EMERGING EUROPE:
FIRST QUARTER 2012 ECONOMIC REVIEW

AT A GLANCE   Russia: In its January forecast, the European Bank for Reconstruction and Development said it sees Russia continuing to grow at the rate of 4.2% this year. A Reuters report said headline Russian inflation was recorded at a post-Soviet low in March. Read more Turkey: Turkey’s economy grew at the rate of 8.5% in 2011, according to a Financial Times report. Still, the 5.2% growth rate recorded for the fourth quarter was a disappointment as it fell far below the rates recorded earlier in the year. Read more Poland: The manufacturing sector posted a marginal increase in March as companies produced more despite a dip in new orders and job cuts. The economy though is showing signs of a slowdown, as the Euro-zone, the country’s core export market, is reeling under the effect of austerity measures. Read more Hungary: Even though the economy is struggling overall, year-on-year growth was clocked at 1.4% in the fourth quarter of 2011. However, the EC forecasted recessionary conditions in Hungary this year as its major trade partner Germany is expanding only at a slower rate. Read more Czech Republic: In a sign that the Euro-zone crisis is catching up with the export-oriented Czech Republic, the economy became the first in central and Eastern Europe to slip into recession as it recorded a 0.3% contraction in GDP during the fourth quarter of 2011. Read more

In an interim review published in February, the European Commission reduced its growth outlook for most of the non-euro member states in the European Union’s eastern periphery. The commission said while Hungary’s economy is expected to contract, the Czech economy is likely to stagnate during the year. However, the agency singled out Poland, the biggest among non-euro EU states, for special praise. The EC said the Polish economy will continue to expand during the year though the rate of growth will be slower than that in 2011. The commission said investment spending will be the driver of growth in Poland, while a weak zloty will encourage exports. In other comments, published in a Wall Street Journal report, the commission observed that Hungary’s external environment is worse than expected as export markets shrink, while consumer confidence is on the wane in the Czech Republic as the job market remains subdued. The European Bank for Reconstruction and Development (EBRD) also has a downcast view for Eastern European economies, taking into account

Russia: EBRD sees growth at 4.2%

The European Bank for Reconstruction and Development (EBRD) was established two decades ago to help fund the transition of erstwhile communist states to market economies. In a January forecast, the EBRD said it sees Russia continuing to grow at the rate of 4.2% this year.

According to a Reuters report, headline Russian inflation was recorded at a post-Soviet low in March. Still, inflation is expected to rise later in the year as the prices of gas and electricity go up. The low reading was anticipated following a freeze on household utility bills ahead of the March presidential polls, the report said.

Meanwhile, an HSBC Purchasing Managers’ Index only showed a marginal increase in March as the increase in new orders and output were modest.

On a different note, Russia’s oil production came in at 10.36 million barrels per day in March, remaining mostly unchanged from the levels seen in February. Russia is expected to increase its oil output by 1% this year.

 

Turkey: A mixed bag

Turkey’s economy grew at the rate of 8.5% in 2011, according to a Financial Times report.However, the 5.2% growth rate recorded for the fourth quarter was a disappointment as it fell far below the rates recorded earlier in the year. Inflation, which remains above 10%, and the current account deficit, which despite a dip still hovers around the same figure, also contributed to the share of not so pleasant news. The increase in the current account deficit still remains the single biggest challenge facing the Turkish administration, as dependence on oil imports will cost the treasury about $68 billion this year, up from $54 billion recorded last year. The figure for January stood at $6 billion, which was only modestly lower than last year’s levels.

Standard & Poor’s said in a recent report that it expects the Erdogan administration to bring down government debt to around 35% of the GDP by the year 2015. However, the ratings agency also said the country’s GDP growth will only be 2% this year.

Meanwhile, Turkey tried to reach out to its one-time foe Greece in its hour of crisis. The Wall Street Journal reported that Turkish Deputy Prime Minister Ali Babacan urged Greece to boost trade ties with fast-growing Turkey if it were to survive. The two countries appear to be a study in contrasts, with Turkey, a crisis-stricken country not so long ago, marching ahead of the welfare state Greece over the years.

 

Poland: Manufacturing sector posts surprise increase

Poland’s manufacturing sector posted a marginal increase in March as companies produced more despite a dip in new orders and job cuts. However, the fastest-growing economy in the region is showing signs of a slowdown, as its core export market, the Euro-zone, is reeling under the effect of austerity measures. The European Commission expects the Polish economy to expand at the rate of 2.5% this year compared to the 4.3% growth last year.

Poland received a pat on the back from the OECD recently when the international institution said the Polish finance minister’s plan to trim the budget deficit to 2.9% of the GDP this year looked achievable, as reported in the Financial Times. However, the OECD was quick to add that in the absence of deeper reforms, the Polish economy will be able to grow only at 3% in 2012 and 2013. Bringing further cheer, the dragon seems all set to enter the Polish market. China’s largest bank, Industrial & Commercial Bank of China Ltd., has applied to the Polish banking regulator to open a branch in the country.

Meanwhile, Polish Finance Minister Radoslaw Sikorski minced no words when he was recently reported as saying in a WSJ report that the European Union faced economic stagnation if its leaders don’t put up a united stand to solve several issues facing the bloc. The minister’s stance came as a surprise as he was widely seen to be a proponent of strengthening Poland’s ties with the rest of Europe.

 

Hungary: Managing to keep its head above water

The impact of the Euro-zone crisis on the Eastern European nations depended on the extent of their reliance on Germany and their domestic fiscal cuts, going by the fourth-quarter GDP figures. Thus, even though Hungary is not doing well overall, its economy posted a 1.4% year-on-year growth in the fourth quarter of 2011. However, the European Commission forecasted recessionary conditions in Hungary this year as its major trade partner Germany is expanding only at a slower rate.

Meanwhile, the deputy governor of the Hungarian central bank Ferenc Karvalits said he does not foresee any cut in the base interest rate until there is an improvement in risk perceptions. In a WSJ interview, Karvalits said a monetary agreement with the European Union and the International Monetary Fund could go a long way to bring down Hungary’s vulnerability by providing a safety net.

However, the OECD does not seem to be impressed by Hungary’s modest fourth-quarter GDP numbers. Close on the heels of the European Union’s suspension of some infrastructure subsidies, the international agency urged the country to take “swift action” to stabilize its economy and to stimulate growth, according to a report in the Financial Times. On another note, the European Commission said it is concerned about the independence of Hungary’s central bank and said the action taken by the Viktor Orban administration will have a bearing on whether to give the country access to an emergency credit line.

 

Czech Republic: Economy slips into recession

In a sign that the Euro-zone crisis is catching up with the export-oriented Czech Republic, the economy became the first in central and Eastern Europe to slip into recession, as it recorded a 0.3% contraction in GDP during the fourth quarter of 2011. The economy was at the receiving end mainly because of its reliance on Germany, which purchases 18% of the country’s manufacturing exports. The Czech economy posted successive contractions during the third quarter and the fourth quarter, pushing it into a recession. The European Commission also forecasted that the Czech economy is not expected to grow during the year 2012.

Despite the slip into recession, manufacturing output recorded its fastest growth in six months in March, thanks to new domestic orders coming in. The HSBC Czech Republic Manufacturing PMI increased to 52.1 from 50.5 in February, according to a Bloomberg report.

Meanwhile, the Czech Republic seems to be in no hurry to adopt the euro anytime soon. Recently, the Czech central bank governor was quoted in a WSJ report as saying that he does not see the country entering the currency union at least during his term which ends in mid-2016. The central bank does not appear to be too worried about headline inflation as consumer prices remain weak amid slowing economic growth.