Domestic demand to be pillar of growth this year
|Tight labor market conditions support solid growth of private consumption, while the increasing inflow of EU funds should back investment growth. The net exports contribution is likely to be negative in most of the countries except for Slovakia, where the start of production at a new car plant is export-positive.
"What is going to drive GDP growth in CEE this year?"
Croatia: We see growth remaining in largely the same gear as last year, i.e. we only anticipate a few notches' slowdown vs. the 3.0% expected GDP growth rate for 2017. Looking at the growth drivers, the headline figure should continue to receive strong support from domestic demand, though we expect investments to play a role, as the Agrokor restructuring had a one-off negative effect in 2017, and, along with tourism, EU funds should play a more supportive role. The private consumption outlook remains strong; hence, we anticipate only a modest slowdown vs. 2017, mainly owing to some inflation acceleration and lack of one-offs (tax reform in 2017). The external demand outlook also remains bold, amid the EU growth profile and tourism outlook. Net exports are seen remaining modestly in the red, owing to domestic demand-driven pressures on the import side.
Czech Republic: We expect GDP growth to arrive at 3.4% this year, from the approx. 4.4% reached in 2017. The economic development remains favorable, with support from both domestic and foreign demand. Household consumption, supported by the strong labor market, will be the most significant factor, with a contribution at 1.9pp. The contribution of investment expenditures will come in at 1.3pp, due to the economic recovery in the Eurozone and the current lack of free available employees, which forces firms to invest more in robotization. On the other hand, the contribution of net exports will be slightly negative, due to the solid domestic demand and stronger koruna.
Hungary: In Hungary, tight labor market conditions and sustained soaring net real wages should further support internal consumption. The contribution of household spending could be above 3ppt, providing a decisive role in this year's economic performance. Meanwhile, the investment boom should also persist, mainly thanks to EU funds. On the other hand, the contribution of net exports to GDP growth will likely be negative this year, as improving internal demand raises import bills. All in all, we expect the economy to grow by 3.5% annually in 2018. Possible upside risks stem from higher than expected consumption, while any negative change to global demand for vehicle products or an unexpected slowdown in the German economy could negatively affect the prospects for exports.
Poland: We expect GDP growth to arrive at 3.7% in 2018. More than half of the growth (2.5pp) is likely to be created by private consumption, which will remain the pillar of the growth, as in 2017. Robust growth of private consumption will be supported by labor market tightening, mainly solid wage growth. Moreover, with increasing accumulation of EU funds and improving sentiment, the investment contribution is expected to become a positive contributor to GDP growth (1.3pp) this year. General government consumption should remain relatively stable and is expected to contribute positively to the overall growth rate. On the other hand, net exports will remain mostly neutral for GDP growth this year. However, if the robust development of the external environment translates into strong export growth, as was the case last year, there would be space for a positive surprise vs. our current GDP forecast.
Romania: We foresee a slowdown of Romania's economic growth to 4.1% this year, from 7.1% in 2017, as the generous fiscal stimulus wears off and the contribution of agriculture to real GDP becomes smaller. Trade and services will remain at the forefront of economic growth, making a contribution of 2.5-3pp to real GDP. Export-oriented services like road transportation and IT could perform well in 2018, too, as external demand will remain supportive and structural changes in the Romanian economy will favor these sectors, amidst a transfer of know-how and capital from abroad. Industrial production will lose some speed, but this is related mainly to a base effect, after the very strong growth rates seen in 2017. Public investments are surrounded by risks in 2018, because inflows of EU funds associated with large infrastructure and regional projects are still small. Risks to our economic growth forecast are skewed to the upside and are related mainly to a stronger acceleration of investments than we currently envisage.
Serbia: After a disappointing 2017 (SORS estimate at 1.9% y/y, EBC call at 1.8% y/y), we expect to see a gradual pick-up of economic activity, with the GDP growth rate estimated at 2.9% y/y. The strongest support for the growth figure should come from the domestic demand side, as we expect a stable household consumption pattern, somewhat stronger performance of government consumption (e.g. public wages and pensions) and acceleration of investments, private and public. On the other hand, net exports should have a milder negative contribution, as stronger domestic demand will put upward pressure on the import side, while exports should maintain their solid performance, due to the favorable growth outlook of main trading partners.
Slovakia: We expect GDP growth to speed up to 3.9% this year. Domestic demand should be the key driver, mainly via household consumption (+1.6pp contribution), which is benefitting from the ongoing labor market improvement and good consumer sentiment. Investment should also help the growth, amidst the good economic environment, gradual pick-up in EU funds absorption (from the current programming period 2014-20) and private sector investments. Exports are expected to positively contribute to the growth (net exports' contribution: +1.2pp), as they should benefit from the start of production at the new Jaguar Land Rover car plant in the second half of the year and the bright outlook of our Eurozone partners. The risks are mild and mostly balanced: Brexit negotiations and geopolitical tensions on the one hand; faster investment growth and Eurozone growth on the other.
Slovenia: After strong growth acceleration towards the 4.5% region in 2017, we see only a modest cooling down in 2018 and growth remaining close to 4%, i.e. well above the EU28 average. The growth profile should remain fairly familiar, as domestic demand is set to remain in good shape, with the private consumption outlook backed by the labor market trajectory, disposable income trends and consumer confidence. The investment outlook also remains firm, additionally backed by EU funds gaining traction as we advance in the 2014-20 financial perspective. Similar to other peers, the export outlook also looks stable, chiefly due to the main trading partners' growth outlook. Risks to our current view are balanced.
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