Montenegro: Economic Snapshot for South-Eastern Europe
Economy slows to an over two-year low in Q4 2018
Economic dynamics in the South-Eastern Europe (SEE) region appear to have cooled in the fourth quarter of 2018 to levels not seen since Q3 2016, when regional economic growth was affected by a failed coup d’état in Turkey. Coupled with an expected economic downturn in Turkey, the region has been hit by softer economic activity in the Eurozone. According to a preliminary estimate by FocusEconomics, South-Eastern Europe’s (SEE) economy slowed to 0.6% in annual terms in Q4, well below both the 1.1% rise from last month’s forecast and the 2.4% increase in the third quarter.
Economic growth in Croatia softened notably in Q4 on the back of a sharp slowdown in exports of goods. Conversely, service exports, which includes the all-important tourism sector, improved in the quarter. A robust domestic economy led growth in Q4. This, in turn, caused import growth to accelerate markedly, dragging on overall GDP. Comprehensive Q4 GDP data for Serbia corroborated that the economy lost steam in Q4 due to a sharp slowdown in investment growth and less robust fiscal spending.
Economic dynamics in Bulgaria and Romania were broadly unchanged in Q4 compared to the previous quarter in year-on-year terms. Bulgaria benefited from a rebound in exports and a slowdown in import growth, which propelled the contribution from the external sector to overall growth; cooling domestic demand, however, will be a concern, given it likely reflects a rising unemployment rate and moderating wage growth. In Romania, solid domestic dynamics kept growth relatively robust in Q4. Meanwhile, GDP growth in Cyprus accelerated to a five-quarter high in Q4, supported by solid construction activity and household spending.
With Q4 GDP data in Turkey set to be published on 11 March, economic indicators throughout the quarter suggest that the economy likely contracted at the fastest pace since the global financial crisis in 2009. A combination of large external financing needs, a persistent current account deficit, a tighter monetary policy, high inflation and uncertainty over economic management explain Turkey’s poor economic momentum. Meanwhile, in Greece, the economy seemed to have lost some traction in the final stretch of 2018, following a relatively solid showing in Q3.
Looking at the region’s smaller economies of Albania, Bosnia and Herzegovina, Kosovo, Montenegro and North Macedonia, available economic data points to ongoing healthy momentum. Declining unemployment rates and rising wages should have supported private consumption. On the downside, the external sectors of most of these economies seem to have moderated, reflecting an economic slowdown in the European Union.
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Economic growth in SEE set to slow to a decade low in 2019
Along with a dismal performance in Turkey following years of unsustainable policy support, the South-Eastern Europe region will feel the pinch this year from the ongoing economic slowdown in the European Union, the region’s main trading partner and source of FDI. A deeper slowdown in the European Union, fiscal slippages and domestic tensions in some countries pose the main downside risks to the SEE economic outlook for this year.
The regional economy is seen expanding 1.2% this year, which is down 0.1 percentage points from last month’s projection and marking a substantial slowdown from 2018’s 3.2% increase. If the expansion projected for 2019 materializes, it would represent the weakest growth since the global financial crisis in 2009. In 2020, growth is seen recovering to 2.8%.
This month, panelists revised down their 2019 growth estimates projections for Montenegro, Serbia and Turkey. Conversely, they upgraded their view on the Albania economy, while estimates for the remaining economies were left unchanged.
Kosovo is expected to be the star regional performer this year despite the ongoing trade spat with Bosnia and Herzegovina and Serbia. At the other end of the spectrum, Turkey is expected to contract due to the aftereffects of years of massive fiscal stimulus and tight financial conditions.
TURKEY | Erdogan accumulates more power in effort to rekindle battered economy
Incoming data for Q1 remains weak. Consumer sentiment fell again in February on a pessimistic outlook on the economy. Coupled with the softest growth in consumer credit in over 16 years in January, this bodes ill for household consumption in Q1. Moreover, business confidence stayed pessimistic and the manufacturing PMI remained entrenched in contractionary territory in February. This follows a likely weak outturn in Q4 2018. Private consumption suffered from high inflation and interest rates, as highlighted by the steepest retail sales contraction in December since current records began. Moreover, in the same month, the current account balance registered the first deficit in five months on lower goods exports. Against this backdrop, parliament recently granted President Erdogan emergency powers over the economy, in a move that raises governance risks given the higher concentration of power.
The economy seems set to remain fragile this year as restrictive financial conditions dent domestic demand. Nevertheless, a likely recovery in H2 should give the Central Bank room to spur domestic demand, while the external sector should provide further support. Risks relating to currency volatility and a possible renewal of geopolitical tensions cloud the outlook. FocusEconomics Consensus Forecast panelists expect the economy to shrink 0.3% in 2019, which is down 0.1 percentage points from last month’s forecast, and to expand 3.0% in 2020.
ROMANIA | External demand likely behind Q4’s weak performance
Economic activity moderated in the fourth quarter of 2018, with growth for 2018 as a whole well below 2017’s expansion. Strong retail sales in the quarter suggest consumer spending was again in the driver’s seat, supported by a tight labor market, declining inflation and robust wage rises. On the other hand, the industrial sector languished in Q4, affected by pronounced weakness in the industrial sector in the EU and by sluggish foreign demand. On the political front, in mid-February, parliament approved the 2019 budget, which targets a fiscal deficit of 2.8% of GDP and projects GDP growth of 5.5% for the year. Many analysts consider both projections to be optimistic and also warn against risks of budgetary slippage. Meanwhile, recent plans to relax anti-graft laws and the newly introduced tax on banks prompted the European Commission to urge the country to resume the reform drive.
After decelerating sharply in 2018, the economy will lose further steam this year. Labor shortages and lower employment gains will weigh on consumer spending, while new taxes on corporations and rising labor costs will restrain investment. Downside risks stem from the large fiscal and current account deficits and recurrent political clashes with the EU. FocusEconomics analysts expect growth of 3.3% for 2019, which is unchanged from last month’s forecast, and 2.7% in 2020
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BULGARIA | Economic growth moderates in Q4 on soft household spending
Preliminary national accounts data revealed the economy ended 2018 on a somewhat soft note, with annual growth in the fourth quarter matching the relatively weak showing of the previous quarter. Domestic demand lost traction in Q4, with consumer spending likely weighed on by moderating wage growth throughout the quarter. External metrics fared better, however, as exports of goods and services rebounded after declining in the previous two quarters, propping up the overall expansion. Meanwhile, survey-based data points to soft dynamics carrying over into 2019: Economic sentiment weakened in January and February, with consumers turning more pessimistic and confidence in the retail trade sector deteriorating in both months, boding ill for household spending gains in Q1.
Growth is seen remaining steady and healthy this year. Solid private consumption growth, propped up by rising wages, coupled with strong capital spending, aided by increased absorption of EU structural funds, should underpin economic activity overall. A greater-than-expected slowdown in global trade and in key trading partner growth cloud the outlook, however. FocusEconomics analysts project growth of 3.3% in 2019, unchanged from last month’s forecast, and 2.9% in 2020. (
CROATIA | Weak external sector drags on growth in Q4 2018
Recently-released national accounts data showed that the economy lost steam in the final quarter of 2018, as annual growth moderated to a one-year low, following a solid third-quarter outturn which was underpinned by upbeat domestic demand. A weak external sector dragged on overall activity as exports barely grew, which were primarily supported by the booming tourism industry, while imports spiked. Similar to Q3, the fourth-quarter expansion was propped up by healthy demand at home: Private consumption strengthened notably amid lower inflation and improved consumer confidence, while fixed investment growth jumped to a near two-year high. Going forward, the unemployment rate climbed for the fourth month in a row in January while consumer confidence deteriorated yet again in February—both hinting at the persistence of soft dynamics at the start of the year.
Broadly stable and solid growth is expected this year, driven chiefly by firm domestic demand. An improving labor market, healthy wage growth and subdued inflation should buoy private consumption, while fixed investment should benefit from higher disbursement of EU funds and still-low borrowing costs. A sharper-than-anticipated slowdown in major trading partners in the EU poses a key downside risk to the outlook. FocusEconomics analysts expect growth of 2.7% in 2019, unchanged from last month’s forecast, and 2.5% in 2020. (see details on page 29)
INFLATION | Inflation declines to five-month low in January
Regional inflation fell from 11.4% in December to 11.2% in January, according to a regional estimate produced by FocusEconomics. January’s print represented the lowest result in five months and mostly reflected falling inflation in Bosnia and Herzegovina, Croatia and Montenegro. Price pressures increased in most other countries but only timidly, while inflation was steady in Romania. Importantly, inflation in Kosovo jumped to a multi-year high likely linked to the recent trade spat with Serbia, while inflation was broadly stable, albeit stubbornly high, in Turkey. On the monetary policy front, all central banks which held meetings over the last month left rates unchanged.
Regional inflation is expected to reach 9.6% in 2019, down 0.1 percentage points from last month’s forecast. In 2020, regional inflation is forecast to dip to 7.3%.
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Oliver Reynolds
Economist