Eurozone:
• Survey data remains upbeat indicating acceleration in Q1 GDP growth.
In February, the Eurozone composite purchase manager index climbed to a multi-year high (56 after 54.4) after it has already been rising constantly since September (Figure 1). The manufacturing as well as the services PMI survey components kept rising (55.5 and 55.6). On a country-level, the French composite PMI increased significantly (56.2 after 54.1) driven by an improving services sub-index (56.7).
These survey indicators are known for its high contemporaneous correlation with economic activity indicators such as GDP and short-term leading indicative power. Based on that, quarterly GDP growth could go even above 1 % (q/q) in Q1, though this is far above current market analyst’s expectations (0.4 % according to Bloomberg consensus) and not yet confirmed by high-frequency real activity data that is tracking GDP. In other words, at this point in time it is unclear, whether the rise in surveys is fundamentally justified. Similarly, the German ifo-business climate index rose (from 109.9 to 111.0) in February driven by both better judgement of the current economic situation and future expectations.
The results also go against the current mood among financial investors about upcoming elections and outcome uncertainties in the Netherlands (March) and France (April). The spread between French 10-year government bonds yields and German bonds rose to around 70 basis points during February. Italian government bonds spreads climbed to almost 200 basis points; the highest level since 2014 (Figure 2).
CEE:
• Ukraine returns to growth.
• Russia: Muted demand and improving supply side imbalance remains in place.
In the fourth quarter of last year, the Ukraine real GDP expanded by 4.7 % (y/y) after the economy had grown by 2.0 % in Q3 (Figure 3). Compared to the proceeding quarter, GDP enhanced by 1.9 % (seasonally-adjusted). Previously, domestic investment demand was a major driver of the acceleration in GDP growth as well as the recovery in household consumption. In Q4, presumably agriculture was the main driver owing to a bountiful crop production. The recovery runs through the available data. In January, industrial production increased by 5.6 % after 4.5 % previously. Real retail sales rose by 3.1 % (y/y) in January after dropping by around 25 % in 2015 in the height of the crisis and returning to slow expansion early last year. The economic recovery is expected to continue during 2017.
Consumer price inflation re-accelerated since end of last year. In January, the inflation rate was 12.6 % (y/y). Since Q4 2016, UAH faced renewed depreciation. Pressure on the currency arose amid corporates’ external debt repayments and significant budget expenditures. Also, the transfer of the large lender CB PrivatBank PJSC to state ownership might have contributed to UAH weakness. According to the January inflation report of the National Bank of Ukraine (NBU), food supply-side factors, such as a large crop, export restrictions and higher supply of imported fruit and vegetables contributed to easing inflation pressures, while headline inflation was heightened by increases in administered prices, primarily those for public utilities, as well as the rebound in global oil prices. Despite relatively high headline inflation, the real wage development turned positive during last year (+9 %) supporting the recovery in household demand. The NBU forecasts annual inflation of 9.1 % in 2017 mainly due to a twofold increase in the minimum wage. The projection for 2018 is 6.0 %.
The dichotomy between a muted aggregate demand and gradual improvements on the production side of the Russian economy remained in place. In January, industrial production increased by 2.3 % (y/y) signalling a rebound after lower production growth in December (0.2 %). During the last six months, monthly growth in the industry was meagre (averaging 1.5 %). Sentiment surveys have incidentally suggested that the manufacturing sector is recovering. For example, the manufacturing purchase manager index improved to a level of 54.7 in January and thereby indicated expansion.
Monthly retail sales have been contracting in real terms since early 2015 providing information about a dismal state of household’s demand (Figure 4). Although the trajectory has been improving, real retail sales were still down by 2.3 % in January and 4.1 % (y/y) over the last three months. On the other side, the trend in real wages has been turning positive (plus 3.1 % y/y in January) amid rising nominal wages and lowering inflation. Still, over the last 12 months, real disposable incomes have on average declined by 4.4 % (y/y).
Before the recession, the credit growth and availability to households was an important driver of consumption-led growth in the economy. Growth in loans to households had peaked at almost 50 % (y/y) in 2012/13 followed by a slowdown and a drop in 2015. Recently, lending to households (+4.0 % in January) and corporates (+2.4 %) has been recovering and thereby lessening borrower’s financial constraints.
Author
Martin Ertl
Chief Economist
UNIQA Capital Markets GmbH
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