Euro-Zone Recovery Powers Economic Revival in Most Countries
The club of emerging European economies expanded, as Morgan Stanley Capital International (MSCI) moved Greece from developed to the status of an emerging economy. The majority of the countries covered in this review, including the new entrant, had something to look up to in the New Year.
Despite falling consumption levels, Russia, the biggest economy in the region, had some positive news towards the end of the year, including a renewed focus on introducing reforms. Turkey, which had a respectable first-half of 2013, tumbled in the second half due to domestic turbulence and the government’s alleged move to influence the probe of a corruption scandal. However, according to Turkey’s government, a recovery in the Euro-zone would attract more foreign direct investment, which could help the economy achieve 4 percent growth in 2014. Notwithstanding high unemployment, Poland’s economy benefited from domestic demand and the nascent recovery in the single currency zone.
The small, open economy of the Czech Republic continued to move ahead after emerging from a recession in the second quarter of 2013. Besides growth in industrial production and an uptick in its main export market, Germany, Czech exports also benefited from the central bank’s intervention that weakened the Czech crown. Hungary, too, benefited from growth in the manufacturing sector and the accommodative policy of the central bank. The Greek economy is forecasted to grow for the first time in 2014 after six long years of recession, thanks to the progress it made in reducing its budget deficit and the falling yields on its 10-year bonds. Moreover, the coalition government of Samaras has successfully managed to improve its tax-collection system and health care spending.
At a Glance
Russia: President Putin acknowledged that domestic policy failures are to be blamed for the economy’s plight. Low labor productivity and poor investment are the factors that have hindered the country’s economic growth, Putin said.
Turkey: Turkey‘s finance minister said he sees slow, modest growth for the first half of 2014. Mehmet Simsek added that the recovery in the Euro-zone could help increase foreign direct investment and help the economy achieve 4 percent growth this year.
Poland: The economy has benefited from the nascent recovery in the currency union. The overall manufacturing index for the fourth quarter showed a reading of 53.6, the highest level since the first quarter of 2011. Still, Poland’s soaring public debt continues to be a cause of concern.
Czech Republic: After a prolonged phase of recession which ended in the second quarter of 2013, the economy is showing signs of a gradual pick-up. Manufacturing activity picked up, while the central bank’s weakening of the crown gave a boost to exports.
Hungary: The increase in manufacturing activity in recent months has been a definite positive for the Hungarian economy, which has been reeling under contraction for several quarters now. Meanwhile, the Hungarian central bank said it could cut interest rates further to 2.5 percent if it would help boost economic growth.
Greece: Greece managed to close its budget deficit and even projected a surplus for the year. Manufacturing output continued to show an increase in December for the second consecutive month, though it still stopped short of the 50 percent mark that separates expansion from contraction.
Russia: Reforms back on the agenda
Though much has been said about the need for the Russian economy to diversify away from its traditional oil and gas base, the country emerged as the world’s top oil producer for 2013. Increasing exports to China and high energy prices helped the country maintain its budget, which has been overstretched due to social spending and the massive $50 billion allocation for the 2014 Sochi Winter Olympics. Still, the country’s foreign exchange reserves of $500 billion alone cannot be counted on forever. While the Russian economy is likely to remain dependent on oil for years to come, the higher price of oil alone will not necessarily ensure the fast growth enjoyed over the last decade will persist, as that model of growth seems to have mostly run its course.
Still, Russia’s economic expansion dwindled to a trickle during the year, compared to the 3.4 percent growth in 2012. But the silver lining in the dark cloud was President Putin’s unexpected acknowledgement that domestic policy failures have been to blame for the economy’s plight. In particular, the president mentioned low labor productivity and a poor investment climate as factors that have hindered economic growth. On the investment front, Russia’s problems are nothing new. The country continues to grapple with a declining level of confidence among investors, businesses, and consumers as corruption remains endemic and bureaucratic red-tape all-pervasive. To put things in perspective, fixed investment was down 1.8 percent year-on-year in the first 10 months of 2013 compared to growth of 9.1 percent in the corresponding period a year ago. The more damaging fallout is that Russian businesses have been hindered by low investment in equipment and technology, which has resulted in reduced manufacturing output. Relatively high wages also have eroded the competitiveness of Russian firms. Since firms are deterred by the uncertain business climate, many of them repatriated their savings abroad, which The Economist puts at $48.2 billion in the first three quarters of 2013. To make matters worse, even government-sponsored investment seems to have run out of steam as the Winter Olympics gets under way.
It remains to be seen how much of the commitment to reform will translate into action, yet the very fact that the reform agenda has got some mention bodes well for the economy. Encouragingly, Russia managed to move up 19 positions in the World Bank’s 2013 ranking of countries based on the ease of doing business, a better performance compared to its fellow BRIC peers.
For an economy which barely managed to grow during the year, unemployment continued to remain low at around 5 percent. Combined with wage growth, this has fanned inflation, which is close to 6.6 percent annualized and above the upper limit of 6 percent set by the government for 2013. However, the Russian central bank said it expects inflation to come down in the first half of 2014. Private consumption, which was the engine of growth in 2013, is beginning to taper off as consumers start to repay household borrowings that have increased by 40 percent a year for the last two years. Consumption, after all, is viewed as a reflection of the general health of the economy. While the central bank is opposed to a rate cut, it appears that Russia’s Economy Ministry views this move as the only option to lift the country’s economy from its current slump, according to a write-up in the Financial Times.
Turkey: Corruption scandal casts a cloud
The economy continued to face issues such as slowing growth, a current account deficit, and over-reliance on capital inflows during the fourth quarter. However, Turkey’s faring in 2013 was much better than its performance in the previous year when the economy could grow only 2.2 percent. As the European Bank for Reconstruction and Development (EBRD) pointed out, growth during the first half of 2013 was driven mostly by domestic demand, helped by monetary easing and a surge in spending by the government.
However, the second half of the year witnessed a reversal of fortune for the economy due to domestic disturbances, which culminated in a probe into an alleged corruption scandal involving some of Turkey’s political elite. The Erdogan administration’s move to interfere in the legal process complicated matters further, drawing sharp comments from some of Turkey’s leading entrepreneurs and business leaders. With this, the Turkish lira declined versus the U.S. dollar towards the end of the fourth quarter, reviving talks about the need to hike interest rates to defend the currency. The prospect of the U.S. Federal Reserve’s impending tapering of its bond-buying program led to some capital outflows from Turkey though the market stabilized as the Fed delayed its decision.
On a positive note, Turkey signed an agreement in December in Brussels, which will ease visa requirements for Turkish citizens traveling to the European Union. The move is widely seen as a step forward in Turkey’s long-standing demand to be included in the 28-nation bloc.
While Turkey’s finance minister Mehmet Simsek has commented to the Financial Times that he sees slow, modest growth for the first half of 2014, he feels the recovery in the Euro-zone could help increase foreign direct investment, and help the economy achieve 4 percent growth this year. Still, the EBRD’s forecast for Turkey’s economic growth is a modest 3.6 percent for 2014, based upon the projection of the country’s large current account deficit and the economy’s reliance on volatile portfolio capital flows to bridge this deficit. Turkey has come down a long way from the 9 percent growth scenario enjoyed in 2010 and 2011. External factors such as expensive oil and gas imports are clearly beyond the economy’s control, but simple measures such as ensuring the rule of law and a willingness to raise interest rates may go a long way to raise Turkey’s standing in investors’ eyes.
Poland: 2014 outlook optimistic
The economies of Central Europe continued to depend on export demand from the Euro-zone, especially Germany. Poland, the biggest economy in the region, has benefited from the nascent recovery in the currency union, which began in the second half of 2013. Though manufacturing activity slowed a bit in December compared to the previous month, the overall manufacturing index for the fourth quarter of 2013 showed a reading of 53.6, the highest level since the first quarter of 2011. Moreover, strong domestic demand, reflected in the 7.2 percent year-on-year increase in November retail sales, helped the economy grow 1.9 percent in the third quarter. As Poland moves into recovery mode, the government hopes the economy will expand 2.5 percent in 2014. The World Bank too seems optimistic about Poland, which it sees growing by 2.8 percent this year, while the European Bank for Reconstruction and Development has forecast 2.3 percent growth in 2014.
Meanwhile, the central bank has had its eye on the slowing course of Poland’s economic growth in 2013, compared to 2012 when it had raised rates to stamp out inflation. The bank cut interest rates to a low of 2.5 percent as the economy slowed and inflation eased, a decision that it left unchanged in its latest review. The central bank also observed that a possible tapering in the U.S. Fed’s bond-buying program has been factored in by the markets and that any effect on the Polish bonds and the currency zloty will be limited.
Nevertheless, Poland’s soaring public debt, which stands at 55 percent of its gross domestic product, continues to be a cause of concern. In September, the Donald Tusk administration had initiated steps to transfer Polish government bonds held by private pension funds to the government pension scheme. Polish President Bronislaw Komorowski recently gave his nod to the legislation, which proposes to bring down public debt and strengthen the country’s public finances. Meanwhile, revenues from privatization of government-owned entities totaled 87 percent of the targeted amount for 2013, a positive contribution to the country’s coffers. According to a directive from the European Union, Poland has to bring its deficit below 3 percent of GDP by 2015.
Notwithstanding these positive indicators, Poland’s unemployment situation does not offer signs of hope for 2014. According to a projection by the Polish Human Resources Association, the country’s unemployment rate is likely to exceed 14 percent this year, raising concern especially given the fact that 50 percent of the unemployed are under the age of 34.
Czech Republic: Economy on the mend
After a prolonged phase of recession which ended in the second quarter of 2013, the Czech economy is showing signs of a gradual pick-up.Manufacturing activity clocked 55.4 in November, the highest level recorded since May 2011. Industrial output increased 6.2 percent annually compared to 3.5 percent the previous month, helped by the rise in domestic and export demand. Overall, the central European economies have benefited from the recovery in Germany, the region’s biggest export market. As well, Czechs may have to thank their central bank, which intervened in November to weaken the Czech crown, boosting exports.
Nevertheless, the country’s dominant automotive industry feels that the weak foreign-exchange rate may help only small exporters, not the big ones. The bank’s move was aimed at averting deflation and to support the economy, which seems to have borne fruit as consumer prices rose in December. The Czech central bank also decided to keep the interest rate near zero at their December meeting. The Czech economy, worth about $196 billion, shrunk 1.2 percent in the third quarter from the year-ago period as investment and exports fell amid political uncertainty.
The central bank’s monetary intervention was positively reflected in Czech retail sales, which increased by 6.1 percent in November, the highest rise since January 2011. Sales of cars dominated the purchases made by consumers, followed by the sales of non-food items.
Besides external factors such as weak exports and the impact from the austerity measures being implemented, the Czech economy was also affected by a political stalemate after the then Prime Minister Petr Necas resigned in June 2013 following a bribery scandal. With President Milos Zeman announcing he is going to appoint a new prime minister, the small, export-oriented economy seems to have come out of the situation.
Still, the rise in the country’s unemployment rate to 8.2 percent in December compared to 7.7 percent in the previous month showed that the economy’s problems are far from over despite the recent improvements. The job market is likely to improve as the mostly export-oriented domestic car production industry is seen to rebound in 2014 in the face of a recovery in the European market.
Hungary: Economic indicators point to a mild recovery
The increase in manufacturing activity in recent months has been a definite positive for the Hungarian economy, which has been reeling under contraction for several quarters now. Hungary recorded a reading of 52.6 points in November, though the PMI reading fell to 50.2 points in December. Production volumes and new orders increased on a month-on-month basis, while employment, imports, and exports also showed a rise. Still, the economy managed to expand 0.8 percent in the third quarter after emerging from a recession in the second quarter.
The Viktor Orban administration has come under fire for implementing a slew of measures, which included a high bank tax and new levies on energy and telecom firms. The government is now focusing on the export-oriented automobile manufacturing sector, as contribution from this industry segment is crucial for a turnaround in the economy.
Meanwhile, the Hungarian central bank said it could cut interest rates further to 2.5 percent if it would help boost economic growth. Thanks to the U.S. Federal Reserve’s bond-buying program, Hungary has seen good capital inflows into its bonds, which enabled the central bank to cut its base rate from 7 percent to 3 percent in August 2012 to fast-track growth in this central European economy. However, the bank said it does not foresee deflationary risks in the economy and projects inflation of 1.3 percent for 2014 and 2.8 percent for the year after. The central bank has played an active role in reviving economic growth in Hungary as it reduced borrowing costs and introduced a $12 billion stimulus program to roll out loans to small and medium-sized businesses.
In December, rating agency Fitch affirmed Hungary’s sovereign ratings. Fitch said the fiscal disciplinary measures followed by the government, steps taken to facilitate supply of credit to SMEs, and strong growth in Hungary’s EU trading partners would add to GDP growth in 2014-15. The agency said it expects Hungary to post current-account surpluses, thanks to the rebound in exports and private sector deleveraging.
With most economic indicators pointing to a mild recovery, it did not come as a surprise that Hungary’s economic-sentiment index clocked its best reading in more than 11 years as consumers and businesses grow more confident. While business confidence was driven by the services and retail sectors, consumers were buoyed by a reduction in household energy prices.
Greece: On the road to recovery
As in the previous quarter, the southern European economy continued to show stronger signs of an impending recovery during the fourth quarter. First of all, Greece managed to close its budget deficit and even projected a surplus for the year 2014. The budget also envisions $4.2 billion in spending cuts for the year.
However, the troika -- the European Central Bank, the European Commission, and the International Monetary Fund -- is yet to approve the budget, which proposes a €2.96 billion surplus in 2014, before debt repayments. The troika team is scheduled to visit Athens in January to consider the release of the latest $1.73 billion international loan tranche. The 10-year bond yields, a proxy for its borrowing costs, came down to below 8 percent from a whopping 40 percent not so long ago. What’s more, the government feels confident that it can issue fresh debt some time later this year.
Manufacturing output continued to show an increase in December for the second consecutive month, though it still stopped short of the 50 percent mark that separates expansion from contraction. Greece even made some handsome gains in tourism revenues, thanks partly to the problems in Tunisia and Egypt. To cap it all, the economy is forecasted to grow for the first time this year after six long years of recession. The new-found optimism was also echoed in the words of Greek Prime Minister Antonis Samaras, who said the country would exit the IMF-EU bailout agreement as scheduled in 2014.
In another sign of increasing consumer confidence, bank deposits showed a rise in November after declining for five months. Greek households have been dipping into their savings to meet their expenses as fiscal austerity measures and high unemployment take a toll on the economy. Still, private sector credit continued to shrink during November as high real interest rates -- 7.5 percent in October -- deterred the demand for credit from both businesses and citizens.
Meanwhile, consumer prices decreased 1.7 percent year-on-year in December after falling 2.9 percent in November, as October’s 27.8 percent record-high unemployment and wage cuts bite. While deflation is being viewed by the EU-IMF as beneficial to the beleaguered Greek consumer, the Organization for Economic Co-operation and Development (OECD) has warned that the fall in prices could undermine Greece’s economic growth and increase its debt-to-GDP ratio.
Yet, the problems of the economy are not just skin-deep. Structural reforms are the need of the hour. Still, the shaky ruling coalition has taken baby steps in this regard by improving the tax-collection system and health care spending.
FORWARD LOOKING STATEMENTS
Certain statements made in this article may be forward looking. Actual future results or occurrences may differ significantly from those anticipated in any forward looking statements due to numerous factors. Thomas White International, Ltd. undertakes no responsibility to update publicly or revise any forward looking statements.
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