USA:
• Yellen’s testimony before congress subtly indicating rate hike in March. Markets don’t believe it.
Fed Chair Yellen presented the semi-annual Monetary Policy Report to the Congress on 14th February. With respect to the current economic situation in the U.S., Yellen described that consumer spending has continued to rise at a healthy pace, supported by steady income gains, increases in the value of households’ financial assets and homes, favourable levels of consumer sentiment, and low interest rates. Business investment was relatively soft for much of last year, though it posted some larger gains toward the end of the year in part reflecting an apparent end to the sharp declines in spending on drilling and mining structures. Moreover, business sentiment has noticeably improved in the past few months. In addition, weak foreign growth and the appreciation of the dollar over the past two years have restrained manufacturing output. Housing construction has continued to trend up at only a modest pace in recent quarters and recent increases in mortgages rates may impart some restraint.
Among the sources of uncertainty for the outlook, Chair Yellen mentioned possible changes in U.S. fiscal and other policies, as envisaged by the Trump administration.
With respect to monetary policy, the federal open market committee (FOMC) expects the evolution of the economy to warrant further gradual increases in the fed funds rate. “Waiting too long to remove accommodation would be unwise, potentially requiring the FOMC to eventually raise rates rapidly, which could risk disrupting financial markets and pushing the economy into recession”, Yellen said. “At our upcoming meeting, the Committee will evaluate whether employment and inflation are continuing to evolve in line with these expectations, in which case a further adjustment of the federal funds rate would likely be appropriate”, gives a subtle hint that a rate hike could be envisaged as early as in the March FOMC meeting. This would keep the Fed on track for three rate increases (each 25 basis points) as indicated in the December median projection of FOMC members (Figure 1). On the other side, market implied odds for a rate hike in March are only 34 % at the moment. The feedback loop between Fed communication and market expectations is important and this ambiguity could indicate a rate action postponement.
Eurozone:
• Solid Q4 GDP in Germany
The German economy grew by 0.4 % (q/q) and 1.7 % (y/y, seasonally-adjusted) in Q4 2016 and by 1.8 % over the total of last year (Figure 2). According to the German statistics office (Destatis), positive impulses came from public and private consumption and investment predominately in the construction sector, while the contribution from net trade remained negative.
Economic growth remained lukewarm in Italy with GDP enhancing by 0.2 % (q/q) in Q4 and annual growth of 1.1 %. Economic sentiment stabilized in the second half of 2016 and picked up slightly recently as well as industrial production (3.7 % y/y average monthly change in Q4), but growth prospects remain muted in Italy. We had previously reported about Q4 growth in the total of the Euro Area (UCM Weekly as of 6th February). Sentiment surveys have been indicating accelerating cyclical momentum. Eurozone purchase manager indices (PMI) as well as the German ifo-business survey for February will be released this week (on Tuesday and Wednesday).
CEE:
• Strong Q4 GDP surprises in Poland and Romania and solid growth elsewhere.
Poland’s economy recovered by year-end after economic growth had been weak in Q3 2016 (0.4 % q/q). In Q4, real GDP expanded by 1.7 % (q/q) and 2.7 % in annual terms posting an upside surprise versus expectations. The rise in GDP was accompanied by solid quarterly expansion in average monthly industrial production (3.7 % y/y), strong retail sales (5.6 % y/y) and passenger car sales (16.9 % y/y). Sustained, positive labor market developments foster the strong domestic economy. Monthly employment grew on average by 3.1 % (y/y) in Q4, wage growth slowed somewhat to 3.4 % (y/y) and the unemployment continued to fall (5.9 %, seasonally adjusted) in December. Economic growth is expected to remain formidable amid a recovery in investment and fiscal transfer to households (Family 500+ programme).
The Czech GDP expanded by 0.2 % (q/q) and 1.7 % (y/y) in Q4 following an equal quarterly increase in Q3. In the total of last year, real GDP was up by 2.3 % (after 4.5 % in 2015). Although the GDP print was below the consensus expectations (0.7 % q/q), the domestic economy keeps providing a favourable environment for insurances. The GDP growth was contributed to especially by consumption of households and external trade, while – on the production side of the economy – the performance of construction was lower than in 2015 (Czech Statistical Office). The unemployment rate was at an all-time low in December (3.5 %, seasonally-adjusted). We expected 2017 GDP growth in the Czech Republic in a similar magnitude as last year.
Hungary’s economic growth did not recover meaningfully by the end of last year. In Hungary, GDP advanced by 0.5 % (q/q) and 1.6 % (y/y) in Q4 2016. The quarterly increase in GDP was gradually higher than in Q3 (0.3 %) but remained below market expectations (0.7 %). According to the release of the Hungarian Central Statistical Office (KSH), growth came from agriculture and market services, while the industry stagnated and construction lowered GDP. Sentiment surveys have recently indicated a recovery in economic activities. In addition, the government provides renewed fiscal stimulus (including a reduction of the corporate tax rate to 9 %) in order to bring GDP growth to an official target of 3 % in 2017.
Romania and Bulgaria surprised with stronger than expected GDP growth in Q4. Romania’s GDP advanced by 1.3 % quarterly and by 4.7 % in annual comparison. In seasonally-adjusted terms, the economy grew by 4.8 % during the total of last year posting one of the strongest GDP growth rates in Europe. However, growth is likely to return to a more normal path once transitory effects from past one-off fiscal stimulus (for example VAT rate cuts) will fade over time.
Bulgaria also delivers solid growth performance. In Q4, real GDP enhanced by 0.9 % (q/q) and 3.4 % (y/y). According to the flash estimate from the National Statistical Institute, final consumption increased by 0.9 % annually, fixed investment decreased by 1.5 %. Foreign trade registered strong growth with exports rising by 9.1 % and imports increasing by 7.8 %.
Author
Martin Ertl
Chief Economist
UNIQA Capital Markets GmbH
Disclaimer
This publication is neither a marketing document nor a financial analysis. It merely contains information on general economic data. Despite thorough research and the use of reliable data sources, we cannot be held responsible for the completeness, correctness, currentness or accuracy of the data provided in this publication.
Our analyses are based on public Information, which we consider to be reliable. However, we cannot provide a guarantee that the information is complete or accurate. We reserve the right to change our stated opinion at any time and without prior notice. The provided information in the present publication is not to be understood or used as a recommendation to purchase or sell a financial instrument or alternatively as an invitation to propose an offer. This publication should only be used for information purposes. It cannot replace a bespoke advisory service to an investor based on his / her individual circumstances such as risk appetite, knowledge and experience with financial instruments, investment targets and financial status. The present publication contains short-term market forecasts. Past performance is not a reliable indication for future performance.
Imprint
Information required pursuant to the Austrian Media Act
Publisher of this publication:
UNIQA Insurance Group AG
Untere Donaustraße 21, A-1029 Vienna, Austria
Media owner of this publication:
UNIQA Capital Markets GmbH
Untere Donaustraße 21, A-1029 Vienna, Austria
Management Board of UNIQA Capital Markets GmbH:
Mr. Arnd Muenker, Dr. Andreas Bertl, Mr. Franz Hagmann
UNIQA Capital Markets GmbH is constituted as a limited liability company; the media owner is licenced as an investment firm and regulated by the Austrian Financial Market Authority (FMA-Finanzmarktaufsicht).
Ownership structure of the media owner:
UNIQA Insurance Group AG is 100% owner of UNIQA Capital Markets GmbH.
Basic tendency of the content of this publication:
Information on general economic data.