What's Up in CEE? - fastest growth this year since 2008
After the release of detailed GDP data for 2Q, a couple of upward revisions have moved our full-year GDP growth forecasts for the CEE region to 4.1% for 2017. That would be the highest growth rate since 2008. The question is whether CEE can continue to grow at such a pace in the coming years. At the moment, we see very firm support from household consumption, which benefits from improved labor market conditions and higher wage growth, while foreign demand is supportive as well. As we do not see any external imbalances emerging at this point and inflation remains well anchored, we expect central banks to take only slow steps towards the normalization of their monetary policies.
In the Czech Republic, the CNB has already started to do so with its 20bp hike delivered in August, while there is another 25bp hike in the pipeline by year-end. The National bank of Romania may increase the deposit rate and thus narrow the interest rate corridor, especially if the RON continues to slide further this year. We treat the recent rate cut delivered by the Serbian central bank as a one-off that does not change monetary conditions too much, as the key interest rate in Serbia remains the highest in the region (3.75%). The only outlier in the region where the central bank keeps a strong easing bias is Hungary. Inflation is still 3% below target (the target is set higher than in peer countries) and appreciation pressure on the HUF was making meeting the inflation goal more difficult. A cut of the deposit rate deeper into negative territory is expected at the September meeting along with extension of the FX swaps that inject HUF liquidity into the market and aim to prevent the HUF from appreciating. When there is a need to tighten, these measures will be among the first (and easiest) to be undone.
We expect growth to slow down a bit next year to about 3.5%, mainly due to less expansive fiscal policies. We think that the fiscal expansion conducted in Romania, Poland and Hungary has reached its limits. These countries have been consuming their difficultly built fiscal space in relatively good years and would need to backpedal somewhat to comply with the 3% deficit threshold (or keep a safe margin away from it). As there are no sanctions related to breaching the preventative arm of the SGP (which defines the consolidation path for countries with deficits below 3% of GDP), non-Eurozone countries feel bound only by the ‘old’ 3% nominal deficit rule. In any case, with structural deficits straying too far from the safe region, markets would start to ask for high spreads and enforce greater fiscal discipline.
One area where we can imagine some positive surprises to our GDP growth forecasts is EU funds. The inflow of funds has still not resumed at full force and we expect this to come only at the latest stage of the programming period or shortly thereafter. However, much smoother and faster utilization of EU funds poses a positive risk to our GDP forecasts.