Erste Bank: Economic growth likely accelerated in 3Q17 in CEE

We expect that economic growth likely remained very strong in CEE, despite already having seen strongly upbeat figures in 2Q17. The engine of growth is not just domestic demand, but also external demand. Tuesday will draw the focus on Romania, Slovakia, the Czech Republic, Hungary and Poland.

We think that the growth figures have all managed to increase on a yearly basis, ranging between 3.4% and 6.5%, with the strongest annual growth expected in Romania and the least strong in Slovakia.


We expect that economic growth likely remained very strong in CEE, despite already having seen strongly upbeat figures in 2Q17. The engine of growth is not just domestic demand, but also external demand. Tuesday will definitely draw the greatest focus, as Romania, Slovakia, the Czech Republic, Hungary and Poland will all release flash 3Q17 GDP releases.

Romania: We expect the local economy to pick up to 6.5% y/y in 3Q, as signaled by most macro indicators so far. What could set the third and fourth quarter apart from the previous two is agriculture, which is said to be delivering a one-of-a-kind performance this year. The latest 2017 crop estimates look promising and raise prospects for stronger private consumption via an increased cottage food industry that will better support self-sufficiency in local homesteads, a trademark of Romanian agriculture.

Bearing in mind that agriculture remains a wildcard – and as often as not causes surprises – we see risks to our growth forecast as weighted to the upside in 3Q. Although losing momentum in 2018, we expect Romania to advance a robust 4.1%, driven mainly by household consumption. However,
the recent overhaul of the welfare system, whereby almost the entire burden has been pushed onto employees, will probably weigh on both wages and private consumption.

As expected, last week, the National Bank of Romania narrowed the interest rate corridor around the policy rate by another 25bp, while leaving the policy rate unchanged (1.75%). The central bank also changed the wording of the decision, announcing ‘firm’, as opposed to ‘adequate’, liquidity management. The move is aimed at strengthening the signal of the monetary policy rate by better anchoring money market rates around the policy rate. The central bank now sees inflation spiking in the near term and very likely to overshoot the upper end of the target band in the first part of 2018. It has thus upped its annual inflation forecast to 2.7% for December 2017 (from 1.9%), to 3.9% in 1Q18 and 3.8% in 2Q18.
However, the forecast for end-2018 was left unchanged at 3.2%. The MPC decision, together with the upward revision of its inflation forecast, suggests that a policy rate hiking move or cycle is in the making. We have been anticipating two rate hikes in 1Q18, with a longer cycle depending on global market conditions, the fiscal policy stance and the evolution of inflation.

The government last week adopted an emergency ordinance that overhauls the welfare system. The move is intended to deal with the ever-expanding welfare deficit, which currently stands at a whopping RON 13.5bn, bearing in mind that 157,798 companies in Romania have not paid social contributions for their 2.08mn employees, according to the minister of finance. The new framework shifts almost the entire burden onto employees, while lowering the overall contribution level to 37.25% (35% for employees and 2.25% on the whole wage fund) from the current 39.25%. Moreover, income tax will be reduced to 10%, from the current 16%. With a view to unlocking some funds to cover the hole created by these changes, the emergency ordinance provides that contributions to local privately managed pension funds will be pared back from 5.1% to 3.75%. To the same end, a European Directive that makes it more difficult for foreign companies to repatriate profits will be implemented.

Inflation shot up to 2.6% y/y, from 1.8% y/y the previous month. Apart from volatile food, processed food (bakeries, meat, edible oil and diaries) continued to steadily push up inflation in October. Food prices were up a hefty 1.3% m/m, the highest monthly reading since September 2012. On the non-food side, the hike in the electricity price was significantly higher than announced by the regulator (6.9% vs. 5%), while the price increase for fuel was in line with our expectations (3.5% m/m). Growth in services prices was much more benign (below 0.2%), held down by RON appreciation. The latest results have led us to revise upwards our year-end forecast to 2.7%, from the previous 2.4%. We continue to expect inflation to overshoot the upper bound of the target band in the first half of 2018 (3.9-4%), spurred on by more expensive food, fuel and (probably) energy.

Raportul Erste, aici: Economic growth likely accelerated in 3Q17 in CEE

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