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CEEMEAnomics Summary - 26 August 2015

Core Content

This document provides an analysis of global and regional economic developments, focusing on Central Eastern and Eastern Europe (CEEMEA), particularly on Poland and South Africa, as well as Turkey. It outlines the impact of the Chinese economic slowdown on global markets and regional economies, while also discussing domestic policy and inflationary pressures in these countries.

Main Themes and Key Information

Global Market Turbulence and China's Impact

• China's economic challenges continue to cause volatility in global financial markets.
• Concerns over a Chinese slowdown are expected to affect emerging markets, especially commodity producers and capital goods exporters.
• CEEMEA countries are seen as more insulated compared to South Africa, Russia, and the Middle East.
• South Africa's GDP growth has been disappointing, with Q2 growth at 1.3% q/q and 1.2% y/y, down from 2.1% y/y in Q1.
• The slowdown is attributed to weak demand, falling commodity prices, and electricity supply cuts.
• China's demand for South African commodities (platinum, iron ore, gold) has weakened, further pressuring the economy.

South Africa: Growth and Inflation Outlook

• South Africa's GDP growth is expected to be 1.4% in 2015 and 1.8% in 2016, down from 2.0% and 2.3% respectively.
• The negative output gap is likely to persist for a longer period.
• The South African Reserve Bank (SARB) is unlikely to hike interest rates in September, but a November hike is still in play.
• The risk of further rate hikes being delayed until 2016 is increasing due to weaker growth and lower inflation from falling oil prices.
• Consumer price inflation (CPI) is expected to be affected by falling agricultural output, which could raise CPI by 0.5pp by year-end.

Poland: Drought and Retirement Age Referendum

• A severe drought has led to crop yields down by over 25% in some areas.
• The agricultural sector is expected to suffer, with food prices rising by 3-5% by the end of 2015, potentially raising CPI inflation by 0.8-1.3pp.
• The Polish government plans to hold a referendum on lowering the retirement age alongside the October general election.
• The referendum question is vague, but a 'Yes' vote would likely repeal the 2013 retirement age reforms.
• Earlier retirement would be conditional on length of service, which would lower the cost of the reform to PLN 1.7-1.8bn in 2016.
• The referendum is expected to pass, with 87% support in opinion polls, though high turnout is needed for it to be binding.

Turkey: Political Uncertainty and Monetary Policy

• The Turkish Lira (TRY) has depreciated due to policy inaction, political uncertainty, and global risk aversion.
• The Central Bank of Turkey (CBRT) is expected to raise interest rates if forced to do so, potentially widening the interest-rate corridor and pushing overnight rates up to 12.5%.
• The CBRT may set its new policy rate at 10.75% once the situation stabilises.
• A re-run of the general election is scheduled for 1 November, which could further exacerbate political uncertainty.

Key Economic Indicators and Outlook

Regional Economic Indicators

• CEEMEA PMIs are expected to remain buoyant in August, with readings above 50.
• Poland's Q2 GDP is expected to grow at 3.3% y/y, Czech Republic at 4.4% y/y, and Hungary at 2.7% y/y.
• Hungary's central bank is likely to raise rates in 2016 due to rising inflation.
• Czech economic growth is attributed to inventory build-up and strong international trade.

Summary of Key Events

• Poland will hold a referendum on lowering the retirement age in October, likely repealing the 2013 reforms.
• South Africa's GDP is expected to decline due to weak manufacturing, mining, and agricultural sectors.
• Turkey's CBRT is postponing rate hikes, but may be forced to act if inflationary pressures increase.
• China's slowdown is a major concern for global markets and South Africa's economy, especially due to commodity prices and export demand.

Charts and Data

• Chart 1: Cereal production and prices in Poland.
• Chart 2: Meat prices tracking cereal costs.
• Chart 3: Fruit production and prices in Poland.
• Chart 4: Vegetable production and prices in Poland.
• Chart 5: South Africa's GDP growth and sector contributions.
• Chart 6: Prices of key commodities (platinum, iron ore, gold) for South Africa.
• Chart 7: SARB leading indicator showing negative growth for seven quarters.