As uncertainty about the prospects for the global economy rises, the region of South East Europe, most of whose economies are outside the European Union, faces a number of risks. Can strong domestic demand, a characteristic of current economic trends soften the impact of adverse external developments? The current IMELUM Macroeconomic Quarterly covers all of this and much more.
Over the past quarter uncertainty in the global economy has risen. Relations between Washington and Beijing are far from cordial with the ongoing trade war just one aspect of a multifaceted competition between the incumbent global power and its most serious challenger. At IMELUM, this competition is something we expect will be a feature of the rest of our lifetimes; and we do not consider ourselves old.
Although much of Europe is at the beach in August the prospect of a no-deal Brexit remains a very real risk. The weakness in the British Pound in the second half of July suggests markets are finally realising that the way Article 50, which governs how a nation leaves the EU, is constructed makes no-deal the legal default option if a negotiated exit cannot be achieved. In any event, the risk of a no-deal Brexit will only add to global uncertainty as summer makes way for autumn.
Weak manufacturing and export data in bell weather countries such as Germany and South Korea combined with Sino-American trade tensions have greatly contributed to the renewed easing bias of the world’s major central banks. With over USD13trn of public debt alone in negative yield territory, this begs the question of where monetary policy goes from here? In the region, the record accumulation of foreign exchange reserves by Serbia in July to curb appreciation pressures as investors hunt for yield, is an example of how such questions can manifest themselves. More importantly, how will countries like that respond when the current positive tide turns?
Regional political issues – EU accession delayed while Croatia and Slovenia deal with different policy goals
Quite apart from global economic, policy and other uncertainties South East Europe has issues of its own to deal with. Namely, the prospect of EU accession remains distant for all those countries outside the bloc.
In May, Bosnia Herzegovina did not receive an Avis from the European Commission to advance its accession path. North Macedonia, whose agreement with Greece of its name has removed its greatest EU integration stumbling block, and Albania did not receive the go ahead to commence EU accession talk in June. Serbia and Kosovo remain mired in their differences which had already significantly slowed the pace of the former’s EU accession talks. Opening Chapter 9 on Financial Services in late June was a small positive step before President Macron made very clear in Belgrade in mid-July that France’s view is the EU must first reform from within to be able to incorporate more than the current 28 member states.
Croatia and Slovenia do not have these issues to deal with. Croatia is focussed on adopting the euro and joining the Schengen free movement zone. Slovenia is negotiating with the European Commission over its fiscal targets in the medium term. The difference between the two EU member states of South East Europe and those still outside the EU is becoming more evident, although, amongst those countries outside the EU in the region, we do note the contribution of export growth in Serbia to GDP growth in recent years.
Domestic demand strong across the region as employment and wages rise
One thing the countries in the region all have in common is strong domestic demand with rising wages, employment and credit growth providing support. As tax revenues are performing well everywhere, fiscal policy is being loosened everywhere too. This is supporting investment activity as well as consumption.
How will tax cuts in Slovenia impact growth and how resilient are Slovenia’s corporates to weakness in Italy in particular? How sustainable is Croatia’s recovery in domestic demand, especially now that 1Q 2019 investment data showed a marked acceleration? What will the central bank in Serbia do to deal with capital inflows in the second half of the year? And will the formation of a national government in Bosnia Herzegovina only take place in 2020?
The July IMELUM South East Europe Quarterly delves into all these questions and much more with macroeconomic forecasts and assessment of risks and opportunities and a view on currency and interest rate developments in all countries.
This is a summary of the current IMELUM Quarterly Macroeconomic Report available to premium subscribers. As part of our standard twelve reports to clients each year, IMELUM publishes extensive macroeconomic forecasts for Bosnia Herzegovina, Croatia, Serbia and Slovenia four times a year. The next IMELUM Quarterly Macroeconomic Report which we will publish in October will also contain reports and extensive macroeconomic forecasts on Montenegro and North Macedonia. To inquire about our premium services contact us at firstname.lastname@example.org