9
1 Economic Outlook Our publications are available online at www.kbc.be/economicoutlook/. If you have any questions relating to the contents of this publication, contact: Dieter Guffens (32) (0)2 429.62.87 E-mail: dieter.guffens@kb c.be Publisher: Johan Van Gompel, Havenlaan 2, 1080 Brussel Address for correspondence & subscription management: KBC Groep NV, GCE, Havenlaan 2, 1080 Brussel. E-mail: [email protected] This publication is jointly produced by KBC’s economists in Belgium and Central Europe. Neither the degree to which the hypotheses, risks and forecasts contained in this report reflec t market expectations, nor their effective chances of realisation can be guaranteed. The forecasts are indicative. The information contained in this publication is gen- eral in nature and for information purposes only. It may not be considered as investment advice according to the Act of 6 April 1995 on the secondary markets, the legal status and supervision of investment companies, intermediaries and investment advisers. KBC cannot be held responsible for the accurac y or completeness of this information. All historical rates/prices, statistics and graphs are up to date, up to and including 25 June 2013, unless otherwise stated. The views and forecasts provided are those prevailing on 20 June 2013. Central Europe • Fragile recovery in the cards • Czech floods in the spotlight • Hungary exits from EDP procedure Poland narrowly escapes recession • Economic prospects worsen in Slovakia • In the spotlight: Poland ready to join euro, but are the Poles? Real GDP growth Inflation 2013 2014 2013 2014 Poland 1.1 2.3 1.1 1.9 Czech Republic -0.7 1.7 1.8 1.6 Hungary 0.3 1.5 2.3 3.2 Slovakia 0.5 1.5 1.5 1.5 Bulgaria 1.6 2.6 2.5 2.9 Russia 2.8 3.4 6.0 5.1 Turkey 4.1 4.7 6.6 6.4 Policy rates 25-06-2013 +3m +6m +12m Poland 2.75 2.50 2.50 2.50 Czech Republic 0.05 0.05 0.05 0.05 Hungary 4. 25 4.00 3.75 3.75 Slovakia (ECB) 0.50 0.50 0.50 0.50 Romania 5.25 5.25 5.25 5.25 Bulgaria - - - - Russia 8.25 8.25 8.25 8. 25 Turkey 4.50 4.50 5.00 5.00 Exchange rates 25-06-2013 +3m +6m +12m PLN per EUR 4.31 4.20 4.15 4.10 CZK per EUR 25.77 25.70 25.50 24.90 HUF per EUR 296.71 295.00 30 0.00 305.00 RON per EUR 4.51 4.35 4.35 4.35 BGN per EUR 1.96 1.96 1.96 1.96 RUB per EUR 42.96 42.50 42.00 41.50 TRY per EUR 2.55 2.50 2.50 2.50 10-year rates 25-06-2013 +3m +6m +12m Poland 4.45 3.30 3.30 3.50 Czech Republic 2.52 1.90 2.05 2.35 Hungar y 6.75 5.75 5.75 5.75 Slovakia 2.77 2.40 2.50 3.00 Romania - - - - Bulgaria - - - - Russia 8. 14 7 .80 7 .60 7 .50 Turkey 8.59 7.80 8.00 8.30 June 2013

Economische Vooruitzichten Centraal-Europa - juni 2013

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1

Economic Outlook

Our publications are available online at

www.kbc.be/economicoutlook/.

If you have any questions relating to the contents of this publication, contact: Dieter Guffens

(32) (0)2 429.62.87 E-mail: dieter.guffens@kb c.bePublisher: Johan Van Gompel, Havenlaan 2, 1080 BrusselAddress for correspondence & subscription management: KBC Groep NV, GCE, Havenlaan 2, 1080 Brussel.E-mail: [email protected] publication is jointly produced by KBC’s economists in Belgium and Central Europe. Neither the degree to whichthe hypotheses, risks and forecasts contained in this report reflec t market expectations, nor their effective chancesof realisation can be guaranteed. The forecasts are indicative. The information contained in this publication is gen-eral in nature and for information purposes only. It may not be considered as investment advice according to the Actof 6 April 1995 on the secondary markets, the legal status and supervision of investment companies, intermediariesand investment advisers. KBC cannot be held responsible for the accurac y or completeness of this information. Allhistorical rates/prices, statistics and graphs are up to date, up to and including 25 June 2013, unless otherwisestated. The views and forecasts provided are those prevailing on 20 June 2013.

Central Europe

• Fragile recovery in the cards• Czech floods in the spotlight

• Hungary exits from EDP procedure• Poland narrowly escapes recession• Economic prospects worsen in Slovakia• In the spotlight: Poland ready to join euro, but are the Poles?

Real GDP growth Inflation

2013 2014 2013 2014

Poland 1.1 2.3 1.1 1.9

Czech Republic -0.7 1.7 1.8 1.6

Hungary 0.3 1.5 2.3 3.2

Slovakia 0.5 1.5 1.5 1.5

Bulgaria 1.6 2.6 2.5 2.9

Russia 2.8 3.4 6.0 5.1

Turkey 4.1 4.7 6.6 6.4

Policy rates

25-06-2013 +3m +6m +12m

Poland 2.75 2.50 2.50 2.50

Czech Republic 0.05 0.05 0.05 0.05

Hungary 4.25 4.00 3.75 3.75

Slovakia (ECB) 0.50 0.50 0.50 0.50

Romania 5.25 5.25 5.25 5.25

Bulgaria - - - -

Russia 8.25 8.25 8.25 8.25

Turkey 4.50 4.50 5.00 5.00

Exchange rates

25-06-2013 +3m +6m +12m

PLN per EUR 4.31 4.20 4.15 4.10CZK per EUR 25.77 25.70 25.50 24.90

HUF per EUR 296.71 295.00 30 0.00 305.00

RON per EUR 4.51 4.35 4.35 4.35

BGN per EUR 1.96 1.96 1.96 1.96

RUB per EUR 42.96 42.50 42.00 41.50

TRY per EUR 2.55 2.50 2.50 2.50

10-year rates

25-06-2013 +3m +6m +12m

Poland 4.45 3.30 3.30 3.50Czech Republic 2.52 1.90 2.05 2.35

Hungary 6.75 5.75 5.75 5.75

Slovakia 2.77 2.40 2.50 3.00

Romania - - - -

Bulgaria - - - -

Russia 8.14 7.80 7.60 7.50

Turkey 8.59 7.80 8.00 8.30

June 2013

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-2

-1.5

-1

-0.5

0

0.5

1

1.5

2

2009 10 11 12 13

Record low policy rates across the region(in %)

Improving consumer confidence(deviation from LT average, 3-month moving average)

0

1

2

3

4

5

6

7

8

9

10

2009 10 11 12 13

Czech Republic SlovakiaHungary BulgariaPoland

Czech Republic PolandHungary Euro Area

Economic Outlook Central Europe

General perspective

Fragile recovery in the cards

For years, most economies in Central

Europe were able to rely on the inward

flow of capital mainly from Western

Europe, generating strong growth fig-

ures and a steadily converging dynam-

ic. Today, however, they are operat-

ing in a different reality. The inward

flow of foreign investments has all but

dried up, as borne out by the recent

development towards an external bal-

ance in most economies. Moreover, the

economy in the euro area remains inthe doldrums, hampering an export-

led recovery. The disappointing export

performance, however, is only one side

of the story. Domestic demand is driv-

ing the economic weakness to an even

greater extent than foreign demand. In

Central Europe, too, 2012 was a year

of austerity imposed by the European

Commission as part of the Excessive

Deficit Procedure (EDP). Towards the end

of last year, economic activity in Poland

and Slovakia, traditionally strong playersin the region, also cooled off markedly,

while it was already depressed for some

time in Hungary and the Czech Republic.

In this context, it is no surprise that

central banks in Central Europe, too, are

pursuing strong monetary easing. The

Hungarian central bank takes the prize

here, having cut its key interest rate by

25 basis points for eleven consecutive

months, taking it to a historically low

4.25%. For the moment, however, the

easing of the lending conditions for banks

is having virtually no impact in increasing

lending. It remains to be seen whether

specific measures recently launched in

a bid to reduce the cost of finance for

small and medium-sized enterprises will

offer a solution. The Polish central bank,

meanwhile, has already cut interest rates

by a total of 200 basis points duringthis cycle. In the Czech Republic, the

traditional interest rate channel has long

been exhausted, with the policy rate

at 0.05%. Intervention on the currency

exchange rate is an option that remains

on the table as a means of further eas-

ing the monetary reins, especially since

the recession proves to even deeper

than previously thought. First quarter

GDP growth contracted again by 1.1%

quarter-on-quarter.

 Although the ongoing fiscal consoli-

dation will continue to be a drag on

domestic demand in the short to medi-

um-term, we believe the bottom of the

cycle in the region has been reached

and an, albeit modest, recovery is in the

cards. Consumer and producer confi-

dence show signs of improvement and

recent data on retail sales in Hungary

and the Czech Republic are encour-

aging. External demand should ben-

efit from an expanding business cycle

in the EMU, especially in Germany. The

next few months growth in industrial

production should start accelerating

again. Moreover, fiscal policy will be less

restrictive this year. Bulgaria, Hungary

and Romania became the first countries

to be able to shake off the EDP yoke.

Other countries (Czech Republic, Poland,

Slovakia) remain under the EDP umbrellafor the time being, but can look forward

to less severe fiscal consolidation this

year. In most countries, therefore, fiscal

policy in 2013 will be considerably less

restrictive than last year, something that

should help drag domestic demand out

of the mire.

Dieter Franceus ([email protected])KBC Group

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Quarter-on-quarterYear-on-year

-6

-4

-2

0

2

4

6

2008 09 10 11 12 13

Czech recession still continues(real GDP growth, in %)

Repo-rate Money relevant inflation (year-on-year)Inflation (year-on-year) CNB targetOutlook (year-on-year)

Low inflation warrants near-zero policy rate foran extended period of time

(in %)

Economic Outlook Central Europe

Czech Republic

Czech recession not yet over

Petr Dufek ([email protected])CSOB Czech Republic

The performance of the Czech economy

in the first quarter was much worse

than indicated by the initial forecasts of

about a month ago. Real GDP dropped

by 1.1% quarter-on-quarter and a huge

2.2% year-on-year. Household and gov-

ernment consumption went up vis-à-vis

late 2012, investment rose moderately,

exports improved slightly, while imports

stagnated. The poor growth figure can

mainly be explained by inventories, which

declined due to last year’s stockpiling ofrevenue stamps for tobacco products,

and lower stocks in the energy, retail

and wholesale sectors. The economic

performance was also affected by the

automotive industry, which faced weak

foreign demand in Q1. Nevertheless, the

economy is approaching its stabilisation

phase, which may be followed by the first

signs of recovery later this year. While the

overall 2013 growth rate will remain in the

red (our latest forecast is -0.7%), the long-

est recession of the Czech economy todate should end by the middle of this year.

Average wages drop for thefirst time

First quarter data suggest a decline in

the average nominal wages, something

unheard-of thus far. While the drop by

2.2% in real wages is not a surprise, a

decline in nominal salaries is. The drop

is partly attributable to bonuses having

been paid out in advance in late 2012

before the imposition of an additional tax.

Still, this is only part of the explanation, as

wages are falling in 12 out of 19 sectors,

including the public sector. Another rea-

son is the lengthy recession, which limited

room for salary increases and the creation

of new jobs. While the unemployment

rate fell slightly last month, the only rea-

son for this was the commencement ofseasonal jobs, rather than a change in the

overall labour market trend.

Poor consumption, minimalinflation pressures

Weak domestic demand limits infla-

tion pressures. Year-on-year inflation, for

which the central bank sets its targets,

fell to 1.3% in May, while the ‘monetary

relevant inflation’, which the CNB also

takes into account, fell below the lowerthreshold of the tolerance inflation band.

This enables the central bank to maintain

its policy of technically zero interest rates

and to consider more monetary easing

alternatives. Currently, the only possible

instrument appears to be forex interven-

tions, which would keep the koruna at

weaker levels. However, as the koruna

is currently already weaker than CNB

forecasts, actual forex interventions will

not be on the agenda anytime soon. For

the moment, only ‘verbal interventions’

on the forex market are likely.

Floods in the spotlight

Recently, a large area of the Czech

Republic has been affected by floods,

which led to damage in excess of CZK

10 bn. In view of the positive state

budget developments and given theexisting budgetary reserves, the use of

public funds to remedy the damage will

not generate any pressures for addi-

tional financing by the State. The Czech

Republic continues to be a very credible

debtor in Europe, evidence of which is

the spread between Czech and German

yields and the evolution of CDS. Even

before the floods, the Ministry of Finance

had declared less ambitious budgetary

targets for the coming years, because

of the need to reduce restrictions on therecession-struck economy. This will be

helped by the fact that the government’s

cost of financing is very low. Hence the

public sector’s investment activity will

likely be renewed for the first time in

years, and this may have positive effects

on GDP growth in the years to come.

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

01/2009 10/09 07/10 04/11 01/12 10/12 07/13

Outlook 

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Economic Outlook Central Europe

Hungary

Hungary exits from EDP procedure

Central bank continues the easing cycle(in %)

First quarter real GDP growth surprised on the upside(in %)

0

2

4

6

8

10

12

2006 07 08 09 10 11 12 13

Year-on-yearQuarter-on-quarter

 

Policy rateHeadline CPI (year-on-year)Core CPI (year-on-year)

David Nemeth ([email protected])K&H Bank ZRT 

After 9 years, the European Council has

stopped the excessive deficit procedure

against Hungary. The Council found that

the Hungarian government had shown a

strict fiscal policy and remained commit-

ted to keep the budget deficit below 3%

of GDP. As the Commission found risks

in Hungary’s convergence program and

forecasted a deficit of 3.3% of GDP in

2014, the government announced addi-

tional fiscal adjustments: public expen-

ditures were cut, public investment andreconstructions had to be financed by

new one-off revenues and an increase of

sector-specific taxes, such as bank, ener-

gy, financial transaction and (possibly)

advertisement taxes is on the table. The

second and the third step may be intro-

duced only if the budget deficit exceeds

the 3%-norm, while the government

may be using the third pillar mainly to

underline that Hungary is fully committed

to keep the budget on track. Also, the

budget will be supported by the fact thatHungary came out of recession (0.7%

quarter-on-quarter Q1 GDP growth).

Still, rating agencies may remain cau-

tious towards Hungary, because of the

unfavourable track record close to par-

liamentary elections (next elections are

due May 2014). Hence, we expect that

in the best case the ‘negative’ rating

outlook of Hungary will be modified to

‘stable’ in the coming months, while an

upgrade back to investment grade is not

expected before 2H2014.

Falling inflation, slowlyaccelerating production

Inflation moderated to 1.8% year-on-

year in May thanks to the fall in fuel

and regulated prices, the latter through

a government-induced decrease of util-ity costs. Although the Q1 GDP growth

figure looks quite favourable at first

sight, it is affected by a strong statisti-

cal base effect from a better agriculture

performance compared to the extremely

poor harvest in 2012. Still, the figure

confirmed that Hungary may return to

a growth path between 1.5% and 2%

from 2014 onwards. The external posi-

tion is further improving thanks to the

positive current account balance and the

very fast deleveraging of the economy,but this rebalancing weighs on eco-

nomic growth. Despite the exchange

rate fixation mechanism introduced by

the government, the households’ non-

performing loan (NPL) ratio is increasing.

The peak of the NPL ratio is expected at

18%. The stability report of the National

Bank of Hungary (NBH) highlighted that

the bank sector is fundamentally healthy,

although its vulnerability increased late

2012. Still, only in an extreme negative

scenario, some banks may need addi-

tional capital.

Good news are alreadypriced in the market

The NBH continues its gradual and cau-

tious rate cut cycle. Its base rate was

lowered by 2.75%- points, reaching the

historically low level of 4.25%. The NBHbases its monetary easing on three pillars:

the ongoing loose monetary policy in the

major developed economies, the infla-

tion rate being well below the inflation

target of 3% and the tight fiscal policy

which has helped to moderate Hungary’s

required sovereign risk premium back to

2010’s levels. We expect a further 50 bp

of rate cuts for the next 3 months. The

deteriorating international environment

and discussions on the exit of the US FED

resulted in sharp increases of both devel-oped and emerging market bond yields,

and put substantial pressure on HUF

yields, with 10-year bond yields being

pushed up by around 200 basis points up

to a maximum of 6.7%. We expect the

5- and 10-year bond yields to slightly fall

again, and trade between 5.3% and 6%.

-10

-8

-6

-4

-2

0

2

4

2008 09 10 11 12 13

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Economic Outlook Central Europe

Poland

Poland narrowly escapes recession

Private consumption Change in inventoriesPublic consumption Net exportsGross fixed capital formation Real GDP growth

-6

-4

-2

0

2

4

6

8

10

12

2005 06 07 08 09 10 11 12 13

Weakening real GDP only supported by net exports(growth contribution, year-on-year in %)

CPIWages in enterprise sector

-2

3

8

13

18

2007 08 09 10 11 12 13

Labour market weakness depresses real wage growth(year-on-year, in %)

Jaroslaw Antonik ([email protected])KBC Towarzystwo Fund. Inwest. A.S.

Weak macroeconomic data released in

the first quarter of 2013 were also

reflected in GDP figures. In the first

quarter, real GDP growth decreased to

0.5% year-on-year (yoy) from 0.7% in

the previous quarter. On a quarter-on-

quarter (qoq) basis, the growth rate

was 0.1%. In that sense, the Polish

economy avoided a technical recession

of two consecutive quarters of nega-

tive growth. The contribution to real

GDP growth was the following: privateconsumption -0.1%, investments -0.3%,

change of inventories -0.5%, net export

+1.4%.

The decomposition of GDP growth thus

confirmed the weakness of domestic

demand, including private consumption.

Consumption remained at the level of

the previous year (0.0% yoy), govern-

ment consumption continued to decline

(-0.5% yoy). Investments reduced its

negative dynamic (-2.0% comparedto -4.1 % in the previous quarter).

However, it is still too early to announce

a turning point.

Weak consumer demand reflects the

impact of several factors. First of all, the

unfavourable situation on the labour

market, where we see a further increase

of the unemployment rate. In April it

reached 14% (compared to 12.9% in the

previous year). In the light of the labor

market weakness, real wage growth will

probably remain absent, leading house-

holds to further decrease an already low

savings rate. All in all, we expect the

recovery in private consumption to be

slow. Economic activity should improve

in 2H13 but will remain modest as the

producer confidence in manufacturing

(PMI) is still below the neutral level of 50.

The cyclical slowdown and especially the

decrease of private consumption growth

imply the absence of any inflation pres-

sure. In May, CPI inflation dropped to

0.5%, slightly above market expecta-

tions and significantly below the infla-

tion target of 2.5% of the Polish central

bank. Core inflation also stayed on a low

level (1%) and so did inflation expecta-

tions. CPI inflation will remain low in

the coming months, supported by lower

natural gas and electricity tariffs andthe lack of sizeable changes of com-

modity prices. Additionally, demand for

household and corporate credit remains

subdued.

The Monetary Policy Council (MPC)

decided to cut its policy rate by 25 basis

points to 2,75% on its June’s meeting, in

line with market expectations. The finan-

cial markets received a clear message

from the central bank’s governor that,

although the easing cycle is not finished

yet, it is nevertheless coming to an end.

He also said that at the July meeting

the Council should be ready for an even

clearer signal. As a consequence, July

might mark the end of the easing cycle.

The weak GDP data created some risk for

public finances. In 2013, the deficit-to-

GDP ratio will probably rise compared tothe previous year but it shouldn’t exceed

4%. The Polish government is strongly

committed to maintain fiscal discipline

and amendments to the budget are very

likely. According to the Prime Minister,

the government will decide after June

whether any amendments are needed.

Nevertheless, taking into account that

the Polish macroeconomic situation is

favourable compared to the rest of the

EU countries, ant that Fitch raised its

rating outlook for the Polish sovereign,there is still room for a rating upgrade

later this year. This is especially the case

considering that the cyclical trough of

Polish economic growth is behind us

and the next quarters will probably show

some signs of further improvement.

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Economic Outlook Central Europe

Slovakia

Worsening economic prospects

Favourable inflation dynamics(year-on-year, in %)

Real GDP growth clearly slowing down(in %)

Year-on-yearQuarter-on-quarter

HeadlineCore

-10

-5

0

5

10

15

2001 02 03 04 05 06 07 08 09 10 11 12 13

Marek Gabris ([email protected])CSOB Slovakia

The Slovak economic growth was 0.6%

year-on-year (yoy) in the first quarter

2013 after the result of 0.7% yoy in the

final quarter of 2012. The economy grew

by 2.0% for the whole year of 2012,

reflecting a deceleration mainly in the

second half of the year.

The main engine of growth was still net

foreign demand. All other components of

GDP contributed negatively to economic

growth. Final consumption decreasedby 0.9% yoy, negatively affected by low

consumer confidence, higher propensity

to save and high unemployment. Real

wage growth (the first after two con-

secutive years of decline) was not a suf-

ficient stimulus for households to boost

their consumption. The final consump-

tion of government decreased by 0.6%

yoy, affected by the fiscal consolidation

package. Gross fixed capital formation

dipped by 8.4% yoy in Q1 2013. This is

also negative from a longer term per-spective as the long lasting dip could

affect the potential growth. On balance,

prospects for economic growth in 2013

worsened, implying that the economy

could probably grow around 0.5% yoy

as the outlook for Slovakia’s main trad-

ing partners is also clouded.

Inflation is gradually declining as there

are basically no demand pulled pres-

sures and energy prices are falling.

Harmonized inflation dipped from 2.5%

yoy at the beginning of 2012 to 1.8%

yoy in May and we expect a further

decline during the summer.

Foreign trade is booking new record

surpluses. The merchandise trade surplus

for the first four months is 1.9bn EUR

or 66% higher compared to the same

period of 2012. The main reason is fasterreduction of import growth compared to

export growth. However, the export sur-

prised in April by jumping up again and

the growth rate reached almost 10%

year-on-year. But we expect it was more

related to one-off factor than a change

in trend as economic growth is deceler-

ating. However, export-oriented indus-

tries like the automotive sector should

still stay the main driver of growth as

the unemployment rate is expected to

stay high above 14% for the rest of theyear. This will negatively affect domestic

demand, on top of the impact of fiscal

consolidation.

The fiscal situation is relatively favour-

able as the tax revenues are slightly

above expectations during the first five

months of 2012. The IMF latest review

also confirmed the possibility to reach

the fiscal goal to get deficit under the

3% threshold even despite the poorer

prospects of growth for the remainder

of the year.

The Smer party (Social Democrats) still

has the highest popularity in opinion

polls, with popular support increasing

from 39.0% in April to 40.8% in May.

The second most popular political party

are the Christian Democrats (KDH) with

10.8%, followed by Ordinary People(OLaNO, 7.8%), SDKU 7.3%, Most (eth-

nic Hungarians, 6.1%) and New Majority

(new party of former minister of justice

Mr Lipsic, 5.1%). Mr Fico (current PM

and head of the ruling Smer party)

announced in his press article that he

could be a candidate in the presidential

elections in May 2014.

-2

-1

0

1

2

3

4

5

6

2008 09 10 11 12 13

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Economic Outlook

Bulgaria

New government faces challenging environment

Benign inflationary environment(year-on-year, in %)

Labour market weakness persists 

Unemployment rate (seasonally adjusted, in %, left-hand scale)Year-on-year change in registered unemployment (thousand, right-handscale)

CPI inflationPPI inflation

-100

-50

0

50

100

150

0

2

4

6

8

10

12

14

2006 07 08 09 10 11 12 13

Bulgaria’s economy has been stuck in

low gear for several years. In the pre-

crisis environment Bulgaria was ben-

efitting from a continuing inflow of for-

eign direct investments. When external

financing dried up abruptly in 2009, eco-

nomic activity collapsed. Since then the

economy has gone through some neces-

sary adjustments and the unsustainable

current account deficit has been largely

corrected. Economic growth, however,

has been lackluster at best and outputhas still not fully recovered to the pre-cri-

sis level. Overall, 2012 real GDP growth

was only 0.8%, decelerating from 1.8%

in 2011. In the first quarter of 2013, real

GDP growth eased further, expanding

by 0.4% year-on-year. On the one hand

external demand continues to suffer

from the financial and economic tur-

bulence in the euro area. On the other

hand fiscal consolidation and continuing

labour market weakness keep exerting a

drag on domestic demand.

Nevertheless, we expect growth dynam-

ics to improve significantly in the second

half of 2013. There are several reasons to

support this argument. The first reason

is that Bulgaria’s export sector should

benefit from the better growth outlook

in the European Union. Secondly, fis-

cal policy will most likely become more

supportive. Bulgaria ended 2012 with a

government deficit of only 0.8% of GDP,

much lower than expected thanks to

stronger VAT revenues. Although fiscal

prudence is admirable, this was perhaps

not the appropriate policy approach

given the combination of poor growth

and comfortable fiscal fundamentals.

The European Commission already lift-

ed the Excessive Deficit Procedure for

Bulgaria in the summer of 2012. Thirdly,

consumer confidence in May was at thehighest level in 27 months. Inflation

has been subdued, largely due to sev-

eral government-induced energy price

cuts. This is most visible in the producer

price inflation indicator which has turned

negative on a year-on-year basis.

In February, social protests against the

widespread poverty and low standards

of living led to the resignation of the

centre-right government. After a high-

ly polarized campaign, May electionsfinally resulted in a Socialist-led minority

government. The new cabinet needs the

support of the nationalist Attack party,

making effective governing all the more

difficult. New prime minister Plamen

Oresharski expressed this concern with

the statement that Bulgaria is in a deep

institutional crisis, continuing economic

depression and worsening disintegra-

tion of society. He also said that the

government should play a more promi-

nent role in the economy. However, it

remains to be seen whether this minority

government will be able to tackle the

numerous social and economic problems

Bulgaria faces. It is essential to reduce

unemployment which remains stub-

bornly high (12.3%). Several structural

reforms in the labour market are needed

to improve the quality and productivity

of the labour force. This is all the moreimportant given the shrinking working-

age population due to the unfavorable

demographic outlook and ongoing emi-

gration.

-15

-10

-5

0

5

10

15

2009 10 11 12 13

Central Europe

Dieter Franceus ([email protected])KBC Group

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