2013: a year of readjustment and renewing commitments to sustainable growth for SEE

By Hilary Walsh, Economy, Finance and Trade Manager at Euromonitor International

Hilary Walsh

The global economic slowdown of 2012 was far sharper than expected and its impact on the economies of Southeast Europe turned the spotlight on the region’s structural weaknesses whilst also exacerbating the effects of the eurozone debt crisis. For these economies, 2013 is a year of readjustment and renewing commitments to creating robust and sustainable economic growth, an approach which is forecast to result in more promising rates of real output in 2014.

Key points

  •  Moldova, Turkey, Kosovo, Macedonia, Serbia, Albania, Romania, Montenegro, Bulgaria, Bosnia and Herzegovina, Croatia, Slovenia and Greece make up the key SEE economies. Five of these are already EU members, while “the Balkan 6” (Serbia, Albania, Kosovo, Macedonia, Montenegro and Bosnia-Herzegovina) and Turkey, are in the candidate process for membership;
  • The residual effects of the eurozone debt crisis are the key downside risks that these countries are exposed to. However, structural issues such as high unemployment rates, unsustainable public debt and deficit levels, weak business environments and poor consumer confidence levels are also hindering overall macroeconomic prospects in Southeast Europe;
  • Average regional growth in SEE or “emerging Europe” is expected to increase from -0.6% in 2012 to 1.0% real GDP growth in 2013 before growing by 2.3% in 2014;
  • In this group, it is the EU members who are the worst affected, countries such as Croatia, Greece and Slovenia still struggling with deep recessions, unstable financial systems and lack of privatisation dragging on potential investment levels;
  • By 2020, the regional average real GDP growth of Southeast Europe will be 3.5%, up from just 1.0% in 2013, while the EU average in 2020 will still be just 1.9%. Average regional growth in Southeast Europe is expected to increase from -0.6% in 2012 to 1.0% real GDP growth in 2013 before growing by 2.3% in 2014. While these growth rates pale in significance when compared to the growth rates seen in Asia-Pacific and Africa and the Middle East, emerging Europe’s main competitors, the increase in output growth forecast between 2012 and 2014 says a lot about the overall prospects for the region in the long term. Moldova is forecast to be the fastest growing
  • economy in SEE in 2013 and the third fastest growing in 2014, with 4.0% real GDP growth expected both years. The economy contracted in 2012 thanks to a prolonged drought which impacted key agricultural exports but these have since rebounded healthily with remittances and industrial activity also boosted. Inflation in the country also slowed from 7.7% in 2011 to 4.7% in 2012 and an estimated 4.6% price growth is expected in 2013 which will continue to take the pressure off consumers’ real incomes, hence fuelling consumer expenditure which is forecast to grow by 4.8% in Moldova in real terms in 2013, the biggest increase in consumption in the region;

Real gdp growth

  • In 2014, Turkey is expected to be the fastest growing economy in Southeast Europe, as well as the entire European region. Despite this the country is still struggling with unemployment and constrained capacity. Turkey is a highly open economy but this creates vulnerabilities in terms of weak demand from external markets and capital outflows which have been an ongoing issue since the global financial crisis of 2008-2009 and were made worse by the eurozone debt crisis. FDI inflows shrank by 23.9% in US dollar terms in 2012 but this should reverse in 2014 at least, if not sooner;
  • Kosovo is expected to grow by 2.9% in real terms in 2013 before expanding by a further 4.3% in 2014. Kosovo has proven to be one of the most resilient economies in Southeast Europe since 2008, with real GDP growth averaging 3.4% a year in real terms. One of the “Balkan 6”, the next group of countries hoping to accede to the EU over the next decade, Kosovo was lucky in that it had very little exposure to the eurozone debt crisis. Kosovo is on a formal path to EU membership at the moment and so is doing its best to keep public debt as a percentage of GDP and government deficits as low as possible whilst also trying to stimulate domestic demand and resolve the issue of high unemployment, which stood at 48.3% in 2012; Serbia is set to see one of the biggest changes
  • in fortune in 2013, going from real growth of -0.8% in 2012 to 2.0% in 2013. The country’s industrial production index is still below 2005 levels in 2013, thanks mainly to supply bottlenecks while unemployment is high at 16.9%. However, this stagnation is showing signs of receding as inflation levels ease and its automotive exports boost growth prospects. The country’s proximity to Croatia will also be a boon to the Serbian economy which, in turn, will also help the Serbian EU accession process in the mid to long-term. Whilst some of the emerging SEE economies are already starting to come out of the other side of the slowdown caused by the eurozone debt crisis, some are still struggling with deep recessions, unstable financial systems and lack of privatisation dragging on potential investment levels. In this group, it is the EU members who are the worst affected.
  • The newest member of the EU, Croatia, is forecast to shrink in 2013 by 0.7% in real terms but this is an improvement on the 2012 figure of -2.0%. Despite the prospect of EU accession, economic conditions have actually deteriorated since the eurozone debt crisis began. Business and consumer confidence levels are low and the fiscal consolidation programme put in place to prepare the country for EU membership has suppressed growth. However, this consolidation needs to continue for now as in the long run, sustainable debt levels will be more conducive to higher growth rates and definitive structural changes;
  • Slovenia is a current EU member, since 2004, and like Croatia, it’s also suffering from the effects of the eurozone debt crisis, high debt levels and poor investor confidence. However, in 2013 Slovenia is taking major steps forward to stabilise the economy and foster real economic growth. The deep recession in Slovenia means there has been speculation that it may be the next EU member to need a bailout and as such, the country has embarked on a spate of long overdue privatisations to reduce the government’s influence on industry and services as well as improving the overall business environment;

Industrial production index in selected SEE economies in 2013

  • Another EU member, Greece, the only SEE economy to be considered a developed economy, is also stuck in a deep recession. Greece’s economic problems are well documented and while the forecast for 2013 and 2014 is for the economy to keep contracting, the size of the contractions is getting smaller and Euromonitor International is forecasting the country to return to positive growth in 2015, with 3.8% real growth expected, it’s first real economic expansion since 2007;
  • Of all the EU members in SEE discussed here, Bulgaria is the only one that has seen moderate positive growth over the last year. However, unemployment is still too high at 12.6% while bank nonperforming loans to total gross loans are expected to reach a record high of 17.2% in 2013. The good news for Bulgaria is that inflation has declined and is expected to stay low while exports are recovering to above their pre-crisis levels

 

Prospects:

The overall macroeconomic outlook for this region in 2013 is still relatively poor but in the mid to long term it does look more promising. It’s easy to forget how far these countries have come in the last twenty years in terms of economic and political stability so challenges associated with opening up to trade, increasing productivity, developing social safety nets and generally building credible institutions are to be expected.

Industrial production index in selected SEE economies in 2013

  • By 2020, the regional average real GDP growth of Southeast Europe will be 3.5% while the EU average will still be just 1.9%, according to Euromonitor International. Economic adjustment will continue briskly as the recovery in Southeast Europe gradually gathers pace;
  • The next few years will see these countries, particularly the “Balkan 6” gaining greater access to the free market in preparation for EU accession whilst also building on their fiscal achievements to ensure macroeconomic stability, strong business environments and rising consumer incomes.

p77 Real GDP growth & inflation vs. bank non-performing loans in SEE in 2013