281014 - Emerging Europe Watch.docx

Group Economics
Emerging Markets
Emerging Europe Watch
Peter de Bruin
Tel: +31 20 3435619
[email protected]
Intensifying headwinds
28 October 2014
•
Over the past months, emerging Europe has increasingly faced headwinds. On the one hand, this is the
ongoing effect of the Ukraine/Russia crisis, which has caused the Russian economy to continue to slow.
Indeed, capital outflows in conjunction with rising uncertainty have left their mark on investment, while the
recent slide in the ruble has fuelled inflation. In turn, this is eroding consumers’ real purchasing power, implying
that the outlook for consumption is also weak.
•
On the other hand, the weaker-than-expected performance of the eurozone, emerging Europe’s main trading
partner, is also causing the region to slow. This can for instance be seen in Poland, where exports to the EU
have slowed noticeably. All in all, according to our emerging Europe GDP tracker, annual growth in the region
fell to 1.1% yoy in Q3, down from 1.3% in Q2, keeping it on a downward path.
•
Within the region, despite its structural outperformance over the past years, the Polish economy seems to be
slowing the most, while growth in the Czech Republic and in Hungary seems to be a bit more resilient. In
contrast, recent data in Turkey are suggesting that growth picked up a bit in the third quarter in response to the
monetary easing that followed the sharp tightening in January.
•
Looking further out, though risks remain tilted to the downside, growth should pick up next year. This reflects
that we think that somewhere down the road, both Russia and Ukraine should recognise that some form of a
diplomatic solution is needed. Alternatively, the conflict could evolve to a ‘frozen conflict’ with fewer economic
consequences than currently is the case. This should give room to a slight rebound in Russian GDP growth,
though the slide in oil prices poses yet another headwind. Meanwhile, countries such Poland, Hungary and the
Czech Republic should benefit from firming domestic demand and somewhat stronger growth in the eurozone.
Main economic indicators/forecasts
GDP growth (%)
Emerging Asia
Emerging Europe
Latin America
Middle East/North Africa
Emerging markets total
2012
6.1
2.3
2.8
2.3
4.7
2013e
6.1
1.7
2.4
2.2
4.6
2014e
6.1
1.2
1.1
2.9
4.4
2015e
6.1
2.1
2.7
3.7
4.8
-0.6
2.3
3.2
-0.4
2.2
3.2
0.9
2.2
3.3
1.7
3.8
3.9
2012
-2.5
-1.6
-2.5
3.2
2013e
-2.5
-1.5
-2.5
0.5
2014e
-2.5
-0.5
-3.5
0.0
2015e
-2.5
-1.5
-3.0
-1.0
Eurozone
-3.7
-3.0
US
-6.8
-4.1
Source: EIU, ABN AMRO Group Economics
-2.6
-2.6
-2.0
-2.4
Eurozone
US
World
Budget balance (% GDP)
Emerging Asia
Emerging Europe
Latin America
Middle East/North Africa
Inflation (%)
Emerging Asia
Emerging Europe
Latin America
Middle East/North Africa
Emerging markets total
Eurozone
US
World
Current account (% GDP)
Emerging Asia
Emerging Europe
Latin America
Middle East/North Africa
Eurozone
US
2012
4.5
6.4
8.0
7.5
5.6
2013
4.6
5.4
8.6
11.6
6.0
2014e
3.9
6.3
12.2
6.9
5.7
2015e
4.3
5.7
10.1
6.9
5.6
2.5
2.1
4.1
1.3
1.5
4.0
0.5
2.0
4.0
1.0
2.2
4.0
2012
1.0
-0.6
-1.6
10.6
2013e
1.5
-1.5
-2.5
9.0
2014e
1.5
0.0
-2.5
7.5
2015e
1.0
-0.5
-2.5
6.0
1.8
2.6
2.7
2.6
-2.9
-2.4
-2.6
-2.9
* figures Emerging Markets regions are rounded
2
Emerging Europe Watch: Intensifying headwinds
Russia
Economy
Gross fixed capital formation
%yoy
40
30
20
10
0
-10
-20
-30
00 01 02 03 04 05 06 07 08 09 10 11 12 13 14
Source: Thomson Reuters Datastream.
Russia’s September round of data reinforced the view that the
economy has continued to slow. Admittedly, industrial production
unexpectedly grew by 2.8% yoy, up from 0% the month before, but
investment continued to decline. It contracted by 2.8% yoy,
marginally down from -2.7% in August, implying that tighter
monetary conditions, ongoing capital outflows, and uncertainty
continue to weigh on firms’ investment decisions. Meanwhile, retail
sales grew by 1.7% in September, up from 1.4% in August, though
this slight improvement could not prevent the series from remaining
on a downward trend. Indeed, the recent slide in the ruble has
fuelled inflation, which in conjunction with falling wage growth, is
eroding consumers’ real purchasing power. Consequently, we think
that GDP growth slowed to around 0.3% yoy in Q3, down from 0.8%
in Q2. This implies that our growth forecast for this year of 0.5%
remains within reach, though we recently scaled down our 2015
GDP growth forecast to 1.0% from 1.5%, and the recent slide in oil
prices suggests that risks continue to be tilted to the downside.
Poland
Economy
Actual GDP growth and GDP tracker
%yoy
8
7
6
5
4
3
2
1
0
00 01 02 03 04 05 06 07 08 09 10 11 12 13 14
GDP annual growth
GDP tracking estimate
Source: Thomson Reuters Datastream.
Of the other emerging European economies, the Polish economy
probably slowed the most in the third quarter. According to our GDP
tracker, annual GDP growth slowed to around 2.5% yoy in the third
quarter of this year, down from 3.3% in Q2. The slowdown in growth
is attributable to confidence spillover effects from the Ukraine/Russia
crisis, which explains why the manufacturing PMI has remained
below the 50-mark during the past three months. This is also
explains why we have seen a deterioration in consumer confidence.
The latter is probably behind the sharp slowdown in retails sales.
Another factor that is currently weighing on the Polish economy is
that exports slowed noticeably in Q3. Indeed, according to monthly
data, exports to other CEE European countries have fallen off a cliff,
while exports to the EU have slowed, as the region’s performance
has fallen behind expectations. Despite the slowdown, the strong
performance in the beginning of the year suggest that our 2014 GDP
forecast of 3.0% remains attainable.
Hungary
Economy
Industrial production growth
%yoy
20
15
10
5
0
-5
-10
10
11
12
Source: Thomson Reuters Datastream.
13
14
The Hungarian economy is also showing signs of slowing, though
we think this is also partly due to payback from the very strong
performance of the economy in the first half of the year, when annual
growth reached a probably unsustainably high of 3.9% in Q2.
Indeed, in August annual industrial production growth fell from
12.3% to 2.9%, as in response to excess production in previous
months, a car manufacturer was forced to temporarily stop
production. Still, the manufacturing PMI averaged 53.4 in the third
quarter, the same level as in Q2, suggesting that the manufacturing
output did not slow too much in the quarter as a whole. We also
have seen slower growth in retail sales, though think that with the
unemployment rate having continued to edge down, and wages
rising by around 2%, consumption should remain relatively resilient.
All in all, we think that growth slowed down to around 3% yoy in Q2,
which implies that our average GDP forecast of 3% remains within
reach.
3
Emerging Europe Watch: Intensifying headwinds
Czech Republic
Economy
Manufacturing PMI and new orders sub-index
level
70
60
50
40
30
20
08
09
10
11
12
HSCB manufacturing PMI
13
14
new orders
Source: Thomson Reuters Datastream
As in the other emerging economies, there is also evidence of some
slowing in the Czech Republic, though compared to the region, the
economy has continued to fare relatively well. Admittedly, industrial
production growth (from 8.6% yoy to -5.2%) fell sharply in August,
but one has to bear in mind that this series in very volatile. In
contrast, the manufacturing PMI rose from 54.3 to 55.6 in
September, keeping the series on a sideways trend. There are also
some mixed signals on the consumption front. Although this series
too is very volatile, annual growth in retail sales has slowed, with
sales in September dropping from 6.2% to 2.7%. That being said,
the unemployment rate has continued to edge down, while wages
growth has remained on an upward trend, suggesting that the
consumption outlook has remained relatively bright. All in all, we
think that growth slowed down only modestly in Q3 (from 2.5% to
2.3% or so), suggesting that our average growth forecast for this
year of 2.5% remains on track.
Ukraine
Election outcome
GDP
Exit polls suggested that the parliamentary elections after the
ousting of former President Yanukovych led to a victory of proEuropean parties. President Poroshenko’s Bloc and the National
Front led by Prime Minister Yatsenyuk each secured around 20% of
the votes. This implies that the two parties, possibly with the support
of Self Help – a new pro-Western party that captured around 13% of
the votes, could form a pro-Western coalition. Encouragingly,
President Poroshenko and Prime Minster Yatsenyuk have managed
to push through difficult reforms during the past months, suggesting
that further reforms lie ahead. This will increase the chance of
financial support from the IMF and the EU. Still, Ukraine faces many
challenges. The economy likely contracted by 9.5% yoy in Q3, while
Russia has cut off its gas supplies. More fundamentally, the proWestern victory is unlikely to soothe the rebels in the East of the
country nor for that matter Russia, suggesting that a short-term
solution to the conflict remains out of sight.
% yoy (include estimate for 2014 Q3)
8
4
0
-4
-8
-12
11
12
13
14
Source: Thomson Reuters Datastream
Turkey
Economy, central bank
Monetary policy, policy rates
%
14
12
10
8
6
4
10
11
12
Benchmark repurchase rate
One-week interbank rate
Source: Thomson Reuters Datastream
13
Overnight lending rate
14
In contrast to the other emerging European economies, the Turkish
economy is showing some signs of improvement. While the central
bank left its policy rates on hold in October, and, in response to
stubbornly high inflation, over the past weeks pushed up the oneweek interbank rate to the upper bound of its interest rate corridor,
the 175bp of easing between May and August has slowly started to
underpin economic activity. Indeed, the manufacturing PMI, which
after a short stint below the boom-bust mark, rose to 50.3 again in
August, and to 50.4 in September while industrial production growth
has also been accelerating. Meanwhile, the 7% yoy gain in imports
that followed a 13.5% drop in July, suggests that that domestic
demand is also firming. All in all, Q2 probably marked the low point
for annual GDP growth, and growth has since most likely has picked
up a bit. This should help average GDP growth this year to come in
at around 3%, which would be in line with our forecast.
4
Emerging Europe Watch: Intensifying headwinds
Disclaimer
This document has been prepared by ABN AMRO. It is solely intended to provide financial and general information on economics. The information in this document is strictly proprietary and is being supplied to
you solely for your information. It may not (in whole or in part) be reproduced, distributed or passed to a third party or used for any other purposes than stated above. This document is informative in nature and
does not constitute an offer of securities to the public, nor a solicitation to make such an offer.
No reliance may be placed for any purposes whatsoever on the information, opinions, forecasts and assumptions contained in the document or on its completeness, accuracy or fairness. No representation or
warranty, express or implied, is given by or on behalf of ABN AMRO, or any of its directors, officers, agents, affiliates, group companies, or employees as to the accuracy or completeness of the information
contained in this document and no liability is accepted for any loss, arising, directly or indirectly, from any use of such n
i formation. The views and opinions expressed herein may be subject to change at any
given time and ABN AMRO is under no obligation to update the information contained in this document after the date thereof.
Before investing in any product of ABN AMRO Bank N.V., you should obtain information on various financial and other risks and any possible restrictions that you and your investments activities may encounter
under applicable laws and regulations. If, after reading this document, you consider investing in a product, you are advised to discuss such an investment with your relationship manager or personal advisor and
check whether the relevant product –considering the risks involved- is appropriate within your investment activities. The value of your investments may fluctuate. Past performance is no guarantee for future
returns. ABN AMRO reserves the right to make amendments to this material.
© Copyright 2014 ABN AMRO Bank N.V. and affiliated companies ("ABN AMRO").

Download Report