Too early to cry recession for CEE
Economic growth is two-sided nowadays in CEE. Domestic demand is healthy, while external demand is scarred, damaged from the dire straits the German manufacturing sector (mostly automobiles) has been in for some time now. But there is more to the duality, as the future is full of uncertainty, while the past years have been quite healthy for growth.
But how uncertain is the future exactly? Fears of an upcoming recession in the US have increased visibly, with the US yield curve becoming inverted. In Germany, ever-more voices have been raised saying that the country may enter technical recession. Should we worry about CEE as well? So far, despite slowing growth dynamics, GDP growth in 2Q remained solid everywhere but Slovakia. Our model, stemming from a probit model based on the 10Y-2Y spread and German growth expectations for 3Q and 4Q, suggests that the probability of recession in the next quarter remains contained in CEE.
The inflationary situation is also two-sided: While domestic demand is high and there is cost-push stemming from wage growth, the external environment is muted, which has a downward effect on local prices, too. CEE central banks could stay in wait-and-see mode in this environment.
Markets are also in uncertain mode. As far as FX is concerned, global central banks and news flow (i.e. around Brexit or the US-Sino trade war) are decisive. As for government bond yields, much depends on global central banks. In the short run, if the ECB fails to deliver on hopes of substantial easing this week, some increase in yields might not be ruled out.