Regional Focus: Eastern Europe’s Consumer Markets Remain Fragile in 2014
Consumer income and expenditure across Eastern Europe are expected to see positive developments in 2014, backed by the region’s higher growth rates and declining inflation. However, high unemployment rates and currency depreciation will continue to affect consumer confidence. Meanwhile, political uncertainty arising from the Crimea crisis represents a key risk to Eastern Europe’s consumer markets in 2014 as it could hurt economic growth in Russia, the region’s largest market.
- Consumer markets in Eastern Europe will be supported by the region’s better economic performance in 2014. The region’s real GDP growth is forecast to pick up slightly to 2.1% in 2014, compared to 1.2% in 2013, driven by improving external demand;
- Higher growth will boost per capita disposable income in the region. During the 2008-2013 period, growth in per capita disposable income has been uneven in Eastern Europe, with countries such as Russia and Poland witnessing a strong expansion, while in some countries it has not returned to the pre-crisis level in 2008. Per capita disposable income in the region as a whole expanded by 14.0% in real terms between 2008-2013, while it is forecast to grow by 3.3% in real terms in 2014;
- Similarly, per capita consumer expenditure will also be bolstered thanks to improved consumer confidence. Russia’s per capita consumer expenditure increased by 17.0% in real terms during the 2008-2013 period, among the highest growth rates in the region. For the region as a whole, per capita consumer expenditure is estimated to expand by 3.2% in real terms in 2014;
- Despite such a positive outlook, significant risks can put a downward pressure on the region’s consumer markets, with implications for consumer businesses. An escalation of the Crimea crisis between Russia and Ukraine, as well as between Russia and the West, could significantly hit Russia’s economy in 2014, while having a negative impact on Eastern Europe’s markets. Russia is the most important consumer market in the region, accounting for 49.3% of total consumer expenditure in 2013;
- Meanwhile, high unemployment rates and currency depreciation in many Eastern European countries will continue to depress consumer confidence in the region. Poland’s unemployment rate stood at 10.3% of the economically active population in 2013.
Improving Economic Conditions Should Boost Consumer Income and Expenditure
Most economies in Eastern Europe are expected to see higher growth rates in 2014:
- Economic growth in Eastern Europe slowed down significantly during the 2011-2013 period amid the eurozone’s debt crisis and global economic downturn. In 2013, real GDP growth for the whole region stood at 1.2%, compared to 2.0% in the previous year. Since early 2014, however, economic activity in the region has strengthened, backed by improving external demand and favourable commodity prices. Growth is forecast to pick up slightly to 2.1% in real terms in 2014 for the region as a whole;
- Economic growth in Russia, the region’s largest economy, has shown signs of accelerating since late 2013 as a result of higher exports thanks to high energy prices. All the three economies Croatia, Czech Republic and Slovenia which contracted in 2012/2013 should recover in 2014, backed by stronger external and domestic demand. Real GDP growth in the Czech Republic is forecast to reach 1.1% in 2014, up from a contraction of 0.9% recorded in 2013;
- Inflation remains under control in most countries in the region, thus preventing interest rate rises, which in turn can encourage consumer lending and retail sales. In fact, inflationary pressures have declined in economies such as Hungary, Czech Republic and Poland. As a result of the government-mandated energy price cuts, Hungary’s annual inflation rate eased from 5.7% in 2012 to 1.7% in 2013.
Economic recovery should bolster disposable income and consumer expenditure:
- Between 2008 and 2013, Eastern Europe’s per capita annual disposable income in fixed US$ terms grew at an annual average rate of 2.7% in real terms, lower than 4.0% per year in Asia Pacific but higher than an average contraction of 0.7% in Western Europe;
- During the 2008-2013 period, countries which witnessed a growth in per capita annual disposable include Russia, Belarus, Lithuania, Bulgaria, Ukraine and Poland. Bulgaria’s annual disposable income per capita expanded by 14.2% in real terms during the same period, partly owing to a 3.1% decline in total population. In other countries such as Hungary, Latvia, Czech Republic and Croatia, annual disposable income has not recovered to its pre-crisis level in 2008;
Per Capita Annual Disposable Income in Selected Eastern European Countries: 2008 and 2013Source: Euromonitor International from national statistics
But Eastern European Consumers still Face Significant Risks
Growth in Eastern European consumer markets will remain fragile in the short term due to some major risks:
- Political uncertainty arising around the Crimea/Ukraine crisis since early March 2014 represents a key short-term risk in Eastern Europe as it could lead to an increase in market volatility and hit business and consumer confidence. Following its seizure of Crimea, Russia may face growing capital outflows, while any trade sanctions by the West will hurt economic growth. Russia’s economic prospects are important to Eastern Europe’s consumer market as the country accounted for 49.3% of the region’s total consumer expenditure in 2013;
Consumer Expenditure in Eastern Europe by Countries: 2013
Source: Euromonitor International from national statistics/Eurostat/UN/OECD
Note: Other countries include Albania, Belarus, Bosnia-Herzegovina, Bulgaria, Croatia, Estonia, Georgia, Hungary, Latvia, Lithuania, Macedonia, Moldova, Montenegro, Serbia, Slovakia and Slovenia
- A worsening outlook in Russia will also have wider impacts on economic growth in the region. Russia has been an important trading partner of many economies in the region such as Belarus, Estonia, Latvia and Lithuania. In 2013, exports to Russia accounted for 35.5% of Belarus’ total exports. As such, consumer markets in some regional countries will feel the knock-on effects if the Crimea crisis escalates and Russia’s economy falls into recession;
- Meanwhile, unemployment remains a concern in Eastern Europe, putting pressure on consumers’ disposable income. Many countries such as Croatia, Hungary, Latvia, Poland, Slovakia and Bulgaria still suffer from double-digit unemployment rates due to sluggish economic growth. In Croatia, 14.3% of the economically active population in 2013 were jobless, compared to 15.8% in 2012;
- Some Eastern European currencies continue to devaluate as a result of declining foreign direct investment (FDI) inflows and high current account deficits. Russia’s ruble stood at RUB31.8 per US$ in 2013, depreciating by 21.7% since 2008. Devaluation affects consumers as it results in higher prices for imported goods, while driving consumer prices up.
- In 2014, per capita disposable income and consumer expenditure in Eastern Europe are forecast to grow by 3.3% and 3.2% in real terms respectively, compared to 3.8% and 3.5% in 2013. While this will benefit consumer businesses, consumer confidence in Eastern Europe will remain fragile due to political uncertainties and economic risks in the region;
- The Crimea crisis has started to weigh on Russia’s economic outlook and escalation of geo-political tension, between Russia and the European Union and the US, remains a major risk. The World Bank has in March 2014 cut its growth forecast for Russia, saying the economy could contract by 1.8% in 2014 in a high-risk scenario. Eastern Europe’s consumer markets will be hit hard if the Russian economy falls into recession in 2014;
- In the period through to 2030, communications, education and health goods and medical services will be the fastest-growing consumer spending categories in Eastern Europe, indicating long-term opportunities for businesses in these sectors.