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CEEMEA Weekly Summary - 4 September 2013

Core Content

This report provides an overview of economic developments in Central and Eastern Europe (CEE) and the Middle East, focusing on GDP growth, inflation trends, currency performance, and central bank policy expectations.

Main Themes

Poland: The Economy is Starting to Shine

• GDP Growth: Recent data and leading indicators suggest GDP growth will accelerate in the coming months, with a broad-based recovery.
• Economic Drivers: Manufacturing and consumption are expected to grow significantly, while net exports remain a key growth factor.
• Q2 Performance: Final Q2 GDP estimate confirmed a 0.4% q/q and 0.8% y/y growth, slightly lower than preliminary data but consistent with expectations.
• Improvement in Data: Industrial production and retail sales showed strong growth in July, with industrial production rising 6.3% y/y and retail sales up 4.3% y/y.
• PMI Data: The manufacturing PMI rose to 52.6 in August, up from 51.1 in July, indicating a recovery.
• Future Outlook: The Polish economy is expected to grow by over 1% y/y in Q3 and nearly 2% y/y in the final months of 2013. Leading indicators suggest a continued upward trend.
• Challenges: Falling investments still hinder growth, and the unemployment rate remains high.

South Africa: ZAR to Remain on the Back Foot

• Currency Performance: The rand has depreciated nearly 17% against the USD and 11% on a trade-weighted basis, making it one of the worst-performing currencies in 2013.
• Fundamentals: The rand's depreciation is driven by both external factors (EM sell-off, Fed QE tapering) and internal issues (twin deficits, industrial action).
• Trade Deficit: The trade deficit reached a record high in July, widening to ZAR 14.2bn from ZAR 7.7bn in June.
• Budget Deficit: Budget revenues remain below target, and the cumulative deficit for the first four months of FY2013/14 is significantly higher than the same period last year.
• Future Outlook: The rand is expected to weaken further in H2 2013, ending the year at around 10.70/USD.
• Central Bank Response: Authorities have limited tools to influence the rand, with the SARB and National Treasury unlikely to take aggressive measures to stabilize the currency.

Turkey: Rising Core Inflation

• Headline Inflation: CPI inflation eased to 8.2% y/y in August, driven by base effects and a correction in food prices.
• Core Inflation: Annual core inflation continued its upward trend, rising to 6.4% y/y, with services inflation also increasing.
• Monetary Policy: The CBRT has not introduced new instruments to appreciate the lira, and the current framework leaves the TRY vulnerable to external shocks.
• PMI Recovery: Turkish manufacturing PMI rose to 50.9 in August, re-entering expansionary territory after a 12-month low.
• Future Outlook: Headline inflation is expected to decline gradually to around 7.5% y/y by year-end, but core inflation will remain elevated due to sticky services inflation and lira depreciation.

Key Data and Releases

Upcoming Releases

Central Bank Watch

Summary of Key Insights

• Poland is showing signs of economic recovery with improved GDP data, rising manufacturing and consumption, and a positive outlook for Q3 and Q4 growth.
• South Africa faces continued currency weakness and a deteriorating trade deficit, with limited policy tools to stabilize the rand.
• Turkey has seen a decline in headline inflation but core inflation remains high, driven by services and exchange rate factors. The CBRT is unlikely to introduce new instruments to appreciate the lira.
• Central Banks in the region are expected to adjust rates in response to economic conditions, with the CBR likely to cut rates by 25bp in September and possibly more in Q4.
• Emerging Market Vulnerabilities: The report highlights the sensitivity of emerging markets to external shocks, particularly related to US monetary policy and global economic conditions.