Next week will see the release of Czech, Hungarian and Romanian third quarter gross domestic product (GDP) numbers. While the global markets’ focus is firmly on the turns and twists of the eurozone debt crisis, we look at the CEE growth estimates and fail to find much to cheer about.
In both Hungary and Czech Republic growth has been stifled as conditions in the external environment continue to have a negative impact, while domestic demand in both countries has been in the doldrums for much of 2011. While the latter has been a result of both austerity measures and generally slow private consumption levels in thrifty Czech Republic, households with Swiss franc, euro and yen loans in Hungary have been continuously squeezed under their mortgage obligations due to the liding forint value (and where public efforts and schemes to address the FX loan burden have backfired in the form of increasing the risk premium of the forint).
However, one key difference, at this stage, between these two export-oriented CEE countries is the wiggling room they have in their respective monetary policies. Whereas in Czech Republic - with public debt below 40% of GDP as of end 2010 and with virtually no inflationary pressures on the horizon – the central bank (CNB) has sample room to engage in looser monetary policy, the Hungarian central bank (MNB) is stuck in a situation of a potential rating downgrade to junk status, a heavy public debt burden that stood above 80% of GDP at the end of 2010 and a currency that increasingly reflects the rising risk premium emanating from the government’s interventionist approach to foreign currency mortgage loans and an inflation that – albeit rather moderate in recent months – is still above MNB’s target rate of 3%.
In Czech Republic our expectations are for growth of 1.3% from the same period a year ago. This is just below the current consensus of 1.6% y/y and markedly below both the Q2 growth of 2.2% y/y and the Q3 growth of 2.6% y/y in 2010. For details on our latest Czech macro forecasts.
For Hungary our estimates are pointing to much more anaemic third quarter growth in comparison to the Czech numbers as we look for a near-nil expansion of 0.1% y/y. Our forecast is notably below the current surveyed consensus of 1% y/y, which in itself points to a rather lacklustre performance, and also significantly below the Q2 growth of 1.5% y/y and Q3 2010 growth of 1.7% y/y.
In both Hungary and Czech Republic growth has been stifled as conditions in the external environment continue to have a negative impact, while domestic demand in both countries has been in the doldrums for much of 2011. While the latter has been a result of both austerity measures and generally slow private consumption levels in thrifty Czech Republic, households with Swiss franc, euro and yen loans in Hungary have been continuously squeezed under their mortgage obligations due to the liding forint value (and where public efforts and schemes to address the FX loan burden have backfired in the form of increasing the risk premium of the forint).
However, one key difference, at this stage, between these two export-oriented CEE countries is the wiggling room they have in their respective monetary policies. Whereas in Czech Republic - with public debt below 40% of GDP as of end 2010 and with virtually no inflationary pressures on the horizon – the central bank (CNB) has sample room to engage in looser monetary policy, the Hungarian central bank (MNB) is stuck in a situation of a potential rating downgrade to junk status, a heavy public debt burden that stood above 80% of GDP at the end of 2010 and a currency that increasingly reflects the rising risk premium emanating from the government’s interventionist approach to foreign currency mortgage loans and an inflation that – albeit rather moderate in recent months – is still above MNB’s target rate of 3%.
In Czech Republic our expectations are for growth of 1.3% from the same period a year ago. This is just below the current consensus of 1.6% y/y and markedly below both the Q2 growth of 2.2% y/y and the Q3 growth of 2.6% y/y in 2010. For details on our latest Czech macro forecasts.
For Hungary our estimates are pointing to much more anaemic third quarter growth in comparison to the Czech numbers as we look for a near-nil expansion of 0.1% y/y. Our forecast is notably below the current surveyed consensus of 1% y/y, which in itself points to a rather lacklustre performance, and also significantly below the Q2 growth of 1.5% y/y and Q3 2010 growth of 1.7% y/y.
Russian GDP for Q3 is expected to come out strong
After a rather tame growth performance in H1, Russian GDP growth has likely accelerated clearly in Q3. We expect growth to have topped 5% y/y in July-September. Was household consumption the only growth driver earlier in the year, now investment activity has clearly picked up. Meanwhile, import growth is moderating due to the weaker rouble.
In addition to the GDP figures for Q3, plenty of interesting data including industrial production, wage growth and retail sales figures for October are due next week. We expect the robust performance seen in the past months to continue, as thus far the global jitters have had only a marginal effect on Russia.
In addition to the GDP figures for Q3, plenty of interesting data including industrial production, wage growth and retail sales figures for October are due next week. We expect the robust performance seen in the past months to continue, as thus far the global jitters have had only a marginal effect on Russia.
Baltic growth still upbeat, while risks are rising
Latvian GDP was released this week. In Q3 GDP growth accelerated to 5.7% y/y, up from 5.6% y/y in Q2 11. The outcome was significantly higher than our expectation of 4.5% y/y. According to Latvian statistics, the major contributors to GDP were manufacturing and domestic trade: the country's industry grew by 8% y/y and trade by 10% y/y. Based on this information it is clear that Latvia's domestic demand is recovering faster than we predicted. The exceptionally good third quarter results are likely to positively affect the whole year results and it is very likely that the Latvian economy will expand by more than 4% on average. However, the impact on Latvia of the deterioration in the global outlook could be fairly strong and there is a clear risk that GDP growth might decelerate significantly already in Q4 11.
We expect Estonian GDP growth to decelerate only marginally to 7.5% y/y down from 8.4% y/y in Q2. However, there is a clear risk of a more significant deceleration in the fourth quarter of this year. Two-thirds of Estonia's export routes are to Europe, where a significant slowdown is expected in Q4 11. The first signs of negative external demand trends were already reflected in the industrial production indicators: in September IP grew only 6% y/y and one of the major sectors - computers and electronics - indicated a significant decline of 48% m/m.
We expect Estonian GDP growth to decelerate only marginally to 7.5% y/y down from 8.4% y/y in Q2. However, there is a clear risk of a more significant deceleration in the fourth quarter of this year. Two-thirds of Estonia's export routes are to Europe, where a significant slowdown is expected in Q4 11. The first signs of negative external demand trends were already reflected in the industrial production indicators: in September IP grew only 6% y/y and one of the major sectors - computers and electronics - indicated a significant decline of 48% m/m.
Polish CPI steady
Polish inflation remains above the Polish central bank’s inflation target of 2.5% and we expect that to be the case for some time to come. However, we do expect inflation to gradually inch down in the coming months on the back of the expected continued slowdown in Polish growth. We expect Polish October inflation to have eased slightly to 3.8% y/y from 3.9% y/y. This is below the consensus expectation of 4.0% y/y and if we are right, it might further increase the expectations of rate cuts from the Polish central bank in early 2012.