20160711-NATIXIS-Fifty_shades_of_growth_in_the_Central_and_Eastern_Europe_20页_1mb

50 Shades of Growth in Central and Eastern Europe

Core Content

The economies of Central and Eastern Europe (CEE) exhibit a wide range of growth profiles and risk factors, shaped by both domestic policies and external conditions. The region is broadly divided into countries with strong growth, those facing political uncertainties, and those in deep recession. The analysis covers the Czech Republic, Hungary, Poland, Russia, and Turkey, highlighting their distinct economic and political dynamics.

Main Countries and Their Growth Profiles

Czech Republic, Hungary, and Poland

• Above-potential growth: These countries have experienced strong GDP growth driven by low energy prices, favorable fiscal policies, and EU funding.
• Export dependency: All three are heavily reliant on exports, which are supported by the growth of their EU trade partners.
• Domestic demand: Private consumption is bolstered by weak inflation and improved purchasing power.
• EU funds: The new 2014-2020 EU funds program is expected to provide a boost to investment in the coming years, although absorption of funds has declined in recent quarters.
• Political risks: Euroscepticism is on the rise, potentially influenced by Brexit. Legislative elections in 2017 and 2018 may further reshape political landscapes.
• Fiscal stimulus: Countries have used fiscal measures to support growth, but this comes at the expense of budget discipline.
• Currency depreciation: Helps with export competitiveness and net export contributions, but raises concerns about foreign-currency debt.

Turkey

• Consumer-led growth: Strong private consumption growth is supported by low energy prices and milder inflation.
• Political uncertainty: President Erdoğan's political ambitions and geopolitical risks (e.g., Syrian conflict, Kurdish issue) create a volatile environment.
• Export sector: Tourism and services are key contributors to the economy, but Russian sanctions have impacted these areas.
• Fiscal and monetary policy: The Central Bank has cut interest rates, while fiscal stimulus has helped maintain growth.
• Risk factors: Despite some improvements, geopolitical tensions and internal security threats continue to weigh on economic activity and investor confidence.

Russia

• Economic contraction: The country faces a recession due to oil price slumps and geopolitical tensions, including sanctions.
• Inflation and currency depreciation: Inflation reached 15.6% in 2015, while the RUB depreciated significantly, helping to amortize the impact of external shocks.
• Net exports: Helped offset the decline in consumption and investment, leading to a moderate GDP contraction of -3.7% in 2015.
• Industrial output: Suffered a limited decline of -3.4% in 2015, due to import substitution and countersanctions.
• External debt: Decreased by USD 77bln in 2015, but the external debt-to-GDP ratio remains a concern.
• FX reserves: Still abundant, providing a buffer for currency interventions and import coverage.
• Political stability: President Putin maintains high popularity despite economic difficulties, and the ruling party (United Russia) may lose its absolute majority in the upcoming legislative elections.

Brexit Impact

• Marginal effect: While Brexit may affect high-value-added exports in the Czech Republic and Hungary, and labor-intensive sectors in Poland and Turkey, the overall impact is considered minor compared to the EU-wide slowdown.
• EU funding: The UK's contribution to EU funds could affect the availability of support for CEE economies.
• Currency and debt: The weakness of the zloty and foreign-currency debt may be further amplified by Brexit-related uncertainties.

Key Risks

• Economic risks: All countries face risks from external shocks, geopolitical tensions, and fiscal imbalances.
• Political risks: Eurosceptic movements, political instability, and government policy shifts could disrupt economic growth.
• Financial risks: Capital outflows, currency volatility, and debt sustainability are major concerns, especially in Russia and Turkey.

Summary of Growth Drivers and Constraints

Conclusion

The CEE region is marked by divergent growth trajectories and varied risk exposures. While some countries benefit from EU support, cheap energy, and domestic demand, others face political instability, geopolitical challenges, and economic contraction. The Brexit is expected to have a limited impact on the region, but long-term risks remain, especially for Russia and Turkey, due to external dependencies, sanctions, and fiscal imbalances. The Czech Republic, Hungary, and Poland are likely to maintain growth, albeit with increased vulnerabilities.