs to tighten its monetary policy to curb its high credit growth as well as inflation, which has remained above the targeted 5 percent.
- Poland : Thanks to the recovery in the Euro-zone, which buys 51 percent of Poland’s exports, the economy recorded a trade surplus. The trade surplus, along with other factors, helped the economy post a current account surplus in the second quarter.
- Czech Republic : The export-dependent economy managed to clock a higher growth rate in the second quarter compared to the previous quarter after reeling under recession since late 2011.
- Hungary : Factory output in Hungary picked up in a sign of increased economic activity, which naturally led to increased exports to its main market, the Euro- zone. Still, Hungary’s economic growth, like the Czech Republic’s, has been marginal in the second quarter. What’s more, the country’s yawning current-account deficit has turned into a surplus.
RUSSIA: WEAK EXPORTS, MUTED CONSUMER SPENDING HIT GROWTH
The downturn in Russia over the past few months has been as dramatic as its economic recovery. Any economic analysis of Russia would focus on the direct correlation between commodity prices and the country’s economic growth. The third quarter is likely to be no different as falling oil prices have stifled growth. However, external factors alone cannot be held responsible for Russia’s current economic predicament.
The government, armed with huge oil revenues amassed during the boom years, has been quite liberal in doling out incentives to the public to keep them happy. However, most of the money has gone into unproductive investments, which do not contribute to the country’s economic output. But this year, Russia’s budget revenues have come in below expectations, with most generated from oil and gas taxes. Rightly, the International Monetary Fund urged the government to resist higher spending to reduce inflationary pressures. The Washington-based Fund also cautioned the Russian central bank to keep interest rates on hold.
On the positive side, it appears economic growth in Russia may trend higher in the last quarter of the year due to the nascent recovery in the European Union, its main trade partner, while stabilized growth in China will likely push commodity prices up. Still, the government’s efforts at introducing economic reforms and implementing the much-publicized privatization program have been lackadaisical so far. Much has been said about the need to diversify the economy from its commodity base, but evidence is thin that anything substantial has been achieved on this front.
Exacerbated by weak exports and muted consumer spending, the underlying weakness in the economy was reflected in Russia’s second-quarter growth, the slowest rate of expansion since the financial crisis of 2009. Other parameters such as manufacturing growth, construction, and car sales were not encouraging either. Rating agency Standard & Poor’s said Russia’s current economic situation does not warrant a better debt rating. The agency noted that while the country’s sound public finances and surplus in its current account hold it in good stead, its lack of competitiveness and limited scope for future growth are deterrents. S&P also pointed out that the country’s rating in the future may be affected by its inability to implement reforms and any attempts to temporarily boost growth through fiscal spending.
TURKEY: EXPORTS LOOK UP, FISCAL ISSUES REMAIN
Turkey, which lost favor with investors last year, seems to have rebounded, going by the higher than expected second quarter numbers. Still, industrial production showed a decline in August, something that prompted the government to trim its economic forecast for the year. Like some other emerging markets, Turkey too has remained stable after the U.S. Federal Reserve decided not to taper its bond-buying program for the time being.
A pick-up in exports is definitely a positive for the economy, which has zoomed ahead in recent years on the back of good domestic consumption. Yet, the country’s gold exports to Iran, which had boomed in 2012, have declined this year due to the U.S. sanctions imposed on the Middle East nation. Geopolitical wrangling has also come in the way of economy’s export growth, especially the Syrian imbroglio that pitted Turkey against the triumvirate of Iran, Iraq, and Syria. Similarly, Egypt, Saudi Arabia, and the United Arab Emirates have taken their pole positions against Turkey, which supports the ousted regime in Egypt. Proof can be seen in the substantial decline in Turkey’s exports to all of these countries. On the other hand, Turkey’s exports to the European Union, the destination for most of its white goods and other exports, have shown an increase compared to the last year’s figures.
The International Monetary Fund came down heavily on Turkey on various counts such as its extra loose monetary policy, reliance on domestic consumption, and its high public spending, especially on infrastructure. The IMF said the country needs to tighten its monetary policy to curb its high credit growth as well as inflation, which has remained above the targeted 5 percent. Over and above these, the country’s ballooning current-account deficit, a majority of which is financed by fickle capital inflows, remains the Achilles heel of the economy. Private sector investment has also declined. However, minus the economic imbalances, Turkey has many things going for it: a favorable demographic with average age about 30, geographical location at the crossroads between Asia and Europe, and above all, a dynamic economy.
POLAND: BENEFITING FROM THE EURO-ZONE REBOUND
Emerging Europe as a region gained some traction recently, thanks to the rebound in the manufacturing sector in countries such as Poland, the biggest economy in the region with a population of about 38 million. The Polish manufacturing sector expanded in September, the third successive month of growth. The ramp up in activity was due to the increase in new orders, which prompted companies to take in more employees on their rolls.
Besides the uptick in manufacturing, evidence of consumer activity was seen in areas such as the sales of cars that recorded a month-on-month increase. Retail sales and industrial production also has increased recently.
Thanks to the recovery in the Euro-zone, which buys 51 percent of Poland’s exports, the economy recorded a trade surplus. The trade surplus, along with other factors, helped the economy post a current account surplus in the second quarter. Treading cautiously, the Polish central bank decided to leave the benchmark interest rate unchanged in its latest fiscal assessment. The bank justified the move, saying that while growth is expected to gather pace in the coming quarters, the acceleration won’t be enough to trigger inflation.
Despite a nascent economic recovery bordering on contraction, the Polish economy still has to deal with crucial issues such as its budget deficit and rising debt burden. In a controversial move, the Donald Tusk administration recently sought to reduce public debt by transferring assets held by private pension funds to the government coffers, Reuters reported. Yet, if the region has emerged as an oasis of tranquility amid a bleak Europe, it is because most of these economies such as Poland are not so dependent on massive capital flows spurred by monetary easing in the U.S. as much as say Turkey or Indonesia. In this context, it would be interesting to note that the downside that hit emerging markets around May 2013 did not create ripples in central Europe. Overall, the Polish economy seems to be on the right track, a far cry from the dismal first quarter of 2013. The government is understandably upbeat with its forecast of a 1.5 percent to 2 percent growth this year, and a 3 percent growth estimate for 2014.
CZECH REPUBLIC: FIRST GREEN SHOOTS OF GROWTH
The export-dependent economy of the Czech Republic managed to clock a higher growth rate in the second quarter compared to the previous quarter after reeling under recession since late 2011. The reasons are not too hard to find. The overall recovery in the Euro-zone, especially in Germany, and the rise in domestic demand have given a new lease on life to most central European economies. Exports account for about 80 percent of the country’s GDP, led by automobile manufacturers such as Volkswagen’s Czech unit Skoda Auto, Hyundai Motor, and Toyota Motor Corp.
The well-watched manufacturing index reading also showed an increase, indicating a slow, but sustained growth. Industrial output rose year-on-year in the month of August after registering growth in July. As in the case of Poland, increased production led to jump in employment for the fifth successive month in September. Though economists caution that the recovery is fragile, indications are that the Czech economy will be able to maintain the growth momentum in the quarters ahead.
Czech policy makers seem to be open to the idea of further monetary easing after the inflation rate slowed further in September, as price growth and consumer demand remain weak. Retail sales, a key indicator of consumer activity, have not picked up speed yet. Another noticeable trend observed by news reports is that Czech shoppers have become more discerning and look for discounts, a reflection of the fact that the prolonged recession has made consumers cautious about how they spend their hard-earned money. The Czech central bank recently said the monetary easing, if implemented, would be done by weakening the currency, koruna.
The political situation in the country became volatile after the collapse of the Petr Necas-led government in June this year. The Necas government had faithfully followed German Chancellor Angela Merkel’s prescription of budget-deficit reduction, which stifled economic growth. After three years of austerity under the previous administration, Czech voters now look forward to a new government that will be formed after the elections to be held in October. Social Democrats, the front runner among the contesting parties, have promised to increase public spending to boost economic growth.
HUNGARY: ECONOMY GAINING TRACTION
The small central European economy of Hungary has many parallels with its neighbor the Czech Republic, primarily because they both depend on exports for a major chunk of their GDP growth. Factory output in Hungary picked up in a sign of increased economic activity, which naturally led to increased exports to its main market, the Euro- zone. Still, Hungary’s economic growth, like the Czech Republic’s, has been marginal in the second quarter. But the recovery has to be seen in the larger context of a prolonged period of fiscal austerity at home and the debt crisis which has plagued the Euro-zone. What’s more, the country’s yawning current-account deficit has turned into a surplus.
Political exigencies too seemed to have played a small role in lifting economic sentiment. The Viktor Orban administration, which faces elections next year, has implemented a second round of reductions in utility prices to woo voters. The money thus saved, the government hopes, will boost consumer spending in the economy.
The Hungarian government has come under fire from the European Central Bank for undermining the central bank’s independence. However, on its part, the Hungarian central bank, like its counterparts in the region, has been following a loose monetary policy to bring some life back to a near-stagnant economy. Successive rate cuts, made possible by a benign inflationary trend, have reduced the benchmark rate from a high of 7 percent to 3.60 percent. The central bank is also lending a helping hand to bolster the government’s efforts to help troubled home owners who have their mortgages denominated in Swiss francs. The central bank is likely to tap Hungary’s foreign-currency reserves as the problem has mainly to do with a weak Hungarian currency. Though some economists differ on the question of further monetary easing, the central bankers have not ruled out additional steps if global market movements and the internal financial situation justify them.
Meanwhile, Hungary’s incumbent government has been in the eye of a storm over its decision to impose windfall taxes on many industries, including banking. The latest move by the Orban administration to nationalize some utility companies operating in Hungary is widely seen as strengthening the power of the state at a time when the rest of Europe tries to minimize the role of the state in business.
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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