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CEEMEA Weekly Summary - 28 May 2014

Core Content

This report provides an overview of economic developments and political trends in the Central and Eastern European (CEEMEA) region, with a focus on Poland, Hungary, Turkey, and South Africa. It highlights key economic indicators, central bank decisions, and political outcomes, along with the implications for future growth and policy.

Main Themes

1. Ukraine: New President Vows to Resolve Conflict

• Petro Poroshenko won the presidential election with a convincing margin and will take office in early June.
• He has vowed to prioritize resolving the conflict in eastern Ukraine.
• The conflict with pro-Russian separatists continues, affecting the region's stability.

2. Hungary and Turkey: Interest Rate Cuts

• Hungary's central bank cut its main policy rate by another 10bp to 2.40%, with further cuts expected due to no inflationary pressure.
• Turkey cut its policy rate by 50bp to 9.50%, contrary to market expectations, but this move has been met with criticism from the Prime Minister.
• Inflation in Turkey is expected to hit double digits, with a forecast of 10.1% annual inflation by the end of May.

3. Poland: Central Bank Holds Steady

• The Polish central bank (NBP) is maintaining its stance of keeping interest rates unchanged for the rest of 2014.
• Market expectations of rate cuts have increased due to low inflation, but the NBP is not expected to act on them.
• The next rate move is anticipated to be a hike in mid-2015, possibly earlier if growth slows.
• The NBP's most dovish members have suggested that rate cuts could occur if inflation were to fall further, but the majority of the MPC is not in favor of easing.

4. Poland: EU Vote Not a Proxy for 2015 General Election

• The EU election saw a narrow win for the ruling Civic Platform (PO) over the opposition Law and Justice (PiS) party.
• The eurosceptic New Right (NP) gained significant support, but the EU election should not be seen as a proxy for the general election in 2015.
• The higher turnout in general elections is expected to dilute the impact of radical protest votes, benefiting mainstream parties.
• The economic recovery and improved labor market are seen as key factors in reducing political radicalism in the 2015 election.

5. South Africa: Dimmer Economic Prospects

• South Africa's Q1 GDP contracted by 0.6% q/q (1.6% y/y), marking its weakest performance since the 2009 financial crisis.
• The contraction was primarily due to strikes and safety issues in the mining sector, which heavily impacted industrial activity.
• The report cuts the 2014 GDP growth forecast from 2.1% to 1.9%, aligning with last year's weak performance.
• Structural issues such as labor relations and supply-side constraints are seen as critical to long-term growth.

6. South African Politics: Uncertain Outlook

• President Jacob Zuma's new cabinet is criticized for not addressing key structural growth issues.
• The appointment of the Minister for Energy is viewed as deeply unsettling.
• The report warns that the political landscape remains uncertain, with the potential for further radicalization if economic conditions do not improve.

Key Information

• Ukraine: Petro Poroshenko's election and ongoing conflict in the east.
• Hungary: Interest rate cut to 2.40%, with expectations of further easing.
• Turkey: Policy rate cut to 9.50%, but inflation is expected to remain above the 5% target.
• Poland: NBP holds rates for 2014, with a possible rate hike in mid-2015.
• South Africa: Q1 GDP contraction, with revised 2014 growth forecast to 1.9%.
• CEEMEA PMI: Manufacturing PMI is expected to soften slightly, but a progressive recovery is anticipated in Q2 2014.
• Inflation Dynamics: Low inflation in Poland and the CEEMEA region is not expected to prompt rate cuts, while the RUB depreciation is likely to boost Russian inflation.

Economic Forecasts and Policy Outlook

• Poland:
  • GDP growth is expected to be over 3% in 2014.
  • The NBP is unlikely to cut rates in 2014.
  • Rate hikes are expected to start in mid-2015, with the possibility of earlier action if growth slows.
• South Africa:
  • Q1 GDP contraction of 0.6% q/q.
  • Revised 2014 GDP growth forecast to 1.9%.
  • Continued industrial action and weak economic indicators suggest a bleak outlook for the next six months.
  • The SARB is expected to raise rates by 50-75bp in H2 2014, but this may be delayed if the real economy continues to underperform.

Political Implications

• Poland:
  • The EU election results are not a proxy for the 2015 general election.
  • The NP's success may not translate to a significant political force in the national parliament.
  • The political landscape is expected to be shaped by economic performance and labor market conditions.
• South Africa:
  • The new cabinet has not addressed key structural issues.
  • The government needs to improve labor relations and industrial output to stimulate growth.
  • The National Development Plan (NDP) is seen as critical for long-term economic reform.

Conclusion

The report underscores the mixed economic and political landscape across the CEEMEA region. While some countries like Poland and Hungary show signs of economic resilience, others such as South Africa face significant challenges. Central banks are cautious about rate cuts, emphasizing the need for economic growth before considering policy easing. Political developments, particularly in Poland, are expected to be influenced by economic performance, with the potential for a shift in power dynamics in the upcoming general election.