EMEA Weekly, Week 20‏

Russia: Slower GDP growth and easing inflation make room for rate cuts

We have downgraded our GDP forecast for Russia for 2013 to 2.9% (previously 3.4%) due to sluggish growth performance in the first quarter. However, we do expect growth to pick up clearly in the second half of the year due to base effects and easing inflation. Household consumption growth remains strong but investments are subdued and a shrinking trade balance surplus weighs on GDP growth. Russia is currently not getting much support from global growth and relying just on domestic demand restrains growth.

Czech Republic: The economic outlook remains gloomy

Unfortunately, the outlook for the Czech economy remains gloomy. It is generally expected that the economy will remain in recession this year. We expect 2013 GDP to contract by 0.2% y/y, with private consumption in particular set to remain the main drag on growth. Next year should bring a moderate recovery but we still expect the economy to operate well below its potential and expect GDP growth of only c1.1% y/y. Despite the sluggish performance of the Czech economy, the CNB has been reluctant to ease monetary policy further by using some non-standard monetary policy tools after it cut the key policy rate to technical zero of 0.05% in November last year. Without the possibility to cut to negative rates, the CNB said it is ready to use the FX channel for further easing. At this moment we do not expect the CNB to start intervening in the FX market. As long as the Czech koruna remains around 25.9 against the EUR, the CNB will not enter the FX market to weaken the CZK further. Furthermore, if the CZK should for some reason strengthen, the CNB would only step up its verbal interventions rather than enter the FX market.

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