Estonia released fourth quarter GDP data on Friday – and the news wasn’t good. The economy grew 4 per cent year-on-year, down from 8 per cent in the previous quarter and its slowest pace in one and a half years.
With a raft of data due next week, how will other economies in emerging Europe fare? According to Capital Economics, both the Czech Republic and Hungary have real reason to worry – with the Czech Republic likely to be the first country in the region to fall back into recession.
William Jackson, analyst at Capital Economics, notes that as one of the most open economies in eastern Europe, the Czech Republic was among the hardest hit by a slump in euro-zone demand at the end of last year. Jackson writes:
The EC’s Economic Sentiment Indicator (ESI) suggests that GDP contracted by around 1 per cent y/y in Q4. We think this probably overstates the extent of the slowdown. After all, monthly activity data suggest that output is not yet contracting in y/y terms and a weighted average of exports, retail sales and industrial production points towards more moderate GDP growth of around 0.5 per cent y/y in Q4, down from 1.2 per cent y/y in Q3. Nonetheless, this would still be equivalent to a contraction of 0.2 per cent over the quarter which, coming on the back of a 0.1 per cent q/q fall in GDP in Q3, would make the Czech economy the first in Emerging Europe to slip back into a technical recession.
The ESI suggests the Hungarian economy also contracted by around 1 per cent year on year. Jackson reckons that here, too, the survey data exaggerate the downturn because of negative news at home and abroad towards the end of 2011. Nonetheless, monthly activity figures suggest a sharp fourth quarter contraction of around 0.8 per cent.
And looking to the future, it gets worse still for both economies:
The big question is whether these data will mark the beginning or the end of the worst. A general improvement in January’s survey data, notably the PMIs, point towards a pick-up in activity at the start of Q1. Nonetheless, we think it would be premature to suggest that the region’s prospects have turned the corner. In fact, not all the survey results have improved – the ESIs have worsened in the CzechRepublic and Hungary, suggesting that Q4’s data may be the brink of a deeper recession, particularly in Hungary.
Estonia’s 4 per cent growth came in well behind the 6.1 per cent consensus of analysts surveyed by Bloomberg. That’s particularly disappointing because the Baltic nation was the European Union’s fastest grower in the EU over the whole of 2011 – with its GDP rising 7.5 per cent. Meanwhile, Lithuania posted its first GDP slowdown in more than a year in the fourth quarter, contracting 0.9 percent from the previous three months.
“The cycle seems to have turned [in Estonia],” Annika Lindblad, an economist with Nordea AB in Helsinki, told Bloomberg. “We expect the weak economic environment to continue weighing on growth, especially in the first half of 2012, as export demand remains weak and the uncertainty in the euro area and the weakening economy weigh on confidence.”
Capital Economics echoes that bearish sentiment, arguing that if, as it expects, the euro is further called into question, there may be even worse to come in emerging Europe. Jackson concludes:
Against this backdrop, the growth outlook for Emerging Europe is challenging, to say the least. Our forecasts for growth (or otherwise) remain well below consensus.
http://blogs.ft.com/beyond-brics/2012/02/10/recession-looming-over-cee/#ixzz1m5MG3IsX
Keyur Patel
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