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CEEMEAnomics Summary - 9 October 2013

Core Content

This summary outlines the economic outlook for Central and Eastern Europe (CEE), the Middle East, and North Africa (MENA) for the week of 9 October 2013. It provides an overview of key economic developments, policy stances, and forecasts for major economies such as Russia, South Africa, and the UAE, highlighting the mixed performance of CEE economies and the ongoing recovery, albeit volatile.

Main Themes and Key Information

CEE: Recovery is Still Volatile

• Economic Recovery: CEE economies are showing signs of an ongoing recovery, but it remains volatile.
• Unemployment and Industrial Data: Unemployment in the Czech Republic was higher than expected, while Hungarian industrial data disappointed.
• Inflation and Output Gaps: Inflation is being depressed by lower food prices due to a strong harvest and negative output gaps. This trend is expected to continue, with Polish activity and labor market data being the main focus for the upcoming week.
• Supportive Calendar Effects: The recovery is expected to be bolstered by supportive calendar effects, leading to better employment and wage data.

Russia: Crumbling BRICs Fundamentals

• Weakened Fundamentals: Russia's economy has weakened since the global financial crisis, becoming more dependent on oil and gas sectors, which account for over 60% of exports.
• Potential Growth Rate: The potential growth rate has fallen below 3%, and is expected to remain around 2.5%.
• Disinflation and Inflation Expectations: Despite slightly faster disinflation to 6.1% y/y in September, the central bank (CRB) is expected to leave rates unchanged for now. However, around 50 basis points of rate cuts are anticipated over the coming months.
• Inflation Targets: The CRB aims for CPI inflation of 5.0% y/y in 2015 and 4.0% y/y in 2016.
• FX Interventions: The central bank plans to abandon FX interventions from 2015 onwards and focus on interest rate stability.
• Slow Disinflation: Disinflation is expected to be slow due to negligible output gaps and rising wages, which are projected to grow at a double-digit pace.

South Africa: Fiscal Challenges Persist

• Fiscal Pressures: South Africa's fiscal system is under pressure due to underperformance in revenue growth against targets.
• Budget Deficit: The National Treasury (NT) is expected to present a wider FY2013/14 budget deficit of around 5.4% of GDP, up from 5.2% in February.
• Fiscal Consolidation: The NT remains committed to fiscal consolidation, with a comprehensive review of expenditure and a tax review committee.
• Rating Agencies: South Africa is under the spotlight from rating agencies, which have downgraded the country. The NT is expected to avoid any significant shocks to the market in its upcoming medium-term budget policy statement (MTBPS).
• Nominal GDP Growth: Higher inflation is expected to support nominal GDP growth, but the fiscal deficit is likely to widen due to lower-than-expected revenue.

UAE: Revival on Track

• Non-Oil Growth: Non-oil growth is supported by strong activity in tourism, construction, and trade.
• GDP Growth: Total GDP growth is expected to remain at 3.5% for the next two years due to limited oil output increases.
• Bank Lending and Consumer Confidence: Bank lending has risen with consumer confidence, although new regulations on lending limits are expected soon.
• Housing Recovery: The housing market continues to recover, with rising rents in Dubai.
• Fiscal Surpluses: The UAE is expected to continue delivering fiscal surpluses due to strong economic activity and reduced need for fiscal stimulus.
• GRE Debt and US Bond Yields: Risks to GRE financing include the scaling back of the Fed's asset purchases and rising US bond yields.

Economic Forecasts

Key Events

• Russia: Central Bank meeting on 14 October with potential rate cuts in the near future.
• South Africa: Medium-term budget policy statement (MTBPS) on 23 October.
• Turkey: Market holiday on 15 October.
• Poland: CPI and industrial production data on 16 October.
• Hungary: CPI and industrial production data on 15 and 16 October.
• Czech Republic: PPI data on 16 October.

Summary

The CEE region is showing a mixed economic picture with ongoing but volatile recovery. Russia faces structural challenges with a weak economy and high dependence on oil and gas, which are expected to limit growth and inflation control. South Africa continues to struggle with fiscal challenges, despite some improvements in revenue performance, and remains under the scrutiny of rating agencies. The UAE is on track for a revival, supported by non-oil growth and a recovering housing market, though its fiscal position is expected to remain stable. The coming weeks will see key data releases and policy decisions that will shape the economic outlook for these regions.