Many figures regarding CEE4 released these recent days
1. Q4-2019 GDP
While Czech and Poland have slowed down a lot in Q4 compared to Q3, Hungary and Romania continued to grow strongly.
We do not have yet the details regarding GDP components but looking at hard data gives us some insights. In Czech, for instance, we assume that the main driver of growth in Q4 has been private consumption as retail sales, industrial production and services remained positive while the manufacturing sector shrank. Similarly, in Poland, while industrial production and retail sales were strong on the last quarter of 2019, construction sector collapsed. In Hungary, despite the strong GDP growth registered, some signs of deceleration already materialized end of 2019. Hard monthly data showed a contraction both in industrial production and in construction. Moreover, the automotive sector have also stagnated. In Romania, public and private consumption were probably the main drivers of GDP growth on the back of huge fiscal spending.
Over the full 2019 year, Poland, Hungary and Romania grew at a very strong pace (higher than 4% yoy) and Czech to a lower extend (2.4% yoy).
In a two years horizon, we forecast a moderate deceleration for Czech but stronger for Poland, Hungary and Romania as the global environment is still weak (lower global trade, coronavirus etc) and because of lack of room of maneuver for these countries especially in terms of monetary policy.
In Czech, weak industrial and manufacturing production – due essentially to lower growth of main trading partners- coupled with labour shortage would weigh on growth while neutral credit conditions and fiscal stimulus should full growth. In Poland, the deceleration of production should be partially offset by last year fiscal stimulus effects and the rise of more than 15% of minimum wages implemented in January. In Hungary, the probability that the construction boom is over is strong. Indeed, as mentioned above, hard data showed a return in construction and housing prices are decreasing. In Romania, the deceleration is expected to be the most important. Even though there is a pension reform in the pipe aiming at increasing pensions, we think that the country as no room of maneuver in terms of fiscal policy so as cuts in other segments of fiscal expenditures would have to be implemented. Indeed, both public and current account deficits are expected to be above 4.5% of GDP in 2020 so as FX pressures might constrained fiscal as well as monetary policies.
2. January CPI continued to put pressures on CEE4’s central banks
January headline inflation figures just published show how much the CEE4 central banks are constrained.
Indeed, headline inflation has accelerated in all countries but Romania in January compared to December and are higher than the upper band of the Central banks ‘targets.
GDP deceleration in 2020 should lower inflationary pressures butother factors such as FX pressures, Oil prices, Food prices and Housing prices would play an important role as well.
For the time being, FX pressures are strong due to the increase of global growth uncertainties and due to deteriorating fiscal and external sides especially for Romania.
On the opposite, the recent decrease of oil prices should limit inflationary.
This year, we think that CEE4’s central banks will be in a “corner”. They will face a dilemma between high CPI (plus FX pressures) and decelerating GDP growth.
The Czech National Bank (CNB) surprised market with a hike while the others remained on hold for now. In the coming months, we expect the CNB to stay on hold as well as National Bank of Poland (NBP).
National Bank of Hungary (NBH) is facing high inflation and HUF at very low level. The latest communication of officials has come more hawkish signaling also that exchange rate developments will be considered in future policy. This is the first time the exchange rates are explicitly mentioned as a key factor for monetary policy decisions. We think that at the next meeting, end of February, the NBH will stay on hold adopting a wait and see attitude. It will use other instruments in the first step if the HUF depreciates further.
The Governor of National Bank of Romania (NBR) sent clear messages on the fact that Romania is facing fiscal problem that cannot be fixed with central bank rate hikes.However, we don’t expect fiscal consolidation this year to be enough so as we think that the NBR won’t have other choices than hiking rates. We still expect a 50bp hike for this year.