Eurozone:
- Survey data remains in support of growth acceleration, while lending growth appeared gradually slower in February.
- Quick reversal of inflation fortune (misfortune) in March
In line with Euro Area purchase manager indexes (PMIs) about which we reported last week (UCM Weekly as of 27th March), the German ifo-business survey rose in March. The increase in the headline index (from 111.1 to 112.3) was driven by improving judgements about the current economic situation (from 118.4 to 119.3) as well as future expectations (from 104.2 to 105.7).
In February, Euro Area lending to households rose by 2.4 % (y/y) unchanged to the previous month. Outstanding consumer loans increased by 4.1 % (y/y) after expanding by 4.5 % in January and consumer mortgages rose by 2.9 % (after 2.8 % previously). On the corporate side, lending kept expanding at 1.5 % (y/y) in February, although at a slightly weaker pace than in the months before.
As widely expected, Eurozone inflation fell in March after a temporary rise in proceeding months amid a large energy price base effect (Figure 2). The flash estimate of the headline consumer price inflation was released at 1.5 % (y/y) after 2.0 % in the previous month. Inflation analysts had expected a drop to 1.8 %. Additionally, the core inflation rate (ex energy and food prices) fell from 0.9 % to 0.7 % (y/y).
The surprise fall in the core inflation puts a question mark below the forecast of 1.1 % in 2017 that the European Central Bank had put out in March, although a rebound appears likely next month. In turn, the surprising decline in the inflation rate implies that recent market speculations about an earlier than indicated reduction in the monthly ECB asset purchases (‘QE’) during 2017 are undue (not to speak about an early rate hike). In particular, President Draghi had repeatedly stressed to look through headline inflation and outlined conditions that have to be met for the ECB to reach its inflation objective. The inflation development is broadly in line with our expectation of only gradually rising Euro Area yields this year.
CEE:
- Russia: Ongoing recovery despite February data disappointments that was supported by a surprise CBR rate cut
In Russia, February monthly economic data disappointed, although the economy will likely remain on track for a dismal recovery. Industrial production fell by 2.7 % (y/y) while an increase (1.3 %) was on average expected by analysts reporting forecast to Bloomberg. This is discouraging based on the main assumption that a recovery would be driven by the supply side. The manufacturing survey from the State Statistics Office (FSSS) remained unchanged in March compared to the previous month, while it had been rising previously. Profit margins of the companies in the Russian stock index increased from 11.6 % to 13.1 % during the first quarter of 2017 likely amid a higher oil price since early last year. However, earlier this month crude oil prices corrected by around 7 %.
In February, real wages rose moderately (1.3 % y/y) and less than expected (2.0 %) and in the previous month (3.0 %). On average over the last 12 months, real disposable incomes were down by 4.3 % (y/y). Real retail sales kept decreasing (-2.6 % y/y), while the trajectory of the time series has been improving gradually. Car sales also continued to decline on an annual basis (-4 %). Hence, consumer confidence remains protracted (Figure 3).
Meanwhile, consumer price inflation has been slowing. In February, the CPI index rose by 4.6 % (y/y) after 5.0 % previously. In a surprise move, the Central Bank of Russia (CBR) decided to reduce the key policy rate from 10.0 % to 9.75 % on 24th March. The board of directors noted that the inflation slowdown overshoots the forecast, inflation expectations continue to decline and economic activity recovers. Inflation risks have slightly dropped but remain elevated and the 4 % inflation target will be achieved by the end of 2017. The CBR admits the possibility of cutting the key rate gradually in coming Q2-Q3. At the same time, the CBR insisted that monetary policy should remain tight to maintain the propensity to save and anchor a sustainable inflation slowdown driven by demand-side restrictions.
While February data disappointed against expectations, the CBR sees an ongoing recovery. Based on the conservative oil price assumption of 40 USD per barrel by the end of 2017, the central bank expects growth in real GDP of 1.0-1.5 % in 2017 and 1.0-2.0 % in 2018/19 broadly consistent with our own in-house forecast. In Q4 2016, real GDP had returned to expansion (0.3 % y/y) after contracting for seven consecutive quarters.