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CEEMEA Weekly Summary - 2 July 2014

Core Content

This document provides an overview of economic developments and political events in Central and Eastern Europe and the Middle East during the week of 2 July 2014. It includes updates on monetary policy, industrial activity, labor relations, and geopolitical tensions, with a focus on Poland, Hungary, South Africa, and Turkey.

Main Themes and Key Information

Poland: Just a Soft Patch

• Interest Rates: The Polish central bank (NBP) left interest rates unchanged, as expected. The MPC is expected to drop forward guidance of unchanged rates until at least the end of Q3, signaling a dovish stance.
• GDP and Inflation Projections: NBP staff projections suggest GDP growth of more than 3% y/y in Q2 and an even better Q3. CPI inflation is expected to advance to the 2.5% target by late 2015 or early 2016.
• Leading Indicators: Despite weaker-than-expected activity data, reliable leading indicators suggest a renewed pickup in growth in Q3 2014.
• Consumer Confidence and Spending: Consumer confidence is rising, and this, along with improved real earnings, is expected to bolster household spending in the coming months.
• Labor Market Recovery: Employment expectations are increasing, especially in sectors linked to domestic demand such as retail and construction. This should lead to stronger wage growth and a tightening labor market.
• Price Pressures: Rising unit labor costs and domestic demand are pushing up selling-price expectations, which will likely lead to higher CPI inflation by year-end.

Hungary: Expensive Loan Refund Plan

• Legislation: Hungary's parliament is set to vote on a law requiring banks to refund unfair exchange-rate margins on FX- and HUF-denominated consumer loans.
• Impact on Banks: The law could affect credit worth nearly EUR 22bn and may cost banks up to EUR 3bn.
• Conversion of FX Loans: The government plans to convert all FX-denominated household loans into HUF by year-end, likely at a preferential exchange rate, further increasing bank losses.
• Economic Impact: The refund plan may boost consumption in the short term but could lead to reduced credit activity and investment in the medium term, potentially weakening the HUF.
• Monetary Policy: The NBH's ultra-soft monetary policy has contributed to HUF depreciation, and the risk of further weakening remains substantial due to the loan refund plan and the country's high public debt-to-GDP ratio.

South Africa: The NUMSA's Politico-Industrial Action

• Labor Strikes: The country is experiencing significant labor unrest, with the metals and engineering-sector strike starting on 1 July. This is expected to cut GDP growth further.
• NUMSA's Motives: The strike is believed to be politically motivated, with NUMSA aiming to build momentum for its planned political party and align with other unions.
• Economic Strain: The South African economy is under increasing strain due to weak private-sector employment, high inflation, and the anticipation of further interest-rate hikes.
• Trade Deficit: The trade deficit narrowed in May but remains high on a cumulative basis, highlighting the country's poor economic fundamentals.

Turkey: No Signs of a Major Housing Bubble

• Construction Activity: Robust construction activity and rising house prices have raised concerns about a housing bubble, but the report suggests that overall, there is no major bubble.
• Inflation Trends: CPI inflation is expected to decline to 9.0% y/y in June from 9.7% in June, due to base effects and falling food prices. However, services inflation remains sticky, and core inflation is likely to stay high at 9.8%.
• Current Account: Gold imports helped narrow the current account deficit in May, though the overall deficit remains significant.

Key Events and Developments

• Polish MPC Meeting: Left interest rates unchanged, with forward guidance expected to shift by the end of Q3.
• Hungarian Loan Refund Law: To be voted on 4 July, potentially costing banks up to EUR 3bn.
• Ukrainian Conflict: The resumption of fighting between Ukrainian troops and pro-Russian separatists raises the risk of prolonged conflict.
• South African Strikes: The metals and engineering-sector strike is expected to have a significant impact on GDP growth and investment.
• Turkish Inflation: CPI inflation is expected to decline in June but remain high on a core basis.
• Turkish President Erdogan: Announced as the AK party's presidential candidate, with potential implications for the political landscape.

Economic Forecasts

• Poland: Expected to maintain GDP growth of over 3% y/y in Q2 and even better in Q3. CPI inflation is set to rise by year-end.
• Hungary: Growth will become more dependent on exports and FDI. Credit and investment growth are expected to worsen.
• South Africa: Continued labor unrest and a potential revision of the 2014 GDP growth estimate due to the impact of strikes.
• Turkey: Inflation is expected to peak in May and decline from June onwards, but core inflation will remain high.

Conclusion

The CEEMEA region is marked by mixed economic signals and political tensions. While Poland and Turkey show resilience, Hungary faces significant challenges due to its loan refund plan, and South Africa is grappling with severe labor unrest. The interplay between monetary policy, labor relations, and geopolitical factors will continue to shape the economic outlook in the coming months.