Central Europe Growth Diverging From Baltics

While we have previously called for economic growth in the Baltics to underperform Central Europe in 2014 ( see 'Key Themes For Emerging Europe In 2014', December 12 2013), high frequency economic indicators imply that the divergence between the two regions is widening at a rapid pace in the early stages of the year. This is most prominent in exports and industrial production, pointing to the potential for a more severe Baltic slowdown than we had initially anticipated.

In our view, the Baltic slowdown has been exacerbated by Russia, where we have significantly downgraded our forecasts for domestic demand growth on the back of a deteriorating investment outlook. Not only is Russia an important export market for all three Baltic economies, but also a vital source of traffic and revenue through ports and other transport infrastructure. Exports from Central Europe, on the other hand, are more heavily concentrated in Germany and other eurozone member states, where we see growth picking up in 2014.

What's more, the Baltic economies are heavily integrated with each other in terms of trade and investment, implying a potential for a negative feedback loop whereby a downturn in the region becomes self-reinforcing.

No Sign Of Baltic Turnaround
Europe - Manufacturing Production Volume, % chg y-o-y, 3mma

While we have previously called for economic growth in the Baltics to underperform Central Europe in 2014 ( see 'Key Themes For Emerging Europe In 2014', December 12 2013), high frequency economic indicators imply that the divergence between the two regions is widening at a rapid pace in the early stages of the year. This is most prominent in exports and industrial production, pointing to the potential for a more severe Baltic slowdown than we had initially anticipated.

No Sign Of Baltic Turnaround
Europe - Manufacturing Production Volume, % chg y-o-y, 3mma

In our view, the Baltic slowdown has been exacerbated by Russia, where we have significantly downgraded our forecasts for domestic demand growth on the back of a deteriorating investment outlook. Not only is Russia an important export market for all three Baltic economies, but also a vital source of traffic and revenue through ports and other transport infrastructure. Exports from Central Europe, on the other hand, are more heavily concentrated in Germany and other eurozone member states, where we see growth picking up in 2014.

What's more, the Baltic economies are heavily integrated with each other in terms of trade and investment, implying a potential for a negative feedback loop whereby a downturn in the region becomes self-reinforcing.

Exports Driving Growth In Central Europe
Europe - Goods Exports, % chg y-o-y, 3mma

Economic openness, which measures goods and services exports plus imports as a percentage of GDP, is also significantly higher in the Baltics than in Central Europe, highlighting the prominent risks to growth stemming from a prolonged slump in exports.

Baltics More Exposed To Export Weakness
Europe - Economic Openness

However, some bright spots remain, and we are hesitant to become overly bearish on the back of January readings alone. While heavily integrated with Russia, the Baltics also count the eurozone and Nordic economies as key trading partners, implying that export growth is unlikely to remain in contraction throughout the year. Meanwhile, private consumption remains relatively robust in the Baltics on the back of buoyant wage growth. That being said, the sustainability of domestic demand growth hinges on a rebound in external demand, and if export weakness extends well into H214, we will look to downgrade our growth forecasts.

Read the full article

This article is tagged to:
Related sectors of this article: Economy, Economic Activity
Geography: Europe, Czech Republic, Estonia, Hungary, Lithuania, Latvia, Poland, Slovakia
×

Enter your details to read the full article

By submitting this form you are acknowledging that you have read and understood our Privacy Policy.