A challenging external environment, owing to lingering trade tensions and a slowdown in the EU, poses a downside risk to regional activity.
South-Eastern Europe's economy is projected to grow 0.8% in 2019, down 0.1 percentage points from last month's forecast. For 2020, the regional economy is forecast to expand 2.7%.
Turkey Economic Outlook
High inflation, elevated unemployment, pervasive consumer pessimism and currency weakness continued to ravage the economy, leading to a marked contraction in the first quarter. The economy’s tough spot was further highlighted by feeble business and consumer credit growth in Q1, as well as ongoing weakness in the important construction sector, chiefly due to the cheap lira. Moreover, second-quarter data suggests that the economy remains in a predicament: Consumer credit growth was still weak in April; operating conditions in the manufacturing sector deteriorated in the same month; and consumers remained dejected through May. Against this backdrop, domestic and international political pressure has risen in recent weeks due to the annulment of the Istanbul mayoral election result and the two-week ultimatum given to Turkey by the U.S. on 23 May to cancel the purchase of Russian missiles.
The economy will likely contract this year due to collapsing domestic demand induced by high inflation, rising unemployment and a weak lira. However, the economy should begin to recover towards the end of the year as inflation softens, providing room for monetary policy easing. Lingering geopolitical tensions and currency volatility cloud the outlook, however.
FocusEconomics Consensus Forecast panelists expect the economy to shrink 1.3% in 2019, which is down 0.3 percentage points from last month’s forecast, and to expand 2.7% in 2020.
Romania Economic Outlook
Romania’s economy grew 5.0% year-on-year in the first quarter, overshooting analysts’ expectations and marking the strongest outturn in more than a year. Ahead of comprehensive first-quarter national accounts, retail sales through March suggest that household spending remained firmly in the driver’s seat, as do falling unemployment and rebounding inflation. Domestic demand, however, was likely hobbled by lackluster fixed investment as weak demand from the Eurozone appeared to stifle first-quarter industrial output. Meanwhile, external imbalances, exacerbated in recent months by tepid export growth and trickling FDI inflows, continue to loom. In late May, on the heels of a thumping for his Social Democrats at the European elections, ruling party leader Liviu Dragnea was sentenced to three years in prison on graft charges; economic sentiment improved on the news.
Growth is set to decelerate again this year as slower employment growth and labor shortages taper household spending gains in the aftermath of the two-year-old economic boom. Fixed investment, meanwhile, is expected to recover somewhat but could be hit by rising labor costs. Fiscal and current account deficits remain a concern.
FocusEconomics analysts see growth at 3.5% in 2019, up 0.2 percentage points from last month’s forecast, and at 3.0% in 2020.
Croatia Economic Outlook
Recently released GDP data revealed that the economy gained steam in Q1, with growth accelerating to an over two-year high on the back of strong domestic demand. Despite higher unemployment, private consumption rose at the fastest clip since early 2008 as household incomes were buoyed by solid credit growth and healthy real wage gains in the quarter. Likewise, fixed investment growth surged to an over-decade high, aided by EU-linked structural funding and upbeat corporate lending. On the external front, although exports picked up noticeably, they were outpaced by imports and thus net trade weighed on the overall expansion. Going forward, available data signals that momentum was sustained at the outset of Q2. The unemployment rate dipped to a seven-month low in April while consumer confidence hit consecutive record highs in April and May, indicating that private consumption has remained resilient.
Growth is seen remaining healthy this year amid upbeat domestic demand. A gradually improving labor market, sustained remittance inflows and rising real wages should prop up household spending. Furthermore, continued absorption of EU structural funds should aid investment activity ahead. A slowdown in external demand, primarily from the EU, clouds the outlook.
FocusEconomics analysts expect growth of 2.5% in 2019, which is unchanged from last month’s forecast, and 2.5% again in 2020.
South-Eastern Europe Monetary & Financial Sector News
Regional inflation edged down to 11.0% in April from 11.1% in March, owing to easing price pressures in Turkey, Croatia and Cyprus offsetting a pickup in inflation elsewhere in the region. Inflation should remain fairly stable this year compared to 2018, with higher inflation in Turkey and the Balkans more than offsetting lower inflation in Romania and Croatia.
In recent weeks, regional central banks as well as the European Central Bank held fire and left their key interest rates unchanged. Romania’s bank stood pat despite rising inflation, although Turkey’s Central Bank did increase reserve requirements. Turkey is expected to ease monetary policy later this year, pushing down the average regional interest rate.
Most regional currencies are expected to recover lost ground against the greenback this year on the back of a stronger euro. However, the free-floating Albanian lek, Romanian leu and Turkish lira are seen depreciating this year. Given the size of the Romanian and Turkish economies, this will cause the average regional exchange rate to lose value.
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