Eurozone:
• High-frequency data indicates solid business cycle momentum.
• German GDP growth beat expectations in Q4.
Following solid outcomes in survey-based business cycle indicators, high-frequency real activity data indicated solid economic activities during Q4 2016. In November, German industrial production (Figure 1) rose by 2.2 % (y/y) after 1.6 % (revised upwardly from 1.2 %) in the previous month, while forecasters expect a growth rate of 1.9 %. French industrial production surprised positively rising by 1.8 % (y/y), whereas a decline of 0.8 % was recorded in November. Industrial production beat expectations in Spain (3.2 % following 1.3 % y/y) and Italy (4.6 % after -2.3 % previously). Industrial activity was weak during most of last year, hence, the recovery by year-end is signalling industrial cycle momentum.
In Germany, the business cycle was characterized by solid and steady expansion during 2016. German GDP grew by 1.9 % after 1.7 % in the previous year. The positive development was due to solid domestic demand: Private consumption rose by 2 % and public consumption expanded by 4.3 % partly due to expenditure on migrants. Construction investment increased by 3.1 % (mainly due to residential construction). Fixed investment in equipment rose by 1.7 %. Net exports as well as inventories made small negative contributions (-0.4 % and -0.1 %) to GDP growth. Exports and imports increased by 2.5 % and 3.4 % during the last year. The total number of employed persons rose by 1 % in 2016. Productivity per hour increased by 1.2 % and productivity per employee rose by 0.9 %. German GDP growth is expected to slow down to 1.4 % in 2017 (Bloomberg consensus forecast).
CEE:
• Survey-based data indicating momentum in line with Euro Area sentiment.
• Inflation in CE-4 rising due to energy price base effects but central bank policies set to remain accommodative.
Purchase manager indexes (PMI) for Central Europe continued a strong recovery consistent with improving economic sentiment in the Eurozone. In December, Poland’s manufacturing PMI jumped to the highest level since 1 ½ years (54.3). The PMI index for the Czech Republic increased from 52.2 to 53.8; a new high since the first quarter of last year. The Hungarian PMI made the exception falling from 56.6 to 52.2 but the index is the most volatile and it is difficult to interpret too much into it. Russia’s manufacturing PMI index climbed to the highest level since several years (53.7) providing a further signal that supply side conditions are improving after industrial production surprisingly bounced in November (2.7 % y/y) and the local manufacturing survey has been recovering.
In December, consumer price inflation picked-up almost all around Central Europe (Figure 3). Poland registered a year-over-year rise in consumer prices (0.8 %) for the first time since 2014. Czech inflation rose to 2 % after 1.5 % in November and in Hungary the CPI index rose by 1.8 % (y/y). In the Slovak Republic, inflation turned positive (0.2 %) after three years in mild deflation. Foremost, inflation rises due to base effects in the volatile energy price sub-indexes. In addition, the CE-4 (PL, CZ, SK, HU) gain from solid business cycles including rapidly declining unemployment rates and increasingly tight labor market conditions. This also implies rising underlying inflation pressures.
However, Poland’s economy exhibited a real activity slowdown recently as construction and investment became a drag on growth. We expect 2.5 % real GDP growth for the total of last year (after 3.9 % in 2015) and a gradual recovery in 2017. In the monetary policy meeting last week, the National Bank of Poland (NBP) held the main policy rate at 1.5 % and indicated that a first hike could only be expected in 2018, as economic growth had recently slowed down.
According to the minutes of the monetary council meeting of 20th December of the National Bank of Hungary (NBH) that were released last week, the council assessed that inflation will rise over the forecast period, but reach the inflation target (3 %) as late as in the first half of 2018. Looking ahead, the monetary policy council stated that whole-economy wage growth was likely to rise further, as a result of continued strong demand for labor and the latest wage agreement. This in turn was likely to raise core inflation. However, the overall tone of the minutes appears rather “dovish”. A watchful approach to monetary policy was still warranted due to uncertainty in the global financial environment. While the main policy rate was left unchanged in December at 0.9 %, the council eased monetary policy via unconventional tools “slightly” further by setting a HUF 750 bn upper limit on the stock of the 3-month central bank deposits as at the end of Q1 2017.
In December, the Czech National Bank (CNB) stated that it will not discontinue the use of the exchange rate as a monetary policy instrument before Q2 2017. The CNB still considered it likely that the commitment (to maintain the EURCZK rate at 27) will be discontinued in mid-2017. At the same time, the CNB stated again that any FX appreciation following the discontinuation of the FX commitment would be dampened, among other things, by hedging of FX risk by exporters during the existence of the commitment, as well as by closing the koruna positions by financial investors. In addition, the CNB said it will stand ready to intervene to mitigate potential exchange rate volatility.
Below the line, in the CE-4 inflation is going to rise faster than in the Euro Area and central banks in the region will likely tighten monetary policy in advance of the European Central Bank (ECB) given also solid business cycles and tightening labor market conditions, in our view. On the other side, the above communications would not suggest that national banks (NBP, NBH, CNB) start rate hiking cycles during 2017.
Author
Martin Ertl
Chief Economist
UNIQA Capital Markets GmbH
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