While 2019 began with fears 2020 could see the global economy sink into yet another (deep) recession, it ended fairly well with talk now only of a slowing in global growth rather than recession (although events in Iraq at the very beginning of the year do have the potential to change all of that rather quickly).
For South East Europe it was also a successful year in terms of economic developments. All countries in the region are characterised by strong domestic demand, both private consumption and investment while external imbalances are less pronounced. Only Serbia somewhat departs from this stylised fact given a widening current account deficit (covered in 2019 by FDI inflows) and rising private external indebtedness.
In the context of what the next recession may bring, it is important to note that the region’s fiscal and external positions are much better than they were in 2008.
China, trade and other risks to the global economy
Because of weak global dynamics the world’s main central banks all loosening monetary policy settings last year. Growth in China is slowing because of excessive leverage, but also because of the trade war with the US. In our opinion, China faces an extended period of weak growth until the excess debt which is not adding to productive capacity is worked off. The Phase One trade deal between the US and China saw markets respond enthusiastically, however, all the thorny issues such as mandatory technology transfers as a condition for investment into China have been left for another time. It is not difficult to imagine talks getting bogged down and the US levying new tariffs on Chinese products.
What is valid for China in terms of debt issues, also applies to overextended US corporates and households. High yielding US corporate debt and student loans are amongst the risk factors facing the US economy.
How Germany’s economy performs in 2020 is important for SEE
Germany, whose growth model is based on exports, felt the impact of slower Chinese growth in 2019. Moderating Chinese demand was one reason behind the weaker performance of the German industrial sector last year. The challenges the automotive industry faces in Germany is another important factor. What began with the dieselgate emissions’ standards deception is morphing into sizeable job losses in the sector as Germany’s automakers plan extensive investments into electric engines to catch up to US, Japanese and Chinese competitors.
Much of what can potentially dramatically influence automotive industry developments came out into the open in 2019 in the guise of climate change protests and pressure on the financial industry to cease funding of fossil fuel industries. Thus, the European Investment Bank announced it will no longer be financing fossil fuel related industries, and in the West at least, the pressure is rising on other financial sector players to follow suit. Just as Chinese efforts to deleverage the economy while maintaining acceptable growth will be with us for a while yet, the issue of ecology/climate change will also not go away. In that light, policymakers in the region and in CEE in general will have much thinking to do about how to finance and manage the energy transition, especially for, but not limited to, aging power plants.
Labour force shortages evident
While oil markets are well supplied and we think demand will surprise on the downside, clearly, should things go wrong in the Middle East, a sharp rise in the oil price would generate inflationary pressures and well as deteriorating the current account positions of all countries in SEE. They are, after all net energy importers.
Despite challenges facing its industrial sector, Germany is still short of workers, so citizens of SEE who do not enjoy the privilege of belonging to an EU member state will this year be able to migrate to Germany on essentially the same conditions as EU citizens. Should emigration from Bosnia Herzegovina, Serbia and elsewhere in the region prove to be greater than expected, labour shortages will become even more pronounced throughout the region. Apart from the country’s directly affected, employers in Slovenia and Croatia will also find it harder to fill vacancies. The upshot for the employed is that wages will continue to rise.
Brexit has implications for EU enlargement prospects, such as they are
This year’s most important political event is the US Presidential election where President Trump’s non-standard approach to policy making has challenged the foundations of decades long practices and conventions. US foreign policy is similarly less predictable so that neither allies nor foes are sure exactly how to react. This makes this year’s election even more important.
For the EU and countries outside the EU in the region, Brexit will be a more important issue than it might initially appear.
For countries hoping to join the EU, the departure of the UK is a blow. The reason is simple. The UK is (was) not only one of the largest and most influential members of the EU. Crucially, it was one of the most enthusiastic supporters of enlargement. The loss of the UK, as well as uncertainty over how keen the US currently is on enlargement are unwelcome complications to the already fraught accession path for non-member SEE countries.
How the situation plays out with post-Brexit Britain will likely demonstrate the benefits of membership for smaller states such as Croatia. Entry into the eurozone and Schengen in a reasonable timeframe would accentuate these benefits.
2019 was a successful year for South East European economies
It would be remiss of me not to underline that South East Europe had an economically successful year in 2019. Growth, though moderate, was largely sustainable across the region. Croatia and Slovenia as the most developed economies benefited from membership of the EU’s single market and various EU funds. While Slovenia has long been performing solidly in economic terms, Croatia has quietly recorded its fifth year of approximately 3% real GDP growth. Both countries recorded current account and budget surpluses. Public debt and private indebtedness are also falling. In Croatia consumer confidence is at multi-year highs.
Bosnia Herzegovina’s industrial sector had a tough 2019, with output falling significantly, mainly as a result of domestic issues. Yet, the restructuring inherent in the resolution of some of these issues does mean the prospects for growth in 2020 and indeed the medium term are healthier. Serbia saw an investment boom, driven by infrastructure development, in the second half of 2019 – this has sucked in imports and widened the current account deficit. As long as FDI inflows cover the deficit, as was the case in 2019, concerns will be allayed, but in the event of an adverse external shock the country will be more exposed.
While domestic demand remains robust in the whole region, fiscal balances are healthier than in 2008, the pace of debt accumulation far more moderate and current account deficits, where they exist, smaller.
An election year in Croatia, Montenegro, North Macedonia and Serbia
Croatia, Montenegro and Serbia will have general elections this year. Recent developments in Montenegro and Serbia have ensured the elections will be even more interesting and thus important. Meanwhile, North Macedonia faces early elections in April, after the EU did not agree to commence accession talks in October 2019.
All in all, a more challenging 2020 awaits. Elections in the region may impact the EU accession paths of the countries concerned, while global economic developments, will feed through to growth trajectories. The good news is that should some of the risks outlined materialise and adversely affect growth, the region, on the whole, is better prepared for the next downturn.