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Three black sheep of European economy

8 Nov 2018 17:51|Marcin Lipka

“The European Commission's forecasts for the autumn show that the prospects for the Italian economy are getting increasingly worse. The situation is even more unfavourable in Turkey, where there is a real threat of a recession. Romania is also struggling due to the surprisingly high growth of GDP, which is causing serious problems,” says Marcin Lipka, Conotoxia Senior Analyst.

The newest EC estimates show that the Italian deficit in public finances will reach 3.1% in 2020. It will be the worst result in the whole European Union. Additionally, next year the deficit will reach 3% of GDP, 1 percentage point higher than expected in the spring of this year.

The highest deficit in the whole EU is linked with the lowest expected economic growth among the 27 countries analysed. In 2020, it should reach only 1.3%. The country's condition will also be negatively affected by the highest debt financing costs in the EU. The costs reach 3.8% of GDP in 2019, which means about 0.3 percentage points (around 5 billion EUR) more than was estimated in the spring. Next year it will increase to 3.9% of GDP (66 billion EUR).

Changes in the forecasts in Italy are connected with the implementation of guaranteed income and negative changes of the pension scheme, which simplify the transition to earlier benefits from the country. EC in its report underlines that “the perspective of growth is burdened by the high uncertainties related to growing negative risk. The continued high level of tax yields exacerbate financing conditions of banks and reduce loan accessibility, while public expenses push out private investments.”

Recession in Turkey

Although Turkey is not a part of the European Union, the EC presents its prognosis as a candidate country for the European Community. The importance of estimates for Ankara is emphasised by the fact that these are the first projections of the leading institution covering all the recent economic events on the Bosporus.

The EC expects a recession in Turkey next year. GDP will fall to around 1.5%. The collapse will hamper investments, which will fall by more than 12%. In the EC speculations, unemployment will clearly increase from 10 to almost 13% and inflation will amount to 15.4%.

The EC underlines that the biggest impact on the economic situation will be caused by the interruption of major infrastructure investments. Another negative element is the developments in the private real estate market, where overinvestment from previous years makes it necessary to carry out transactions at a significantly lower price, and sometimes results in the inability to sell them at all.

Risk elements in Turkey are connected with the decline in the lira by 35%, high inflation and difficulties in financing from abroad which may worsen bank balances. The EC is afraid that this process will cause the necessity of the country taking over the banks.

Rough landing in overheated Romania

Romania is another country whose economic condition is worrying. Despite economic growth of 7.3% in 2017 and a fall in unemployment below 5%, it shows that the politics in Bucharest were not adequate.

GDP growth is expected to half this year, compared to the result in 2017. The current account deficit should reach 4.5% of GDP in 2020, even though, three years ago it amounted to 0.8%. The situation is similar for the budget, which in 2015 was balanced (adjusted to the economic situation), but in two years the deficit is expected to reach 4.6% of GDP. What caused this drastic drop in Romania’s fiscal situation?

Romanians cannot afford such increases

First of all, it is worth paying attention to wage increases. Since the end of 2015, wages have risen (net wage) within the range of 12-14%. Data from September shows an increase at a level of 13.1%.

The EC points out that salaries in the public sector rose by 25%, and in health care and education they increased even more. Internal and external imbalances are also raised by the issue of a significant increase in the pension rate.

Therefore, increases resulted in a boom in consumption. In 2016, retail sales rose to around 20%, and at the turn of 2017 and 2018, it amounted to 15%. In August this year, the growth rate fell to 1.8%, which was the lowest result in more than 5 years.

However, the rapid increase in wages could not keep up with Romania's competitiveness. The deficit in goods trade in this country is expected to reach 8% of GDP in 2020, which shows well the country's appetite for goods from abroad.

Common denominator

Turkey, Romania and Italy are the black sheep of Europe not by accident. In each of these countries, economic problems were the result of fatal political decisions. Only to a very limited extent do they derive from the deterioration of the external economic situation, although the authorities of these three countries, which are also significant, perceive things quite differently.

8 Nov 2018 17:51|Marcin Lipka

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