What’s up in CEE 1Q2018
CEE region should grow at 4% this year. Our new now-cast model for GDP growth suggests some deceleration in 1Q. Fewer interest rate hikes, more tightening via stricter macroprudential measures
The favorable growth performance in various areas prompted us to revise our GDP growth forecast for 2018 to 4.0% (from 3.6%) for the CEE region altogether since our last WUCEE was released. This is due to upward revisions for Poland, Hungary, Romania and Slovenia. This is still somewhat of a slowdown compared to the 4.7% seen in 2017. At present, we can say that the growth has likely reached its peak in 4Q17 and we should see some moderation of growth (by 0.5pp on average) already in 1Q18. The strongest deceleration (about 1pp) of the annual growth in 1Q18 should take place in the Czech Republic, Romania and Slovenia, the countries with the highest growth in 4Q17.
In order to better detect any changes in the trend and magnitude of GDP growth, we have developed our new now-casting model for CEE countries, which takes into consideration a wide range of monthly frequency data and evaluates its real-time impact and risks on our GDP growth forecast. The sets of relevant monthly indicators have been carefully chosen for each of the CEE countries and models calibrated on individual countries. It is important to mention that the now-cast model does not represent a new official Erste Group forecast, but it does allow us to check and improve the accuracy or our GDP forecast with every relevant data release. In line with our official forecasts, the now-cast model suggests a deceleration of the growth dynamics in all CEE countries except for Croatia in 1Q18 compared to the previous quarter after accounting for the January data.
When it comes to inflation forecasts, we kept the overall forecast for inflation unchanged for the CEE region at 2.6% for this year, up from 1.9% in 2017. The only country where we see inflation rising well above the target is Romania. Recent monthly prints approached 5% y/y, which triggered our revision for the average annual rate to 4.5%. However, besides increasing domestic demand, the inflation spike is predominantly due to statistical effects related to previous cuts in taxation and increases in administered energy prices. Thus, we see a slowdown in inflation towards the end of 2018. It seems that, except for Romania and the Czech Republic, none of the central banks plans to increase interest rates this year. However, we see that the central banks are trying to tame the growth of real estate prices via imposing new macroprudential measures that tighten credit conditions. Among the most recent are stricter LTV ratios, caps on debt-to-income ratios and counter-cyclical capital buffers.
CEE currencies have been a mixed bag so far this year. The Romanian leu might continue to slightly lose ground, due in part to the NBR’s likely reluctance to strongly increase rates. The ultimate goal is to avoid potential widening of the current account deficit, which would represent the highest risk for macroeconomic stability. The koruna and zloty could appreciate this year, while in Hungary, Croatia and Serbia, central banks should take care that there is no strong appreciation visible in their currencies.