Thomas White Global Investing
Moscow

Emerging Europe

Economy Trends Update January 2018

 

AT A GLANCE

 

Russia: Low inflation is giving a boost to domestic consumption, Russian central bank governor Elvira Nabiullina reported. The government expects inflation to remain below the central bank’s target of 4%, according to a Reuters news report.

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Turkey: With inflation expected to remain above the central bank’s target for the year, the monetary policy committee of the bank is unlikely to resort to monetary easing in the near term despite pressure from the Erdogan administration to cut interest rates.

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Poland: The economy expanded 4.6% during 2017, driven by domestic demand and higher economic activity in the region and the European Union.Household consumption, which contributes about 61% of GDP, expanded 4.7% in 2017, aided by government spending and higher wages.

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Czech Republic: The economy that has registered fast growth in the recent quarters is displaying signs of overheating, Central Bank Governor Jiri Rusnok said. Mr. Rusnok added that the central bank would continue to normalize interest rates to rein in rising inflation.

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Hungary: The overall economic uptick in the central and east European region and the Euro-zone as well as low unemployment has helped the small, export-oriented economy of Hungary to clock healthy growth rates in the recent quarters.

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Greece: The beleaguered south European economy appears to be making small strides toward returning to normality, the latest green shoot being the rebound in the manufacturing sector.

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Uptick in the Euro-zone, manufacturing bolster regional growth

Russia, the largest of the economies under our purview in the Emerging Europe region, continued to benefit from steady oil prices during the review period. More importantly, the economy seems to have become less vulnerable to the fluctuations in oil prices, being able to balance its budget even at $53 a barrel by 2019. Low inflation would give the Russian central bank the leeway to reduce interest rates further. The dip in inflation, a significant increase in tourism revenues and the government’s fiscal support of specific sectors bode well for Turkey’s economy.

Poland’s economy expanded 4.6% during 2017, driven by domestic demand and higher economic activity in the region and the European Union, its main trade partners, according to a Reuters news report. Household consumption, that contributes about 61% of GDP, expanded 4.7% in 2017, aided by government spending and higher wages. The Czech Republic’s central bank said it would continue to normalize interest rates to rein in rising inflation. The overall economic uptick in the central and east European region and the Euro-zone as well as low unemployment helped the small, export-oriented economy of Hungary to clock healthy growth rates in recent quarters. On the domestic front, the double-digit increase in wages coupled with low interest rates has fueled an unprecedented boom in consumer lending. The beleaguered south European economy of Greece appears to be making small strides toward returning to normality, the latest green shoot being the rebound in the manufacturing sector.

 

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Russia: Low inflation a positive; oil prices provide support

Low inflation is giving a boost to domestic consumption, Russian central bank governor Elvira Nabiullina reported. The government expects inflation to remain below the central bank’s target of 4%, according to a Reuters news report. Thanks to low inflation, the central bank has the leeway to reduce interest rates. However, Ms. Nabiullina acknowledged that the economy is still dependent on oil prices but has become less vulnerable to fluctuations in energy prices. In a related development, the Russian government is set to revise its oil price forecast upward for 2018 after the world’s major oil producers, including Russia, agreed to extend cuts to oil production.

Notwithstanding Russia’s reliance on oil prices, the breakeven price for crude oil to balance the country’s budget has progressively come down over the years and is slated to touch a modest $53 a barrel by 2019. Needless to say, the government’s cost-cutting efforts and curbs on corruption helped, a conscious shift in strategy from reckless public spending on projects fueled by higher oil prices during the boom years.

Meanwhile, Russia’s economy, which has rebounded from a two-year recession, seems to have bumped into a roadblock again. In a surprise development triggered by a slip in industrial production, the economy contracted 0.3% year on year in November 2017. Industrial output shrank 3.6% from the year-ago period, partly due to the production cuts by major oil producers and the warm weather that dampened the demand for natural gas in both domestic and foreign markets.

Conversely, Russia’s manufacturing sector continued its expansion spree in January, the sixth month in a row, thanks to new orders, complementing the growth in the services sector.

Taking into account the November contraction, the government said the economy expanded by 1.4% in 2017, lower than its previous view of 2.2% growth. Looking ahead, however, the economy ministry is optimistic that growth will rebound to about 2% in 2018.

 

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Turkey: Government proposes stimulus for select sectors

Turkey’s annual consumer price inflation for the month of January touched 10.4%, the lowest rate recorded since July 2017. This was due to base effects and lower food inflation that was below expectations, according to a bne IntelliNews report. Consumer prices rose by 1.02% month-on-month in January. Still, with inflation expected to remain above the central bank’s target for the year, the monetary policy committee of the bank is unlikely to resort to monetary easing in the near term despite pressure from the Erdogan administration to cut interest rates. The central bank’s official inflation target is 5%, though it forecast consumer price inflation to be at 7.9% by the end of 2018.

Bringing more cheer, Turkey’s tourism revenues marked a significant increase to about $26 billion in 2017. The uptick was mainly attributed to the resumed inflow of Russian tourists as the bilateral ties improved after the diplomatic row that followed Turkey’s downing of a Russian plane. Revenues from tourism are crucial in bridging Turkey’s wide current account deficit.

Meanwhile, Turkey’s government decided to continue the fiscal stimulus measures that breathed new life into the moribund economy last year. Economy Minister Nihat Zeybekci proposed a $21-billion investment in sectors such as healthcare and energy to reduce the country’s dependence on imports. Tax holidays for 10 years, government subsidies on employee insurance premiums and loans at attractive interest rates are some of the incentives being offered to firms that are participating in the scheme.

 

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Poland: Consumption, exports boost economic growth

The European Bank for Reconstruction and Development (EBRD) that oversees some 37 emerging economies in the region had forecast solid growth for several countries in 2017 due to the increase in wages and robust demand from the Euro-zone.

Not surprisingly, Poland’s economy expanded 4.6% during 2017, driven by domestic demand and higher economic activity in the region and the European Union, its main trade partners, according to a Reuters news report. Household consumption, which contributes about 61% of GDP, expanded 4.7% in 2017, aided by government spending and higher wages. Retail sales recorded a 9.2% year-on-year increase in December. The country, which is dependent on exports as well, benefited from a boost in economic activity in the region, including Germany, the top destination for its exports.

Moreover, investment into buildings and roads rose 5.4%, thanks to the increased availability of European Union funds. However, monetary policy makers cautioned that rising wages due to labor shortages could push inflation above the central bank’s target of 2.5%. The bank had left interest rates unchanged at 1.50% in January 2018.

On the political front, Poland’s new government under the leadership of Prime Minister Mateusz Morawiecki secured a vote of confidence in parliament in December. Mr. Morawiecki said while the focus on public spending and building domestic capital would continue, his administration will strive to improve the country’s foreign relations. He added that Poland is in talks with Hungary to form a development bank to make investments in the infrastructure sector in the region with the cooperation of Slovakia and the Czech Republic.

 

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Czech Republic: Political stalemate continues

Incumbent President Milos Zeman was re-elected for another five-year term in the polls held in the last week of January. Though the president has only a ceremonial role in country’s political system, his election assumes significance given the prevailing political uncertainty. Mr. Zeman has ardently backed billionaire Andrej Babis, who heads a minority government as prime minister. Moreover, Mr. Zeman’s anti-immigration stance and his perceived closeness to Russian President Vladimir Putin could have a bearing on the Czech Republic’s relationship with the European Union. The political impasse in the country, if left unresolved, is likely to hamper foreign investments in the country.

The Czech Republic that has registered fast growth in the recent quarters is displaying signs of overheating, Central Bank Governor Jiri Rusnok said, according to a Reuters news report. Mr. Rusnok added that the central bank would continue to normalize interest rates to rein in rising inflation. The central bank raised interest rates twice since August 2017 after keeping it close to near zero for nearly five years.

 

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Hungary: Consumer confidence highest in 15 years

The overall economic uptick in the central and east European region and the Euro-zone as well as low unemployment has helped the small, export-oriented economy of Hungary to clock healthy growth rates in the recent quarters. On the domestic front, a double-digit increase in wages coupled with low interest rates have fueled an unprecedented boom in consumer lending, giving a big boost to Hungarian banks’ profits. Predictably, consumer confidence in Hungary touched a 15-year high in December. Despite the surge in loan growth, the Hungarian central bank is confident that tight lending standards imposed after the financial crisis of 2009 would allay fears of a credit bubble. Credit ratings agency Moody’s said robust growth in Eastern Europe, fueled by higher consumption and low levels of private sector debt, gives ample room for credit expansion, Reuters reported.

Credit ratings agency Fitch upgraded Hungary’s sovereign credit outlook to “positive” from “stable”, citing high current account surplus and good inflow of European Union funds, among other factors. The agency expects GDP growth to be 3.5% in 2018, driven by consumption, low unemployment, rapid rise in wages and subdued inflation.

 

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Greece: Factories start humming again

The beleaguered south European economy appears to be making small strides toward returning to normality, the latest green shoot being the rebound in the manufacturing sector. The uptick has to do with both domestic and external factors: falling wages have brought production costs down substantially, while the economic recovery in the Euro-zone has given an unexpected boost to Greece’s exporters. Small wonder that manufacturing, which makes up about 10% of the domestic economy, has recorded growth for several months in succession. The increase in tourism revenues also bodes well for the economy that has expanded for three quarters in a row. Athens hopes to exit its third international bailout program in 2018, after years of painstaking reforms that included massive cuts in public spending and privatization of government-owned firms.

Still, talks about a complete turnaround may be premature. Greece continues to have the highest unemployment rate in the Euro-zone at 21%. What’s more, national debt stands at a whopping 180% of the country’s economic output, limiting fresh government spending. Understandably, the private sector has to pick up the slack to keep the economy humming.

 

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© Thomas White International, Ltd. 2018