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Stability restored, time for growth Czech economy still affected by weak domestic demand Hungarian monetary easing cycle to continue Poland: gaining pace
Slovak inflation close to all time low in November Modest Bulgarian recovery in the making In the spotlight: The Czech National Bank intervenes in the FX market
Inflation
2015 07-01-2014 +3m
Policy rates
+6m +12m
Poland Czech Republic Hungary Slovakia (ECB) Romania Bulgaria Russia Turkey
Exchange rates
07-01-2014 +3m +6m +12m 07-01-2014 +3m
10-year rates
+6m +12m
PLN per EUR CZK per EUR HUF per EUR RON per EUR BGN per EUR RUB per EUR TRY per EUR
If you have any questions relating to the contents of this publication, contact: Dieter Guffens (32) (0)2 429.62.87 E-mail: dieter.guffens@kbc.be Publisher: Johan Van Gompel, Havenlaan 2, 1080 Brussel Address for correspondence & subscription management: KBC Groep NV, GCE, Havenlaan 2, 1080 Brussel. E-mail: economic.research@kbc.be This publication is jointly produced by KBCs economists in Belgium and Central Europe. Neither the degree to which the hypotheses, risks and forecasts contained in this report reflect market expectations, nor their effective chances of realisation can be guaranteed. The forecasts are indicative. The information contained in this publication is general in nature and for information purposes only. It may not be considered as investment advice according to the Act of 6 April 1995 on the secondary markets, the legal status and supervision of investment companies, intermediaries 1 and investment advisers. KBC cannot be held responsible for the accuracy or completeness of this information. All historical rates/prices, statistics and graphs are up to date, up to and including 7 January 2014, unless otherwise stated. The views and forecasts provided are those prevailing on 8 January 2014.
Economic Outlook
Central Europe
General perspective
Economic Outlook
Central Europe
Czech Republic
approved in its first reading. The Czech Republics deficit in 2014 will probably be CZK 112bn, which is higher than in 2013, but again below 3% of GDP. For the years thereafter, however, the introduction of another reduced VAT rate on pharmaceuticals or the imposition of a special income tax on banks, and possibly also on telecommunications and utilities, cannot be ruled out.
11
12
13
Quarter-on-quarter Year-on-year
Economic Outlook
Central Europe
Hungary
09
10
11
12
13
Inflation target
Economic Outlook
Central Europe
Poland
Gaining pace
The Polish economy reached the bottom of its latest economic cycle in the first quarter of 2013, before recovering in the subsequent quarters. In the third quarter, real GDP growth accelerated to 1.9% year-on-year. The latest economic data are consistent with a sustained recovery. Producer confidence in the manufacturing sector improved further to 54.3 in November, while industrial production and retail sales rose by respectively 4.4% and 3.2% year-on-year in October. taking a wait and see approach. At its latest meeting the policy rate remained unchanged at 2.50%. We expect no further changes in monetary policy at least until mid-2014.
Fiscal creativity
Obviously, the economic recovery is supportive for public finances. However, the biggest fiscal change this year will come from the pension system reform. A substantial part of the Open Pension Funds (OPF) assets will be transferred from the private sector to the government sector. As a consequence of this operation the general government will post a sizeable surplus in 2014 as opposed to a sizeable deficit in 2013. The short term effect of this operation is beneficial for economic growth. It will create room for additional fiscal stimuli, enhanced by the eligibility for EU funds. In the long term however this nationalisation leads to an increase in future obligations.
Export-driven growth
In recent quarters net export was the main GDP growth driver, thanks to the geographical proximity to the wellperforming German economy. However, as the recovery moves forward, net exports growth contribution will diminish and investment and consumption growth will take over. In the meantime, the labour market stabilised. In the light of the high unemployment rate, a gradual improvement will be possible without the risk of creating inflationary pressure. Indeed, GDP remains far below its potential level. As a result of the absence of inflationary pressure and the slack on the labour market, the Monetary Policy Council is
(quarter-on-quarter annualised, in % of GDP) 15 10 5 0 -5 -10 Q2-2011 Private consumption Public consumption Investments 6 5 4 3 2 1 0 -1 -2 2012 2013 Net exports Inventory and errors Real GDP growth -3 2007 08
Growth contributions
09
10
11
12
13
Inflation target
Economic Outlook
Central Europe
Slovakia
Economic Outlook
Central Europe
Bulgaria
Macroeconomic stability
Despite the political instability and the dismal growth performance, macroeconomic stability actually has improved in recent years. Policymakers had the fiscal discipline required under the currency
Deflationary environment
(year-on-year, in %)
Jan-12
July-12
Jan-13
July-13
Economic Outlook
Central Europe
In the spotlight
The Czech National Bank intervenes in the FX market
In the Czech economy, there are no longterm inflationary pressures. Occasional overshooting of the official inflation target was mainly the result from adjustments of indirect taxes or regulated prices. Although both VAT rates were raised by 1 %-point in 2013, inflationary pressures remain strongly subdued as a result of the persisting weakness of domestic demand and growing competition in the service sectors. As a result, yearon-year inflation fell below the lower threshold of the tolerance band of the Czech National Bank (CNB). The CNB has exhausted the possibility of cutting its policy rate, which since November 2012, has been at technical zero (0.05%). The central bank made in clear on several occasions that it does not consider negative rates to be a policy option. For about a year the CNB talked about the possibility of exchange rate interventions, thus successfully keeping the koruna at weaker levels, and preventing it from strengthening below 25.50 CZK per EUR. However, at its November meeting, the central bank decided to take it one step further by putting in place an intervention regime, with a target exchange rate of currently 27.00 CZK per EUR. With large-scale FX interventions, the central bank succeeded in weakening the Czech currency by approximately 5% in a single day and pushing it to the desired target exchange rate. In addition, central bank representatives made it clear that this new monetary policy regime would be in place until strong inflationary pressures become evident in the economy. Hence the CNB will very likely maintain that exchange rate throughout 2014. The exchange rate threshold will be reviewed at each CNB Board meeting. However, changes to the parity should be less frequent than interest rate changes usually are. As a result, we do not believe that the CNB will decide to weaken the koruna further within the next six months. However, the market exchange rate of the koruna is not limited on the weaker side and already reacts very sensitively to messages from the central bank that could point towards a weaker parity. The main policy objectives of the new regime include boosting inflation through increased import prices, raising inflation expectations and thus making households consume and invest more. Possible side effects include improved competitiveness, the creation of new jobs and higher real GDP growth. According to the CNBs new forecast, the 2014 GDP should grow by 2.1% rather than by the originally predicted 1.2%, thanks to the weakened koruna. For a long time there has been speculation as to how strongly the CNB had to intervene at the beginning of its new exchange rate regime, in order to drive the koruna to close to CZK 27 per EUR. After a few weeks, the central bank announced that in the initial days its interventions reached approximately CZK 200 bn in total. Although this corresponded to an increase of the central banks balance sheet total by approximately 18%, this has not reduced the central banks determination to intervene with additional newly printed korunas if needed. Another result of the FX interventions is the rather sharp increase of the koruna liquidity in the market, preventing any rise in interest rates, and consequently in government bond yields as well. Thus the Czech yield curve has decoupled somewhat from the evolution of European interest rates and yields, but we believe this to be only temporary. In any case, the need for a further CNB intervention has decreased in recent weeks, as the market itself has pushed the koruna towards CZK 27.50 per EUR.
Petr Dufek (pdufek@csob.cz) CSOB Czech Republic
23.5 Jan-2013
Apr-13
Oct-13