Wake-up of services softening slowdown
Strong 1Q22 figures stand behind the upward GDP growth revision for 2022. The outlook for 2023 has been lowered. The services sector is exhibiting very robust growth, while other sectors are slowing down. 10Y LCY bond yields should go 80-120bp lower in 2H22 once inflation peaks.
Surprisingly strong 1Q22 figures led us to revise our full-year forecasts for 2022 upwards, despite very high external risks and rising inflation. We expect CEE economies to expand 3.8% this year and 3.2% next year. Uncertainty in industry and foreign trade remains high, due to persisting supply-side bottlenecks, surging commodity prices and worries about energy supplies. Thus, industry is likely to show mediocre growth in the next few quarters. However, the sector of services is likely to be among the main contributors to GDP growth this year, as both hard data and confidence indicators have been showing a solid performance. The deterioration of household consumption in 2022 might be more limited compared to real wage dynamics, partially thanks to the normalization of saving rates from their high pandemic levels and strong y/y growth in 1Q22.
Inflation spiraled into double-digits everywhere in CEE bar Slovenia, driven mainly by food, energy and housing, as the war in Ukraine exacerbated the existing supply-side pressures. The demand-side factors are also pro-inflationary. Several national governments have introduced anti-inflation measures which are expected to last for a while. We expect inflation rates to peak in 2Q or 3Q of this year, within 11-16% y/y in most countries. Overall, this year’s inflation may average 12.2% in the CEE8 region, before easing towards 6.8% in 2023 – still above central bank targets.
CEE central banks are trying to balance soaring inflation against an expected slowdown in economic activity in the quarters ahead. Skyrocketing inflation and worries about de-anchoring of inflation expectations have led them to continue with monetary tightening. Local key rates are already close to 6% in Czechia, Hungary and Poland, and there is more to come – especially in the latter two countries, whereas Czechia is nearing the end of its tightening cycle. Romania and Serbia will also deliver more rate hikes in the quarters to come, and even the ECB is finally jumping on the rate-hiking bandwagon.