Emerging Europe: Economic Recovery in the Euro-Zone Area Brightens Outlook
The International Monetary Fund’s latest assessment of the global economy pointed out that robust economic recovery in developed countries has significantly reduced the risk of a downturn this year. The Washington-based lender said it sees growth in emerging and developing Europe as a whole at 2.4 percent in 2014, which is expected to accelerate to 2.9 percent next year.
Forecasting a 1.2 percent expansion in the Euro-zone area, which is the major export market for many countries in east and central Europe, the IMF also warned that the Ukraine issue could be of concern to regions outside of Russia if the situation deteriorates further, given that Russia fulfills a third of Europe’s energy requirements. The prospects for Russia, the biggest economy in emerging Europe, do not look inspiring as commodity prices are expected to moderate this year. Turkey, located at the crossroads of Asia and Europe, grapples with allegations of higher level government corruption, while a falling currency and high interest rates are draining domestic demand. However, a victory for the ruling party in the local elections has reduced political uncertainty ahead of the general elections.
With the exception of Russia and Turkey, things are looking up for other developing economies in the region such as Poland, the Czech Republic, and Hungary, not to mention debt-laden Greece, which recently made a return to the bond markets with a new five-year offering. The ability to raise money from capital markets after a gap of four years shows the confidence of investors in bonds issued by the Greek government. Greece had to be bailed out by the International Monetary Fund, European Central Bank, and the European Union after the Greek government declared in 2010 that it was not in a position to meet its financial obligations.
At a Glance
Russia: Though Russia’s standoff with Ukraine over Crimea has not yet proved to be as damaging as feared, it did cast a shadow over Russia’s already wobbly economy during the first quarter of the year.
Turkey: Amid the government corruption crisis in Turkey and the alleged move to influence the probe, the International Monetary Fund reduced its 2014 growth estimates for the country from 3.5 percent to 2.3 percent.
Poland: The upbeat economic prospects in Poland’s main export markets and the resultant rise in exports would give a boost to private investment and the jobs market. Poland’s fiscal outlook is also expected to improve in 2014 as the general budget deficit is expected to come down.
Czech Republic: Exports are expected to drive the economy’s growth in 2014 on the back of a weak currency and improved economic conditions in some of its main trade partners such as Germany. Household consumption is showing signs of firming up.
Hungary: According to a forecast from the European Commission, Hungary’s growth is likely to be around 2 percent in 2014, mainly driven by domestic demand. Domestic demand growth received a boost from low inflation, which touched 0.7 percent in the last quarter of 2013 due to cuts in energy and utility prices.
Greece: Greece has raised €3 billion from the sale of a five-year bond issue at 4.95 percent yield, marking its return to the bond markets. The country also reached an agreement with its international creditors, which gives the country access to €10 billion of bailout funds.
RUSSIA: GEOPOLITICAL CONCERNS CLOUD ECONOMIC OUTLOOK
Though Russia’s standoff with Ukraine over the occupation of a part of its territory did not prove to be as damaging as feared, it did cast a shadow over its already wobbly economy during the first quarter of the year. Though the country’s prized oil and natural gas exports to Europe have not been affected yet, sanctions imposed on certain influential businessmen considered close to the Putin administration have sullied the economy’s image in the eyes of investors. According to the government’s own estimates, about $70 billion in capital is expected to leave Russia in the first quarter of the year, a fallout of the crisis for which the country has only itself to blame. Though Russia’s fundamentals remain intact with low household debt and about $480 billion in foreign reserves, the perception of increased geopolitical risk seems to be the most important issue facing the economy currently. In its April forecast, the International Monetary Fund cut its growth estimates for Russia to 1.3 percent this year from its January forecast of 1.9 percent. The Washington-based lender said the economic implications would be harder if the Ukraine crisis deteriorates further.
To put things in perspective, the unwanted global attention surrounding Ukraine could not have come at a more inopportune time for Russia. Economic growth had crawled down to 1.3 percent in 2013, dragged down by weaker demand for the country’s exports and slowing investment activity.
The World Bank cautioned that if the crisis escalates further, the economy may shrink 1.8 percent in 2014. The bank said there is a dent in investor confidence in the economy, which has been exacerbated by the geopolitical crisis. A reading of the business sentiment index showed a sharp dip in March after registering a good reading in February. Taking note of the crisis in Ukraine and capital outflows, investment bank Goldman Sachs reduced its estimate for Russian GDP growth in 2014 to 1 percent from its earlier forecast of 3 percent growth. However, Russian Economy Minister Alexei Ulyukayev expressed confidence that economic growth this year is likely to trend closer to 2013 levels as consumer demand remains strong.
Though the Crimea crisis dominated news reports, the domestic economic indicators did not offer much hope either during the first quarter of the year. Both the manufacturing and services sectors recorded a contraction on a seasonally adjusted basis during March. Meanwhile, the Russian central bank said a possible decline in commodity prices and volatility in global markets would restrict economic growth to between 1.5 percent and 1.8 percent this year. After ruling out monetary easing as a policy tool to kick-start growth, the central bank raised the key interest rate to 7 percent, the highest rate since 1998 as the Russian rouble plunged to a record low against the U.S. dollar. The rate increase is also aimed at reining in inflation, which is hovering near the central bank’s target of 5 percent for 2014.
TURKEY: POLITICAL UNREST EXPOSES ECONOMIC WEAKNESS
Turkey’s economic situation looks strikingly similar to that of Russia’s in more ways than one. As such, things were not looking up for both on the economic front, when a sudden surge of political turmoil exposed these economies to intense global scrutiny. If the Ukraine crisis proved to be damaging to Russia’s economy, Turkey has been grappling with allegations of graft against high-ranking officials in the Erdogan administration and the government’s alleged move to interfere with the probe and the judicial process. The muffling of social networks and the media complicated matters further. High inflation, a big current-account deficit, and a sliding currency have been the bane of the Turkish economy for quite some time now. Add political unrest to the recipe and the cocktail becomes unpalatable for those who have a stake in the country’s economic well-being.
More importantly, the crisis at hand has drawn attention to the flaws in Turkey’s economic model, which was emulated by other emerging economies just a year back. It turns out that debt-fueled private consumption and investment in property were the driving forces behind Turkey’s scorching pace of growth of about 9 percent in 2010 and 2011, not to mention the easy money stemming from the U.S. Federal Reserve’s policy of quantitative easing. Meanwhile, the Turkish central bank, which has been dilly-dallying over the question of raising interest rates, unveiled a whopping rate-hike from 4.5 percent to 10 percent at the end of January. Turkey’s middle class is reeling under soaring inflation, which is expected to rise to 7.8 percent in 2014, while businesses are faced with escalating import bills and eroding margins. Despite the rate hike, economies such as Turkey remain vulnerable to the pull back of monetary stimulus by the Federal Reserve.
Taking note of the problems facing the economy, the International Monetary Fund reduced its 2014 growth estimates for Turkey from 3.5 percent to 2.3 percent. The IMF said increased interest rates and a weak lira will weigh on domestic demand. Meanwhile, ratings agency Fitch reduced its growth forecasts for Turkey to 2.5 percent this year, from its previous estimate of 3.2 percent, saying domestic lending growth has slowed and investor and consumer confidence have moderated. Encouragingly, a clear victory for the ruling party in the recent local elections has reduced political uncertainty ahead of the general elections.
POLAND: LEADING ECONOMIC RECOVERY AMONG EASTERN EU NATIONS
As the Euro-zone economic recovery takes root, Poland seems to have much to cheer about. According to a report from the European Commission (EC), the sixth biggest economy in the European Union will register a GDP growth rate of 2.9 percent in 2014 compared to a meager 1.6 percent last year. The only European Union economy to escape recession in 2009, Poland slowed considerably in 2012-13, but picked up momentum at the end of 2013, thanks to the improvement in economic sentiment and external demand. The winter forecast report from the EC said upbeat economic prospects in Poland’s main export markets and the resultant rise in Polish exports would give a boost to private investment and the jobs market. The report said falling unemployment and subdued inflation is likely to spur domestic demand, which may overtake exports as the engine of Poland’s economic growth. Inflation, which had hovered around 0.8 percent in 2013 due to subdued food prices, weak domestic demand, and falling energy prices, is expected to trend near 1.4 percent in 2014. Domestic indicators such as manufacturing showed the highest reading in three years in February, helped by the growth in new orders.
However, the snowballing crisis in Ukraine seems be have fanned concerns that Poland’s economic interests could be affected, and justly so. About one-fifth of Poland’s exports are bound for Russia and Ukraine. Many jobs are dependent on trade with the east, while Poland gets most of its oil and some amount of gas from Russia. The Polish central bank governor said that the bank would contribute to the Ukraine bailout funds. In a broader sense, Poland’s involvement in Ukraine is a part of its strategy to seek greater involvement in European economic affairs.
Poland’s fiscal outlook is also expected to improve in 2014 as the general budget deficit is expected to come down to 3.8 percent from 4.8 percent of GDP in 2013. However, the Organization for Economic Co-operation and Development (OECD) said the Polish government needs to implement big spending cuts to meet the stipulated budget deficit target below 3 percent of GDP by 2015. In a review of the economy, the OECD also pointed out that Poland may have to raise interest rates from the current 2.5 percent as growth and inflation pick up pace.
CZECH REPUBLIC: GROWTH STORY INTACT IN THE BEGINNING OF 2014
The small, open economy of the Czech Republic, which emerged from a prolonged recession in the second quarter of 2013, seems to be on the growth track, helped by an improving global economy. Real GDP registered a growth of 1.6 percent in the fourth quarter of 2013, boosted by the increase in domestic demand growth due to the weakening of the currency koruna in November as purchases were advanced in anticipation of increased prices. Exports are expected to drive the central European economy’s growth in 2014 on the back of a weak currency and improved economic conditions for some of its main trade partners such as Germany. The signs of export growth are already showing as the country’s biggest auto maker clocked record sales in the month of January, thanks to demand from China and Western Europe. In fact, the Czech Purchasing Managers’ Index rose to its highest level in about three years in February to 56.5, indicating that the economy is steadily recovering.
According to a report from the European Commission, household consumption is showing signs of firming up, but the slow growth in disposable income is holding it back. However, the situation is likely to improve in 2014 as labor market conditions stabilize. Still, the estimated fall in the working age population is likely to weigh on employment growth. On the monetary policy front, the Czech central bank intervened in November 2013 to weaken the currency and is likely to maintain a supportive stance throughout the year. Though inflation has been increasing moderately, a drop in electricity prices and a rollback of the hike in indirect taxes are likely to keep price growth subdued through the year. On the fiscal side, the government deficit is estimated to widen slightly due to higher expenditures for public sector wages and a proposed labor tax reform in 2015. From 2.7 percent of GDP in 2013, the figure is expected to reach 3.3 percent of GDP this year if deficit-reducing measures are not introduced.
The Czech Republic government has been looking at ways to generate new revenues to revamp the education system and build new infrastructure without increasing taxes. Towards this end, the new finance minister, Andrej Babis, has proposed to park idle state funds in the local money market, which would fetch a higher interest than the country’s central bank offers.
HUNGARY: DOMESTIC DEMAND BOOSTS ECONOMIC RECOVERY
Hungary, like its neighbor the Czech Republic, came out of recession in 2013 as its GDP grew 1.1 percent. According to a forecast from the European Commission, Hungary’s growth is likely to be around 2 percent in 2014, mainly driven by domestic demand. Domestic demand growth received a boost from low inflation, which touched 0.7 percent in the last quarter of 2013 due to cuts in energy and utility prices. Low inflation puts more disposable income in the hands of the public, which helps boost consumption. Moreover, household consumption is likely to turn positive this year because of rising public sector wages and the newly introduced subsidized mortgage schemes. Inflation is expected to slow down to 1.2 percent in 2014 from 1.7 percent in 2013.
As the European Commission report pointed out, Hungary’s unemployment rate came in below 10 percent in the fourth quarter. Along with the economic recovery, private sector employment is expected to pick up pace, which will bring down the unemployment rate further during the year. Expectedly, Hungary’s consumer confidence index recorded a 12-year high in March after the economy clocked its fastest rate of growth in eight years during the fourth quarter.
Meanwhile, Prime Minister Viktor Orban, who had drawn some flak for some of his unorthodox policies, was re-elected for another four-year term in the recent parliamentary polls. Orban had nationalized private pension funds and slapped “crisis taxes” on big business, which had shaken investor confidence in the Hungarian system. However, the election results seem to point to the fact that the prime minister has struck a chord with his countrymen who believe that he has helped Hungary emerge from recession. Keeping the Russia-Ukraine stand-off in mind, Hungary’s central bank said the benign inflation scenario in the country would give it room for reducing interest rates further. Central Bank Vice-Governor Adam Balog said inflation in the country is expected to remain stable in 2014.
Taking note of Hungary’s steady economic recovery and improving current-account balance, rating agency Standard & Poor’s raised the outlook for the country’s sovereign debt from negative to stable. The agency also said effective utilization of European Union funds and increasing exports could help the economy clock an average growth of about 2 percent this year.
GREECE: RECOVERY GAINS MOMENTUM AS COUNTRY RETURNS TO BOND MARKETS
During the first quarter of 2014, the southern European economy made some good progress in its struggle to wriggle itself out of its debt crisis that began in 2010. Foremost of all was the deal which Greece struck with its international creditors to give the country access to €10 billion of bailout funds. The six-month negotiation with the Troika --- the European Central Bank, the European Commission, and the International Monetary Fund --- was marred by protests from various local interest groups. The deal will enable Greece to repay €9.3 billion of bonds, which would mature in May. The release of the tranche payment will boost sentiment that the economy is coming out of its deepest recession so far.
Greece’s economy only shrank 3.7 percent in 2013, just barely beating the Troika’s expectations of a 4 percent contraction. Still, the agreement reached with the Troika requires the nod of the Greek parliament. According to a latest report, Greece has raised €3 billion from the sale of a five-year bond issue at 4.95 percent yield, marking its return to the bond markets this year after the country lost access to market funding four years back.
Besides the approval of the bailout aid, the latest negotiations also saw the Troika give its stamp of approval to about €3 billion in budget surplus, which Greece claimed to have achieved in 2013. Greek Prime Minister Antonis Samaras said €500 million from the surplus will be immediately allocated to about 1 million Greek citizens including police officers, military personnel, and low-income pensioners to boost their incomes. Samaras said an additional €20 million would be distributed to charities that take care of the homeless. While the largesse from the government would certainly appeal to the beneficiaries, the measure may be a bit premature considering that Greece still has fiscal targets to achieve, according to a Financial Times report.
Earlier, Greece managed to sell its six-month treasury notes at the cheapest borrowing cost since the economy became embroiled in a debt crisis in 2010, according to a Reuters report. Greece’s debt agency sold $1.79 billion of notes to refinance a maturing issue at a yield of 3.01 percent, mostly to foreign buyers, the report said. Similarly, two of the top banks in Greece successfully tapped bond markets in March.
Encouragingly, tourism is expected to rake in good revenues in 2014, helped by a recovery in the European Union. Greece’s energy bills are expected to come down this year as Russia’s Gazprom has agreed to reduce natural gas prices by 15 percent, which will be applicable retroactively from July 2013.
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