Economische Vooruitzichten Centraal-Europa - Maart 2013

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(32) (0)2 429.62.87 E-mail: dieter.guffens@kb c.bePublisher: Johan Van Gompel, Havenlaan 2, 1080 BrusselAddress for correspondence & subscription management: KBC Groep NV, Global Services, GCE, Havenlaan 2, 1080Brussel. E-mail: [email protected] publication is jointly produced by KBCs economists in Belgium and Central Europe. Neither the degree to whichthe hypotheses, risks and forecasts contained in this report reflec t market expectations, nor their effective chancesof realisation can be guaranteed. The forecasts are indicative. The information contained in this publication is gen-eral in nature and for information purposes only. It may not be considered as investment advice according to the Actof 6 April 1995 on the secondary markets, the legal status and supervision of investment companies, intermediariesand investment advisers. KBC cannot be held responsible for the accurac y or completeness of this information. Allhistorical rates/prices, statistics and graphs are up to date, up to and including 19 March 2013, unless otherwisestated. The views and forecasts provided are those prevailing on 19 March 2013.

Central EuropeCentral Europe continues to struggle with the negative exter-

nal shock coming from the Euro Area. Trade and financial

linkages with the Euro Area are large and the EMUs contrac-

tion in the fourth quarter depressed the export performance.

Unfortunately domestic demand is unable to fill the gap leftby external demand. Most governments in the region have

committed themselves to maintaining ambitious fiscal targets.

Monetary easing has been conducted to dampen the effect

of the external slowdown and we believe the bottom of the

cycle has been reached. Nevertheless, overall 2013 growth in

Central European economies will be modest at best.

Real GDP growth Inflation

2013 2014 2013 2014

Poland 1.2 2.8 1.6 2.2

Czech Republic 0.0 2.0 2.2 2.0

Hungary -0.3 1.2 4.8 4.0

Slovakia 0.8 2.0 2.0 2.2

Bulgaria 1.6 2.6 2.9 3.0

Russia 3.4 3.4 5.7 5.0

Turkey 4.1 4.7 6.9 6.4

Policy rates

19-03-2013 +3m +6m +12m

Poland 3.25 3.00 3.00 3.00

Czech Republic 0.05 0.05 0.05 0.05

Hungary 5.25 4.75 4.75 4.75

Slovakia - - - -

Romania 5.25 5.25 5.25 5.25

Bulgaria - - - -

Russia 8.25 8.25 8.25 8.25

Turkey 5.50 5.50 5.50 5.50

Exchange rates

19-03-2013 +3m +6m +12m

PLN per EUR 4.15 4.13 4.10 4.05CZK per EUR 25.58 25.50 25.20 24.80

HUF per EUR 305.51 305.00 310.00 320.00

RON per EUR 4.41 4.40 4.40 4.35

BGN per EUR 1.96 1.96 1.96 1.96

RUB per EUR 39.90 40.00 40.00 40.00

TRY per EUR 2.35 2.32 2.30 2.30

10-year rates

19-03-2013 +3m +6m +12m

Poland 3.82 3.90 3.90 4.00Czech Republic 1.87 2.20 2.40 2.65

Hungary 6.53 6.45 6.60 6.80

Slovakia 2.97 2.55 2.80 3.05

Romania - - - -

Bulgaria - - - -

Russia 7.40 6.80 6.50 6.00

Turkey 7.04 6.30 6.10 6.00

March 2013


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Inflation pressures are abating(harmonised CPI, year-on-year, in %)

Widespread weakness in industrial production(year-on-year, 3 month moving average, in %)

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Czech Republic PolandHungary Slovakia

Czech Republic PolandHungary Slovakia

Economic Outlook Central Europe

General perspective

Central Europe continues to struggle

Most Central European economies have

been underperforming for quite some

time. Hungary and the Czech Republic

especially have been in recession for sev-

eral consecutive quarters. The Polish and

Slovakian economies performed better,

but even there growth has been slowing

down significantly near the end of last

year and both countries barely managed

to avoid a quarter of negative growth.

Central Europe continues to struggle

with the negative external shock comingfrom the Euro Area. Trade and financial

linkages with the Euro Area are very

large and the EMUs contraction in the

fourth quarter (-0.6% quarter-on-quar-

ter) depressed Central Europes export

performance. Unfortunately domestic

demand is unable to fill the gap left by

external demand. Most governments in

the region have committed themselves

to maintaining ambitious fiscal targets,

often part of EUs excessive deficit pro-

cedure. The effect of fiscal austerity isworst in Hungary, where the govern-

ment resorts to ad-hoc taxation on

companies and banks. The Hungarian

authorities are reluctant to tax house-

holds before the general elections in

March 2014.

With governments in the region unable

to employ counter-cyclical fiscal policies,

it is up to monetary policy to dampen

the effect of the external slowdown,

with the obvious exception of Slovakia.

The last several months central banks

in Central Europe have eased monetary

conditions substantially. The Hungarian

central bank has cut its policy rate by 25

basis points seven months in a row. The

Polish central bank also eased by a total

of 150 basis points. The Czech National

Bank is limited in its policy options. The

policy rate has been standing at 0.05%since November, making further rate

cuts impossible. On numerous occasions

the Czech National Bank has threatened

to intervene in the exchange market to

weaken the CZK. Although so far no

intervention has occurred the CZK has

effectively depreciated slightly on the

threat alone. In the coming months we

expect further rate cuts in Hungary and

one more rate cut in Poland. Recent

inflation dynamics in the region have

been favorable. For the larger part of2012 inflation was above central banks

targets. The last few months price pres-

sures eased significantly, although often

as an effect of fiscal policy measures

(disappearing effect of VAT hikes, cuts

in electricity and gas prices, ). Inflation

is now within the target bands of the

central banks, leaving room for further

monetary easing.

The ongoing fiscal consolidation will

continue to be a drag on domestic

demand in the short to medium-term.

Nevertheless, we believe the bottom of

the cycle in the region has been reached.

Consumer and producer confidence

have recently shown signs of improve-

ment. External demand should benefit

from an imminent upturn of the busi-

ness cycle in the EMU, which is already

visible in Germany. The next few months

growth in industrial production shouldstart accelerating again. However, over-

all, 2013 growth in the Central European

economies will be modest at best. For

Hungary we even expect an additional

year of economic contraction.

Dieter Franceus ([email protected])KBC Group


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Czech Republic GermanyEU

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Czech economy remains in recession(real GDP growth, year-on-year, in %)

Recession Vacancies (right-hand scale)Unemployment rate (in %, left-hand scale)Unemployment rate (seasonally adjusted, in %, left-hand scale

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Unemployment rate rising further


Czech Republic

The Czech recession persists

Petr Dufek ([email protected])CSOB Czech Republic

The Czech economy has been going

through its second recession in the last

four years. The main reason for the cur-

rent economic downturn is the weak

domestic consumption as well as invest-

ment growth, which negatively affected

the performance of construction and the

manufacturing industry. By contrast, the

contribution of foreign trade remained

positive, notwithstanding the recession

in most EU countries, which are still the

destination of most Czech exports. For2012 as a whole, the economic output

fell by 1.1%.

Household consumption declined at a

record-breaking rate, in particular due

to the drop of real household disposable

income. This was triggered by curbed

wage growth against the background

of rising unemployment. Both of these

factors were responsible for the strong

deterioration of consumer confidence in

the economy, together with the reluc-tance to spend and the increased will-

ingness to save. This trend did probably

not change in early 2013 either, when

the situation on the labour market con-

tinued to worsen. The unemployment

rate rose to 8.1%, according to the new

methodology of the Ministry of Labour

and Social Affairs, i.e., more than 10%

according to the original methodology.

This made Februarys unemployment

rate the highest rate ever.

While rising unemployment has been

one of the main problems of the Czech

economy this year, inflation does not

pose any problem at all, whether in the

long term or at the moment. The year-

on-year rise of the CPI decelerated to

1.9% in January, thus reaching a level

below the Czech National Banks (CNB)

target. This happened despite the 1%increase in both VAT rates, to 15% and

21% respectively. For more than a year,

inflation has been significantly curbed

by the above-mentioned poor consumer

demand and by the fairly stable CZK.

The favourable inflation path enables the

CNB to keep its base interest rate at the

all-time low of 0.05%. Given the central

banks forecast and the comments made

by its leading representatives, the CNBs

base rate is unlikely to change its policy

rate in 2013. The CNB has exhaust-ed its scope for further monetary eas-

ing through cutting its policy rate, and

therefore it occasionally talks of another

possible instrument to ease the mon-

etary conditions in the Czech Republic,

such as FX interventions. However, the

CNB Governor recently stated that pos-

sible exchange rate intervention may not

be made before the second half of 2012.

Yet the possibility of such interventions

has been acting as an adequate curb on

any appreciation of the CZK below CZK

25 per EUR.

Despite the negative current economic

data, first signs of a stabilisation or

even an approaching turnaround of the

Czech economy started to occur in the

beginning of 2013. Although these signs

primarily included so-called soft indi-

cators, such as the PMI or confidenceindicators, the economic downturn

stands a good chance of being stopped

in the first half of the year. We put great

hopes into exports, one-third of which

are linked to the positively developing

German economy. While this years first

hard data from industry and exports will

not at all be positive, the stabilisation of

orders, which should become evident

as early as in the second quarter, may

change the existing negative trend of

the Czech economy. Just like during theprevious recession, the turnaround will

be primarily driven by the manufacturing

industry, while construction is unlikely

to emerge from the recession any time

soon.


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Hungary

Government tightens grip on central bank

Recent HUF weakness reflects increased uncertainty(HUF per EUR)

Central bank has been easing seven months in a row

270

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Jan-2012 Apr-12 Jul-12 Oct-12 Jan-13

Policy rate (in %)Headline CPI (annual change, in %)Core CPI (annual change, in %)


Hungarys recession deepened in the

fourth quarter of 2012. The econo-

my contracted by a depressing 0.9%

quarter-on-quarter. During the whole

of 2012, real GDP decreased by 1.7%.

On the one hand external demand con-

tinues to be weak. As a small and open

economy Hungary is heavily dependent

on exports to the Euro Area and fourth

quarter EMU GDP contracted by a dismal

0.6% quarter-on-quarter. On the other

hand domestic demand is constrainedby the ongoing fiscal consolidation by

the Hungarian government. Taxation has

been focused mainly on companies and

banks since the authorities are reluc-

tant to tax households before the gen-

eral election in March 2014. As a result

of these often ad-hoc policy choices,

investment growth has been subdued

and the business environment is per-

ceived to be unpredictable.

Fiscal contraction will continue to be adrag in 2013 since the government aims

to keep the government deficit below

the 3% of GDP threshold and have the

Excessive Deficit Procedure lifted. A fur-

ther reduction in the budget deficit will

require additional tax packages. With

the elections looming next year, the

government might resort to unorthodox

policy measures again. This suggests that

not much growth is to be expected from

domestic demand. External demand on

the other hand should benefit from a

slightly better outlook in the Euro Area,

especially in Germany, illustrated by the

solid rise in the IFO business climate

index. However we believe that the

improvement in external conditions will

not prevent real GDP from contracting

in 2013.

In an effort to boost domestic demandthe National Bank of Hungary continues

pursuing monetary easing. For the sev-

enth month in a row, the central bank

cut its policy rate by 25 basis points to

5.25%. CPI inflation decreased to 2.8%

in February from peaking in September

at 6.6%. Although the sharp drop in

inflation is largely due to a large base

effect related to a VAT-hike early last

year, we believe that further interest

rate cuts are in the pipeline. It is clear

that upward price pressures are verylimited with these weak demand con-

ditions. Further easing is even more

likely now that one of the opponents

of further rate cuts, Andras Simor, was

replaced by Gyrgi Matolcsy as governor

of the central bank. The appointment

of Mr. Matolcsy means that the govern-

ment has tightened its grip on central

bank decision making. As a former

Economy Minister he is associated with

the unorthodox economic policy of

Prime Minister Viktor Orban. Addressing

parliament he explicitly said that one

of the tasks of the central bank should

be supporting the economic recovery

in close collaboration with the govern-

ment. The risk exists that in the medium-

term the central bank might steer away

from its inflation-targeting mandate and

resort to more unconventional policy

measures. Even more worrisome per-haps are the recently approved changes

to the Hungarian constitution that limit

the power of the Constitutional Court.

This decision worsened the already dif-

ficult relationship with the European

Commission and increased the risk of

political repercussions. The recent depre-

ciation of the HUF illustrates the renewed

uncertainty with regards to Hungary.

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Poland

Largest CE economy is losing steam

Private consumption Change in inventoriesPublic consumption Net exportsGross fixed capital formation Real GDP growth

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GDP growth contributions(year-on-year, in %)

CPIWages in enterprise sector

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Real wage growth turned negative(year-on-year, in %)

Jaroslaw Antonik ([email protected])KBC Towarzystwo Fund. Inwest. A.S.

Recent macroeconomic data confirmed

that Polish economic growth is slowing

down. In Q4 of 2012, real GDP growth

fell 1.1% year-on-year (yoy) from 1.4%

yoy in Q3, which was better than the mar-

ket consensus expectation. Compared to

Q3, real GDP growth was slightly positive

(+0.2%), meaning that the Polish econ-

omy avoided a recession in the techni-

cal sense of the word (two consecutive

quarters of negative growth).

Nevertheless, the structure of growth

contributions to real GDP in Q4 2012

was not very promising for the future.

Growth of private consumption, invest-

ments and inventories all contributed

negatively (by -0.5%, -0.1% and -0.1%

respectively). Only the positive growth

contribution of net exports (+1.8%) kept

overall real GDP growth positive. The

most important conclusion of these data

is the continued weakness of domestic

demand as private consumption shrankby 1% year-on-year, the first drop of that

magnitude since 1996.

Weak consumer demand reflected the

impact of several factors. First of all, the

difficult situation on the labour market,

where we observe a steady increase of

the unemployment rate. In February, the

unemployment rate probably reached

14.4%. Moreover, Polish entrepreneurs

will probably announce additional lay-

offs in the coming months. Against

this background, real wage growth will

probably remain negative. Therefore, we

expect the recovery of private consump-

tion to be slow. In addition, Q4 2012 was

the fourth consecutive quarter of fall-

ing investment demand (on a quarterly

basis) and the pace of contraction even

accelerated. This unfavorable outlook for

next two to three quarters is confirmedby the manufacturing PMI which is still

below the neutral level of 50. Economic

activity may well regain momentum in

H2 2013 but will remain modest.

In the meantime, the cyclical slowdown

and especially the negative growth of

private consumption translated into eas-

ing inflationary pressure. In January, CPI

inflation dropped to 1.7%. This level

was below the market expectation and

significantly below the central banksinflation target. Core inflation also

remained on its low level. Meanwhile,

inflation expectations declined in line

with CPI inflation, that will continue in

the coming months as a consequence of

the absence of substantial hikes of regu-

latory prices, lower natural gas tariffs

and the expected price stability on the

commodity market.

The absence of inflationary pressure was

reflected in the new inflation projection

released by the Polish Central Bank. It

expected that, with unchanged policies,

headline inflation may remain below

the central banks inflation target even

until 2015. This was probably one of

the main reasons why the Monetary

Policy Council (MPC) cut its policy rate

by 50 basis points on March meeting.

Although many market participants con-

sider the latest MPCs decision as theend of the monetary easing cycle, we

believe that there is still some room for

at least one cut, based on the expected

further fall of CPI inflation.

Weak GDP growth in the coming quar-

ters may create some risk for public

finances. In 2013, the deficit-to-GDP

ratio will probably rise compared to

2012. However, it will probably not

exceed 4%, since the Polish govern-

ment is strongly oriented towards fiscaldiscipline. This translated into a higher

sovereign credit rating outlook by Fitch.

Comparing the Polish macroeconom-

ic conditions to the situation in other

European countries, there may be room

for a further credit rating upgrade as

early as 2013.


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Slovakia

EMU recession and weak domestic demand

weigh on growth

Economic growth dynamics weakening(in %)

Expansion of Slovak car plants slowing(production in units)

VW Kia Motors SlovakiaPSA Peugeot Citroen

Real GDP growth (year-on-year)Real GDP growth (quarter-on-quarter)

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1993 95 97 99 2001 03 05 07 09 11 13f

Marek Gabris ([email protected])CSOB Slovakia

The Slovak economy has been stepping

on the breaks. Real GDP growth slowed

down from 2.1% year-on-year (yoy) in

Q3 2012 to 0.7% yoy in Q4. Lower than

expected foreign demand is to blame for

this. Growth slowed from 11.6% yoy in

Q3 to 7.1% yoy in Q4. Nevertheless, it

still remained the main driving factor of

overall economic growth.

Indeed, al other GDP components

shrunk. Domestic demand and main-ly household consumption growth are

slowed by fiscal austerity and falling con-

sumer confidence. Final household con-

sumption decreased by 1.2% yoy in Q4

2012. Consumer confidence again dete-

riorated at the end of 2012 because of

rising unemployment and the uncertain

economic outlook, both in Slovakia and

mainly in the Euro area. Government

consumption fell in the same period

by 0.3% yoy, driven by the obligation

to cut the fiscal deficit below the 3%target. Moreover, private companies are

hesitating to invest as a consequence

of the economic uncertainty and weak

aggregate demand. As a result, gross

fixed capital formation decreased by

5.0% yoy in Q4 2012.

From a production point of view, eco-

nomic activity was mainly driven by

the rise of car production in 2012.

Without the growth contribution of the

car industry, real GDP growth could eas-

ily have been negative in 2012 instead of

the reported 2.0% growth. In its wake,

the production of transport equipment

also increased by 26% yoy in 2012. The

number of produced cars itself even

grew by 40% yoy. Therefore, the declin-

ing car sales on the western European

markets is worrying and some car plants

decided to reduce the number of work-ing days in early 2013. However, the

stronger growth performance of emerg-

ing markets (in particular of the so-called

BRIC countries) could at least help to

offset to some extent the possible weak-

ness of Western European demand.

The labour market too is vulnerable

to the lack of new orders and weaker

external demand. Moreover, the adopt-

ed changes to the employment law

probably also played a role in the ris-ing unemployment rate to the highest

level in almost nine years. Indeed, the

unemployment rate is currently at its

highest rate since Slovakia joined the EU

in 2004. The new measures in the labour

code made redundancies more costly,

although still to a much lesser extent

than in western Europe. The unemploy-

ment rate will probably stabilise around

15% in March and thereafter fall again

when the improvement in German busi-

ness confidence and higher industrial

orders turn out t0 be sustained. Already

in January, there were first signs of

improving orders for the Slovak industry,

when they increased by 11.2% month-

on-month.

Finally, inflationary pressure has been

easing recently thanks to the favourable

evolution of regulated prices comparedto 2012. Moreover, the weakness of

domestic demand and the rising unem-

ployment rate put additional downward

pressure on inflation. Indeed, CPI infla-

tion declined from 3.2% in December

2012 to 2.2% in February 2013. We

expect demand-led inflation pressure to

remain under control and decline as the

net inflation rate (adjusted for the effect

of regulated prices, indirect tax changes

and volatile food prices) moved from

2.3% yoy at the end of 2012 to 1.8%yoy in February 2013.

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Government bond yields(10 year government bond yields in %)

Money market rates(in %)

In 1996-1997 Bulgaria went through

a severe economic and financial crisis,

resulting in a contraction of GDP of

more than 10%. Confidence in the

banking system and the government

sector was quickly disappearing, and

continued funding flows from the cen-

tral bank to both the government and

the banks resulted in hyperinflation in

the first half of 1997, with a peak of

2020% in March. To restore confidence

and macroeconomic stability a radicalinstitutional change was implemented

with the introduction of a currency

board arrangement on July 1, 1997.

A currency board arrangement (CBA)

combines several key features. The

domestic currency has a fixed exchange

rate vis--vis an anchor currency and the

central bank commits itself to convert

the domestic currency on demand at

that fixed exchange rate into the anchor

currency. For this to be credible, thecentral bank needs to hold sufficient

foreign exchange reserves to at least

cover its entire monetary liabilities (M0).

This implies that a CBA can only issue

domestic notes and coins, or create

bank reserves at the central bank, when

they are backed by foreign exchange

reserves.

The Bulgarian authorities chose the

German mark as the anchor currency

at an exchange rate of 1000 Lev per

DEM. This was replaced by a peg to the

euro at an exchange rate of 1.95583

lev per euro after the DEM entered the

monetary union in 1999. This choice was

consistent with the trade structure and

the policy strategy of further political

and economic integration with the EU,

of which Bulgaria became a member in

2007.

A CBA has some obvious advantages. It

offers the prospect of a stable exchange

rate, and is effective in eliminating high

inflation since it adopts the better mon-

etary discipline of the anchor currencys

country. This is particularly useful for

countries lacking credible institutions.

Furthermore a CBA prevents the gov-

ernment from financing budget deficits

by printing money. However, there are

some clear limitations. Under a CBA the

central bank cannot conduct an autono-mous monetary policy, as it has lost the

ability to use the exchange rate or inter-

est rates as policy tools. This leaves only

price and wage adjustments to absorb

an external shock.

In the case of Bulgaria the introduction

of the CBA proved effective in stabilizing

inflation and it marked the start of a new

growth cycle. By 2005 both short-term

and long-term interest rates had con-

verged to the euro level. Bulgarias CBA

weathered the financial crisis of 2007-

2008 very well and will likely continue

to do so in the future. Ultimately, the

currency board should be replaced by

EMU membership. Although euro adop-

tion has been a long-time strategic aim

of successive governments, Bulgaria has

shelved the plans to join the common

currency indefinitely. In September 2012

former Finance minister Djankov said:Right now, I dont see any benefits of

entering the euro zone, only costs. The

public rightly wants to know who would

we have to bail out when we join? Its

too risky for us and its also not certain

what the rules are and what are they

likely to be in one year of two.

Bulgaria SlovakiaHungary GermanyCzech Republic

Money market, Bulgaria ECB policy rateMoney market, EMU


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Economische Vooruitzichten Centraal-Europa - Maart 2013

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Transcript of Economische Vooruitzichten Centraal-Europa - Maart 2013