UniCredit Economics & FI/FX Research:
2013 will be a better growth year for CEE than 2012

  • Although working through the collateral damage from the EMU crisis will take some time, industry and external demand should provide more support to recovery in CEE this year
  • Unlike 2012 the new year starts with much less financial stress and easier monetary policy
  • Central and Eastern Europe has still considerable potential to outperform EMU, differentiating on domestic policies

Although working through the collateral damage from the EMU crisis and a broader global slowdown will take some time, 2013 should become a better growth year for CEE than 2012. This is one of the key findings of the latest “CEE Quarterly” published by UniCredit´s Economics & FI/FX Research. After the 2008/09 crisis the last year has brought another downgrade of potential growth across the region, albeit smaller and this time mostly due to external factors. Looking ahead the combination of stronger external demand, lower interest rates, lower inflation which should help to boost consumer purchasing power, upside risks from credit and the potential for a modest bounce from run-down inventories should support a gradual recovery in regional GDP growth. For this reason UniCredit economists forecast GDP growth at 2.5 per cent in CEE in 2012 and at 2.9 per cent (previously 3.1 per cent) in 2013, before rising to 3.4 per cent in 2014.

GDP growth factors
As the effects of the EMU crisis have been significant, more positive CEE data is expected to begin to filter through only towards the end of the first quarter and the second quarter of this year. This is in line with German and EMU forecast, showing a bottom in the cycle the fourth quarter 2012, followed by the resumption of positive growth rates in Q1 (0.5%) and Q2 (0.2%) 2013 respectively. “Industry and external demand in particular are crucial and will have to lead the way in recovery. Only once this becomes convincing a recovery in domestic demand will become realistic”, says Gillian Edgeworth, chief EEMEA economist at UniCredit. Optimism comes especially from China´s manufacturing PMI which clawed its way back above 50 in November for the first time since June 2011 and the prolonged negotiations about the ‘fiscal cliff’, which should remove further uncertainties.

In the face of a slowdown in activity in 2012, the most predominant theme across CEE and emerging markets more broadly was the influx of foreign portfolio capital but for the future proper management of these flows is vital. Some countries have left themselves vulnerable to the extent that FX reserve accumulation has not kept pace. Moreover a normalisation of G7 yields, even if this occurs gradually, risks feeding into higher external funding costs for CEE, putting some countries in the region at a disadvantage to their global EM peers.

Unlike the beginning of 2012, CEE enters 2013 with much less financial stress and easier monetary policy in most countries in the region. This should over time be supportive to an improved growth performance. Around year-end 2011 Poland and Turkey were intervening to defend their currencies from further depreciation while Turkey, Hungary, Poland, Russia and Serbia hiked rates either in 2011 or over the course of 2012. But last year even some of the weakest macro stories in CEE – with the exception of Ukraine – have enjoyed currency stability in H2 2012 while interest rates have already fallen and in some cases will continue to do so. Money market rates across many countries in the region have returned to their historical lows once again.
The better than expected inflation prints that have been seen across the region over the past 2-3 months mark a downward trend in inflation in many inflation targeting economies in the region that should remain over the coming quarters. This follows an extended period of above target inflation in a number of countries, capturing currency volatility, rising energy and at times food prices. But currencies have been stable across the region over recent quarters, as have oil prices. Food price inflation is likely to edge higher but is manageable. This not only supports lower rates for longer but also should help boost real consumer purchasing power.

For many countries in CEE, credit trends dragged on domestic demand in 2012 as they were impacted by a slowdown in deposit growth and declining foreign funding. But for those countries where banking sectors are predominantly foreign owned, UniCredit economists do not expect an increase in the pace of deleveraging from here, though trends are significantly differentiated across the region. Meanwhile banking sectors have adjusted to funding credit growth via deposits growth.

Last but not least there is some limited potential for a boost to regional GDP from run-down inventories.

Potential to ourperform EMU, but convergence is not granted
2012 has forced another assessment of CEE potential growth, but CEE still has considerable potential to outperform EMU. “If to examine labour flexibility and costs in the newer EU countries, the case for a recovery in foreign inflows to real economies in the region remains strong”, states Gillian Edgeworth, “But growth in many countries in the region is as much, if not more, a demand rather than a supply issue at this stage. Thus CEE cannot take growth for granted, even in a stronger external environment.” Charting savings versus investments, CEE ex-CIS significantly underperforms all other EM regions which ultimately risks constraining growth. With this in mind, domestic policy makers' initiatives to keep potential growth on track are essential. Those that act in the opposite direction are increasingly at risk of a more persistent downturn.

UniCredit is a leading European commercial bank with strong roots in 22 countries. Our overall global network embraces approximately 50 markets, with over 9,400 branches and more than 158,000 employees (as of 30 June 2012)
In the CEE region, UniCredit runs the largest international banking network with more than 3,700 branches. The Group operates in Austria, Azerbaijan, Bosnia and Herzegovina, Bulgaria, Croatia, the Czech Republic, Estonia, Germany, Hungary, Italy, Latvia, Lithuania, Kazakhstan, Kyrgyzstan, Poland, Romania, Russia, Serbia, Slovakia, Slovenia, Turkey and Ukraine.

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 Tiemon Kiesenhofer, Phone: +43 (0) 50505 - 56036 
 e-mail : tiemon.kiesenhofer@unicreditgroup.at

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