Research Dept. News
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Monthly Report, num 357 - May 2012
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European Union - Emerging Europe
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Emerging Europe: a complicated 2012 will give way to a more positive 2013
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Emerging Europe is affected by the euro area's recession and the debt crisis in 2012.
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At this stage of the year, it seems evident that 2012 will be a complicated year in emerging Europe and we cannot rule out the possibility of things getting even worse. If this doesn't happen, 2013 should be a more dynamic year in this geographical region. Given emerging Europe's strong commercial and financial integration with the euro area, the macroeconomic scenario we predict depends largely on how the single currency markets fare. In particular, on the extent of the recession in the euro area and how the sovereign debt crisis develops. The forecasts presented below are based on a scenario for the euro area that combines a year of minimal recession in 2012 with a tenuous recovery in 2013 and a situation of containment and very slow improvement in the financial tensions caused by the debt crisis.
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Poland enjoys solid domestic demand.
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Nonetheless, these two external developments do not determine, by themselves, economic development at a national level. Two strictly domestic factors are relevant in order to establish the economic scenario. Firstly, the macroeconomic imbalances facing each country since, if these are large, the country will have less leeway to soften the effects caused by poor growth in the euro area in terms of activity. The second relevant domestic element is the pattern of growth experienced in 2009-2011. Here the main factor is the role played by domestic demand in economic recovery prior to the current stage of a decline in activity since, if this has maintained an appreciable rate of growth, the country in question will be in a condition to disassociate its cycle further from that of the euro area.
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In each of the countries we normally cover in this report, namely Poland, Hungary, the Czech Republic, Slovakia and Romania, the aforementioned factors are combined in different ways. We will start this country by country analysis with Poland. This is an economy that combines a relatively small degree of dependence on exports to the euro area, contained internal imbalances (the only concern being the level of public debt, in the order of 50% of GDP in 2011) and a domestic demand that has proved to be notably robust. This should help it handle 2012 and 2013 without too much difficulty, years in which we expect growth in the region of 2.5% and 3.4%, respectively.
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The Czech Republic and Slovakia, which are highly dependent on the euro area in commercial and financial terms, will hardly grow in 2012.
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Based on the most beneficial combination for the region, namely that of the Polish economy, we can deduce other, less satisfactory situations. The Czech Republic, for example, has a clear absence of imbalances (in fact, it has an even better balance than Poland) but because of its strong connection via exports and finance (due to bank links with Austria and other countries in the euro area) and the weakness of its domestic demand, we expect activity to be at a minimum in 2012 (0.4% growth in GDP), exiting this with gentle expansion in 2013 (growth of 2.2%). We expect a similar scenario for Slovakia. Markedly in synch with Germany's investment and consumer durable cycle, 2012 will be a year of low growth. Nonetheless, a relatively positive outlook in terms of attracting foreign investment and a certain lassitude in economic policy management should help 2012 to be more dynamic than for its Czech neighbour. In 2013, the growth forecast for Slovakia is practically identical to that for the Czech Republic.
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In Romania and Hungary, rigorous budget policies limit the extent to which their economies can recover.
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Romania, for its part, has a relatively more complicated situation. Following the path of the economic adjustment programme set by multilateral institutions in order to secure financial aid, domestic demand has been contained. Nonetheless, a larger harvest than usual in 2011 has led to a better second half of the year than expected. Now, in 2012, the difficulty in repeating such an exceptional agricultural result, an economic policy with hardly any room to manoeuvre to offset the decline in exports and a close connection with Greece at a financial and commercial level justify the moderate growth forecast for the year, in the area of 1%. Nonetheless, as the environment improves, we expect the Romanian economy to embark on a path of more dynamic activity in 2013 (growth forecast of 2.2%).
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The region will grow again in 2013, although to a relatively limited extent.
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Lastly, the situation of Hungary is still the most uncertain of the region. Our main scenario has been produced based on the premise that the Hungarian government will end up making the fiscal shift towards austerity demanded by EU institutions. This change, together with other adjustments in economic policy, will help to secure international financial aid from the International Monetary Fund and the European Union. As a result of the adjustment policy and given the country's heavy dependence on the euro area in terms of finance and exports, we expect the Hungarian economy to shrink in 2012 by 0.4%. Maintaining the policy of austerity, together with the slow process of reducing debt being carried out by households, firms and the government, will enable a return to positive growth, albeit little higher than 1%.
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