In Central Europe, real GDP growth decelerated mildly in Q3 after strong performance in the first half of the year (Figure 1). In H1 2016, year-over-year growth averaged 2.9 % in the CE-4 (Poland, Czech Republic, Slovakia, and Hungary), while GDP changes moderated to 2.4 % in the third quarter. Q3 GDP details are not available at this stage. The growth moderation was likely dominated by weakening investment amid slower rates of EU funds absorption. It seems likely that absorption rates will normalize in coming quarters. The quarterly growth slowdown was also consistent with weaker growth in Germany in Q3 (0.2 % q/q); one of the most important trading partners of the CE-4. Q3 GDP results put moderate downward pressure on current Bloomberg consensus 2016 growth forecasts (Poland: 2.9 %, Hungary: 2.1 %). Presumably, private consumption remained abundant amid tailwind from solid labor market developments, low inflation and yields and positive sentiment.
In Poland, sequential GDP growth decelerated from 0.9 % to 0.2 % (q/q) thereby lowering annual GDP growth to 2.4 % (from 3.1 % previously). Construction activity has slowed markedly in recent months (-20.1 % y/y in October). The Czech Republic also posted Q3 growth behind expectations (0.3 % after 0.9 % q/q in Q2). In annual terms, the change in GDP moderated from 2.6 % to 1.9 %. There was also a slowdown in industrial production (0.3 % y/y) and retail sales (5 % y/y) in Q3. GDP growth will remain below the expansion in 2015 in Hungary and the slowdown was by and large expected. In Q3, real GDP increased by meagre 0.2 % (q/q) and 1.4 % annually after 2.0 % in Q2 2016. The government has accumulated a fiscal reserve due to fiscal discipline in recent years. It is expected to utilize at least a part of the reserve for a stimulus in 2017 countering a further growth slowdown.
Also, Romania’s exceptional GDP growth moderated form 6 % in Q2 to 4.4 % in the last quarter. National elections are scheduled to be held in December. Wage growth (13.5 % y/y in September), retail sales (12.6 % y/y) and sentiment had surged since last year amid fierce fiscal stimulus. Economic growth remained formidable in Bulgaria, where GDP expanded by 3.5 % (y/y) in Q3 after 3.6 % growth in Q2 2016. Bloomberg consensus GDP 2016 forecasts for both countries have upward potential (Romania: 4.7 %, Bulgaria: 2.8 %).
In recent months, the macroeconomic situation improved further in the Ukraine (Figure 2). The Ukraine delivered an upside surprise in Q3 with GDP growth accelerating from 1.4 % to 1.8 % (y/y). There is also slow reform progress. For example, the e-declaration of assets and incomes of 50,000 Ukrainian officials was a milestone for transparency in a notoriously corrupt country. Rating agency Fitch raised its GDP growth forecast to 2.5 % in 2017 and 3 % in 2018.
The recession continued to ease in Russia. In Q3, the year-over-year decline in GDP eased to -0.4 % after a decline of 0.6 % in the previous quarter and a deep recession last year (-3.7 %). Real wage growth continues to recover (2 % y/y in October), while overall disposable incomes kept falling in y/y-terms (-5.9 %) and on average during the last 12 months (-5 %). Meanwhile, the contraction in retail sales has been moderating (-4.4 % y/y), although especially the recovery of consumer spending has been quite slow in recent months (Figure 3). In addition, industrial production has been lagging momentum (-0.1 % y/y in October). The monthly data indicates slow advance after the economic contraction.