Sunday, November 28, 2010

Key macro numbers: Polish GDP continues to recover

Key macro numbers
Polish GDP continues to recover

The recovery in the Polish economy continues and we expect this to be further confirmed by the Q3 GDP numbers, which will be published on Tuesday. Hence, we expect Polish GDP to have expanded by 3.6% y/y in Q3 – slightly up from 3.5% y/y – and we seem to be on track for above-trend growth in 2011 and GDP could top 4½%. Therefore, the output gap is now more or less closed.

Overall, the recovery in Poland is relatively robust as both domestic demand and net exporters are supporting the recovery. It is especially notable that private consumption continues to grow robustly – unlike most other CEE economies where domestic demand remains quite subdued.

EMEA PMIs continue to rebound
After having shown some weakening earlier in the year it looks like the EMEA PMI indices are rebounding and more indices are again well-above the critical 50 indicating continued recovery in the EMEA manufacturing sectors. The recovery appears to be especially buoyant in Poland, the Czech Republic and Turkey. In all three countries the November PMI reading is likely to be approaching 60. Hence, we do not expect the renewed European debt crisis and especially the Irish trouble to have had any major negative impact on the sentiment in the EMEA manufacturing sector. Rather for now the Chinese/Germany nexus seems to be boosting the export-oriented EMEA manufacturing sectors.

Turkish inflation outlook looks less rosy
Turkish inflation for November will be published next week. We expect Turkish inflation to inch further up, to 8.8% y/y, up from 8.62% y/y in October. That is contrary to consensus, which sees inflation in November falling to 8.26% y/y.

Looking ahead, our inflation model shows that outlook for Turkish inflation does not look that rosy anymore. In fact, we see inflation in Q1 easing much less than previously expected and accelerating substantially after that. We expect inflation to remain above 9% from July next year. Increasing inflationary pressures will put pressure on the Turkish central bank (TCMB) to take action to keep inflation under control. Hence, the TCMB will likely face a dilemma over whether to curb overheating in the economy by hiking interest rates earlier and more aggressively, or keep interest rates low to avoid excessive strengthening of Turkish lira.

Estonian economic performance continues to improve
Next week we receive numbers on Estonian industrial production and retail trade. We expect to see a continuation of gradual recovery of the Estonian economy that would be mostly driven by a strong export-oriented industry performance. We expect industrial production to grow to up to 38.2% y/y in October, up from 31.1% y/y in September. Meanwhile the recovery of retail sales continue to be less impressive, we expect retail trade growth in October to accelerate to 1.7% y/y. Estonian consumer confidence indicator are somewhat worse in October, it could adversely affect the acceleration in inflation in recent months. We can hardly expect more significant acceleration in retail trade growth rates in the coming months, the euro issue is considered to be rather negative by the public, as a surge in consumer price growth is broadly expected.
Latvian retail trade would improve in October as well, we expect it to increase to up to 6.9% y/y, up from 6.1% y/y in September.

Fixed income market update
Irish jitters hang over the EMEA markets
Irish jitters are continuing and worries over the situation have further intensifying this week. However, it is notable that continued upbeat US numbers and positive sentiment in the global stock markets have continued to support global risk appetite. This undoubtedly has helped to reduce the negative spill-over to the EMEA fixed income markets.

In terms of “local news” the Polish rate decision on Tuesday was undoubtedly the most interesting event of the week. Despite the fact the Polish central bank (NBP) kept its key policy rate unchanged at 3.50%, it nonetheless stepped up its hawkish rhetoric. It is clear that NBP head governor Marek Belka has been able to convince the hawks on the NBP’s Monetary Policy Council (RPP) to postpone any rate hikes. However, it is also clear that the recovery in the Polish economy is continuing and the output gap has more or less been closed, which eventually could lead to increased inflationary pressures. Judging from the RPP’s rhetoric we could see a rate hike in Q1 2011, but we would also stress that compared with market pricing the risk on polish short-term yields remains on the downside.

MNB maintain wait-and-see stance – with growing risk of a hike
While inflation seems to be well-contained in the most of Europe, Hungarian inflation continue be above the official inflation target (of 3%) of the Hungarian central bank (MNB), which in itself could warrant a rate hike from the MNB. Furthermore, the renewed European debt worries effectively mean that the contagion risks to the much indebted Hungarian economy has grown.

While the general consensus points to unchanged rates in Hungary on November 29, which is also our current stance, a run-away sell-off in the forint may simply tie the Hungarian central bankers’ hands in taking a defensive rate hike measure. Should such an action ensue, we would not expect anything less than a 50bp hike.
Full report: Key macro numbers: Polish GDP continues to recover

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