On Thin Ice: CESEE Core Resilient in the Face of EU Stagnation and the Ukraine Crisis
Vasily Astrov, Serkan Çiçek, Rumen Dobrinsky, Vladimir Gligorov, Doris Hanzl-Weiss, Peter Havlik, Mario Holzner, Gabor Hunya, Sebastian Leitner, Olga Pindyuk, Leon Podkaminer, Sandor Richter and Hermine Vidovic
wiiw Forecast Report No. Autumn 2014, November 2014
141 pages including 31 Tables and 30 Figures
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|1||ALBANIA: Economic development under house arrest||Mario Holzner||details|
|2||BELARUS: Economy at a crossroads||Rumen Dobrinsky||details|
|3||BOSNIA AND HERZEGOVINA: Awaiting change||Vladimir Gligorov||details|
|4||BULGARIA: In limbo, expecting a reset||Rumen Dobrinsky||details|
|5||CROATIA: Recession continues||Hermine Vidovic||details|
|6||ESTONIA: Will the tide come in again?||Sebastian Leitner||details|
|7||HUNGARY: Formidable take-off with limited expiration date||Sandor Richter||details|
|8||KAZAKHSTAN: Economic growth loses pace||Olga Pindyuk||details|
|9||KOSOVO: Robust growth despite political quarrelling||Mario Holzner||details|
|10||LATVIA: Economic activity is losing steam||Sebastian Leitner||details|
|11||LITHUANIA: Headwinds from the east||Sebastian Leitner||details|
|12||MACEDONIA: Growth versus stability||Vladimir Gligorov||details|
|13||MONTENEGRO: Relying on tourism||Vladimir Gligorov||details|
|14||POLAND: A number of short-term risks||Leon Podkaminer||details|
|15||ROMANIA: Investment slump||Gabor Hunya||details|
|16||RUSSIAN FEDERATION: Stagnation and isolation ahead||Peter Havlik||details|
|17||SERBIA: Fiscal dilemma||Vladimir Gligorov||details|
|18||SLOVAKIA: Domestic demand taking over export drive||Doris Hanzl-Weiss||details|
|19||SLOVENIA: Unexpectedly high GDP growth||Hermine Vidovic||details|
|20||THE CZECH REPUBLIC: The second dip about to be left behind||Leon Podkaminer||details|
|21||TURKEY: In the shade of the government’s growth targets||Serkan Çiçek||details|
|22||UKRAINE: Military spending offsets IMF-imposed austerity||Vasily Astrov||details|
Despite near stagnation in the euro area and the negative impact of the Ukraine crisis, in most of the NMS economies and some of the Western Balkan countries growth prospects are viewed as positive. While the NMS economies will preserve their positive growth differential vis-à-vis the EU-28, Russia and Ukraine are facing a deterioration of their economic performance.
External factors have had a major impact on growth performance in the CESEE region. Financial transfers from the EU have lent essential support to economic growth in the European Union’s new Member States (NMS). Investment and operational costs funded via those transfers have become an integral and increasingly important part of aggregate demand in the NMS economies. 2013 and 2014 have been among the strongest years in terms of transfers in the framework of the EU cohesion policy. Their impact is comparable to that of fiscal stimuli, albeit better inasmuch as they do not give rise to new debt. A possible disadvantage compared to classic fiscal stimuli is that transfers have no steerable relation to business cycles.
In the eastern part of the CESEE region, the Ukraine conflict has had a pronounced negative impact on economic growth. 25 years after the fall of the Iron Curtain, the current crisis in relations between Russia and the West is evolving into a dangerous geopolitical conflict. In Ukraine, the main victim of the conflict, the economy may decline by 8% over the current year. In Russia, the costs of the conflict are estimated to be to the tune of about 1% of GDP, primarily on account of increased investment risks and the financial sanctions. The impact on the individual EU countries differs according to their exposure to the Russian market. The Baltic States and some other NMS will be those most affected on account of their trade channels with estimated losses in the order of up to 0.4% of GDP.
The global financial crisis has shattered the rapid expansion of financial intermediation in nearly all of the countries in the region; recovery of crediting activities is still fragmentary and weak. High levels of non-performing loans are a major concern throughout much of the region. There seems to be a justified concern over the region having entered a period of ‘creditless recovery’ which threatens to be much slower than a recovery with strong credit growth.
The outlook for GDP growth in the CESEE region is again fairly diversified. Compared to 2013, the growth performance is expected to improve in twelve and deteriorate in nine of the twenty-one countries in the region in 2014.
The general medium-term trend for the NMS as a whole is seen to be positive: in most of these countries, we expect a gradual acceleration of GDP growth; exceptions are Hungary and Slovenia where a deceleration is forecast, and Poland where the relatively high GDP growth rate will remain practically unchanged. For the current year, the assumption is that the NMS will grow by 1.8 percentage points higher than expansion in the euro area and 1.3 pp above the EU-28 average. In 2015, the gap in favour of NMS growth performance will become somewhat narrower: 1.5 pp relative to the euro area and 1.1 pp to the EU-28 average.
For some of the countries in the Western Balkans, growth prospects will only improve over the period 2015-2016, closely related to the damage caused by the floods this summer. Turkey will continue to register remarkable economic growth. Growth performance in Kazakhstan, Russia and Ukraine will worsen in the current year compared to 2013; the medium-term outlook in Russia and Ukraine is, depending on the evolution of the political crisis, fairly uncertain with considerable downward risks.
As for our forecasts for 2015 and 2016, a further weakening of performance in the euro area poses a downward risk, while a longer lasting drop in oil prices will represent an upward risk, except for energy exporters Russia and Kazakhstan.
Keywords: Central and East European new EU Member States, Southeast Europe, Balkans, Russia, Ukraine, Kazakhstan, Turkey, economic forecasts, employment, foreign trade, competitiveness, debt, financial crisis, deleveraging, exchange rates, fiscal consolidation, Ukraine conflict
JEL classification: C33, C50, E20, E29, F34, G01, G18, O52, O57, P24, P27, P33, P52
Countries covered: Albania, Belarus, Bosnia and Herzegovina, Bulgaria, Central and East Europe, CIS, Croatia, Czech Republic, Estonia, European Union, Hungary, Kazakhstan, Kosovo, Latvia, Lithuania, Macedonia, Montenegro, New EU Member States, Poland, Romania, Russia, Serbia, Slovakia, Slovenia, Southeast Europe, Turkey, Ukraine
- New wiiw forecast for Central, East and Southeast Europe, 2014-2016 CESEE core resilient to EU stagnation and the Ukraine crisis (press conference presentation in English)
- wiiw-Prognose für Mittel-, Ost- und Südosteuropa, 2014-2016: CESEE-Kernländer widerstehen EU-Stagnation und Ukraine-Krise (press conference presentation in German)