We've just released our latest summer focus update.
So Richard, in spring the forecast suggested better growth
across most of the countries in CESEE. Are you still as positive?
Yes we are and actually even more so
in spring we revised up our forecast for most of the region
And we've done the same again for our summer forecast,
so even stronger.
This region started the year actually very strongly
even stronger than we'd expected especially in the EU Member States
First quarter growth was at or close to multi-year highs
in some parts of the region
I think there are basically three reasons for this.
First is the upswing that we see in the Eurozone
Which is very strong and especially in Germany
Germany remains very dominant in the economies of Central and Eastern Europe
It's a very significant export partner for almost all of them
and growth there is very strong.
the first quarter growth was strong
High-frequency indicators suggest the second quarter growth was even stronger
And that is a very important thing for this region
the second factor is is what's going on domestically
so we see quite fast employment growth, tightening labor markets,
faster wage growth across most of the EU Member States in CESEE
and not supporting pretty good pretty strong private consumption growth
almost everywhere
The third factor is EU funds.
So we saw a slowdown from this last year
to do with the the gap between EU funding periods.
That's normal.
the projects for the new funding period
are now really getting going
and so we are starting to see
quite a strong contribution from EU funds to growth in the region
we expect that to last.
EU funds can be anything between 2 and 5 percentage points of GDP per year
for these countries, so it's very significant.
But what about the countries in our region outside of the EU?
There, it's much more mixed case.
I think on the positive side we have Turkey.
Turkey is a very interesting story.
I think at the start of this year because of what was going on politically
people were very negative about Turkey
We were never especially negative
but even we've been caught by surprise
how positive growth has been in the first half of this year
I think after the coup attempt
growth was very slow.
growth actually went negative in the third quarter of last year
but since then it's bounced back very well
and basically it's coming from a lot of different factors.
A big part of it is about the government.
The government has fiscal room.
They saved during the good years
Now they have room to spend and they are doing that
so we're seeing fiscal loosening
We're seeing quite a lot of public investment
and also some government help in terms of credits
of government providing cheaper credit
especially to small and medium sized businesses
that in turn is supporting private consumption growth
which is particularly strong
consumer confidence is strong
but there are also external factors
one is goods exports partly helped by the weakening of the Lira
But also Turkey is benefiting from this stronger demand
in the EU which remains Turkey's biggest export market.
And the final thing is probably tourism.
The tourism sector is still under pressure
security risk is still perceived as being high
for obvious reasons
but the date on with Russia last year has been very significant.
Russian tourists are coming back in really big numbers
and although the tourism sector is still under pressure
Overall it's stabilizing.
And that is a very positive thing for Turkey.
The other countries in our region outside of the EU
are doing less well.
We have quite a few growth downgrades for Russia,
former Soviet Union and some parts of the Western Balkans.
Partly this is to do with political developments,
geopolitics, the conflict in Eastern Ukraine still matters for growth
and in the Western Balkans
tensions between countries is also an issue,
but I think there are other factors.
One is for Russia and the FSU, it's the oil price
We had expected the oil price to gradually rise during our forecast periods.
Now we don't think it will. We think it will be flat.
That's bad for the oil exporters Russia and Kazakhstan.
And in the Western Balkans maybe one of the things holding back growth there
a little bit relative to what we'd expected
is the smaller export capacity
so these countries don't have export sectors
that can compare with places like the Czech Republic, Slovakia or Hungary
and so they're not able to take advantage
of the stronger growth in Western Europe to the same extent
as the Central European countries.
But there is also quite some political noise around
both within the region as well as from outside
Could you mention some countries where these political noise
matters and whether it matters for the whole region
I think clearly in some countries it matters.
In the countries that I've already mentioned,
in Russia, Ukraine and in the Western Balkans
this political noise matters now. It affects the economy today.
In the rest of the region however
Actually in most of the countries of the region
even where we do have a lot of political noise,
so in Turkey for example,
also to a lesser extent in places like Hungary and Poland
At the moment it doesn't seem to matter very much
and this economic upswing is clearly dominating any risks from the politics
However, we are skeptical about
how much or for how long that will last.
I think what we're seeing in some countries in the region
is rising authoritarianism
the undermining of independent institutions,
the challenges simply to the efficacy of Institutions,
and we think that has to matter.
Timing when that will actually matter is difficult
but we think at some point during the forecast period that has to matter
The other issue that these countries are facing
is political risks has come from outside the region.
An obvious one is Brexit. That's a big issue in Europe at the moment.
Our calculation suggested in value-added terms
the links between the UK and Eastern Europe in terms of goods are not that significant
But obviously Brexit matters in other ways.
The UK is very dominant in services,
the links are extensive, and even in the goods sector,
even if the overall value of exports between Eastern Europe
and UK is not that high
or as a share of those countries' economies
so to the complexity of value chains in Europe
now that if we have a reasonably so-called hard Brexit with the UK
leaving the single market in the customs union, which still looks fairly likely
that will have to affect these countries' economies.
And even taking Brexit out, there are issues within the EU
the most obvious is this tension
that we now see between France and Poland
but it's a demonstration example of these broader tensions
between East and West Europe
which are kind of on the back at the moment because Brexit will come back.
There's a lot of irritation I think in Western Europe
about the perceived lack of sharing of refugees by a lot of countries in Eastern Europe,
so-called free-riding, and if this escalates
and if we start to see challenges to EU funds inflows for example
which I have already mentioned are very important
then that is an issue for growth in the region
So overall do you expect that the upswing in CESEE
is going to continue beyond this year?
We think it will, we haven't made such big upgrades
to our Forecasts for 2018 and 19 as we have done for this year
we do think there is a very significant cyclical component to this switch
which can't last much beyond this year.
What's happening in the eurozone we think is very cyclical.
Ultimately not much has changed structurally.
We're hearing a lot of positive noises about reform, especially from the new French president,
but at the moment what we can say in structural terms
is that not much has changed and so we think It's quite cyclical.
and now it matters a lot for eastern Europe and if it fades next year or the year after
Eastern Europe won't be able to maintain these kind of growth rates
the politics is also I think very important
as I said it's difficult to predict exactly at what point these things start to matter
But they are there in the background and they will affect growth
and I would mention maybe also in particular Turkey
where growth is very fast at the moment,
faster even than we expected at the start of the year it appears to have some lags
But Turkey is vulnerable, perhaps more than most of the countries in the region
because of its huge external deficit.
Tt runs this big current account deficit four to five percentage points of GDP per year
and It needs portfolio inflows to continue financing that deficit
and as we see this tightening of global liquidity
and especially because of monetary tightening in the US,
and it's the US dollar aid, which is really the crucial one for Turkey,
that's a risk, and we already see this year
that net FX reserves are declining
because Turkey contracting its capital inflows to finance the deficit.
And if that continues and the deficit is forced to close because there isn't enough financing
that will cause the economy to slow down.
Thanks a lot for you explanations Richard. Thanks for watching.
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