New wiiw forecast for CESEE: Strong growth amid increased negative risks

07 November 2018

Most economies in the region are still doing well, but the external environment had deteriorated amid a looming global trade war and problems in the eurozone (includes video).

Wiiw has released its Autumn Forecast Report, with macroeconomic projections for Central, East and Southeast Europe (CESEE) out to 2020. The full report is only available for members and paying customers, but several individual sections are now free to download:

Olga Pindyuk summarises the Autumn Forecast 2018:

The main conclusions of the report are as follows:

Growth across most of the CESEE region remains robust, and this is likely to continue during the forecast period. However, growth in the region has passed its peak, and the pace of expansion for CESEE as a whole will trend downwards in 2019 and 2020. Much of the reason for this comes from external factors: the Chinese economy is showing signs of slowing, and prospects for the eurozone (a key source of export demand, remittances and investment for CESEE) are less positive than was the case in the spring.

Despite external challenges, the growth outlook for EU-CEE and the Western Balkans is generally good. Labour shortages in much of the region are increasingly acute and present a medium-term challenge to growth. However, in the near term they are spurring significant wage growth, which will support private consumption. Meanwhile high levels of capacity utilisation, low interest rates and EU funds inflows will continue to drive strong investment growth.

The countries facing the biggest current challenges are Turkey and Russia, although the medium-term outlook for the former is much better than for the latter. Turkey is suffering from a combination of long-standing external imbalances, a sharp external shock and sub-optimal domestic policy, which will push the economy into recession. However, we expect a recovery by the end of 2019. By contrast, while Russia has much less of an issue with macroeconomic stability, major structural bottlenecks will keep growth rates depressed in the medium term.

Despite high wage growth, inflation in most of the region remains relatively weak, reflecting in part higher savings, as well as outflows of remittances from migrant workers in parts of CESEE. Overheating concerns have subsided since the spring. However, the tightness of labour markets, rising property prices and negative real interest rates are potential sources of risk. The credit cycle is picking up, particularly in relation to households (demand for credit from corporates is much weaker). Asset quality has improved significantly in most places, and real interest rates have continued to fall in EU-CEE and the Western Balkans.

While the overall outlook remains positive, downside risks have increased further this year and present a serious threat to the region’s growth during the forecast period. We are most worried about a worsening US–China trade war, a smaller post-Brexit EU budget, the potential for a renewed outbreak of the eurozone crisis and the deterioration in institutional quality and independence in parts of CESEE. The main positive risk to the outlook is that labour shortages and higher wages push firms to invest in productivity-enhancing capital upgrading, which would help to lift GDP per capita levels across the region.

CESEE remains on a convergence path with Western Europe. However, the pace of convergence will slow quite significantly by 2020. In many places, wage convergence has lagged behind that of overall GDP per capita.