What’s up in CEE? Outlook 2018
The CEE region is growing at its fastest rate since 2008. Unemployment rates are at all-time lows in many CEE countries and wage growth has visibly accelerated recently. The external environment is also very supportive, with PMIs in Germany, the key trading partner for the CEE region, at 62.50 in November 2017, only 20bp below its 10Y high. So, why do we expect growth in CEE to slow down a little in 2018?
GDP growth in the CEE region is expected to decelerate to 3.6% in 2018, from the 4.6% expected in 2017. Although at first glance 1pp lower growth looks to be a strong deceleration, average growth should remain above potential growth. The widening of output gaps will thus continue in CEE economies, albeit at a slower pace than in 2017. There are two main reasons to expect slower growth in the CEE region in 2018.
1. Fiscal expansion in Romania reached its limit in 2017 and many one-offs that contributed to the stellar growth of 7.1% in 2017, including the double-digit hikes of wages in the public sector, will not be repeated in 2018. The expected slowdown of Romania to 4.1% growth next year alone contributes 0.5pp to the slowdown in the overall CEE region.
2. Real wage growth will decelerate in 2018. This is partially because of higher inflation (+65bp on average), which will consume a bigger portion of the nominal wage growth, but also because of less aggressive nominal wage growth in Hungary and Romania, which experienced double-digit growth in 2017, inflated by one-off administrative measures, such as massive hikes in the minimum wage and wages in the public sector.
On the other hand, we see some risks to the upside vs. our baseline. EU fund inflow is still relatively moderate and could surprise on the positive side. The Slovak economy should advance more in 2018, as the completion of the new Jaguar-Land Rover factory in Slovakia will be in its final stage, with the start of production targeted around year-end. Credit growth could contribute more to economic growth in CEE, as economic sentiment is very favorable and thus could spark demand for credit. We expect the Czech National Bank to continue in monetary tightening, followed by the Romanian central bank, which will need to react to higher inflation in 1Q with several rate hikes. We expect the Polish central bank to deliver its first rate hike only in 4Q18, if at all. We could see the Hungarian central bank pouring more cheap liquidity into the system, via swaps and a mortgage bond buying program, intending to revive credit growth.